Q3 2023 Church & Dwight Co Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Church <unk> Dwight third quarter 2023 earnings Conference call.
Before we begin I have been asked to remind you that on this call. The company's management may make forward looking statements regarding among other things the company's financial objectives and forecasts.
These statements are subject to risks and teas and other factors that are described in detail in the Companys SEC filings.
I would now like to introduce your host for today's call Mr. Matt Mr. Matt Farrell, President and Chief Executive Officer of Church <unk> Dwight. Please go ahead Sir.
Hey, Thank you operator, good morning, everybody and thanks for joining us today I'll begin with a review of Q3 results and I will turn the call over to Rick Dierker, Our CFO when Rick is wrapped up we will open the call up for questions.
So let's begin in Q3.
A fourth consecutive quarter.
Solid results beginning with Q4 2020 to.
Reported revenue was up 10, 5%.
Which exceeded our 8% our outlook.
Organic revenue grew four 8% also exceeding our 4% outlook its worthy of note that our global consumer business posted five 8% organic growth, which exceeded our expectations going the other way our SPD business accounted for one point of negative growth.
Gross margin expanded 270 basis points and marketing as a percentage of sales increased 80 basis points to 11, 5% of sales.
<unk> EPS was <unk> 74 cents, which is <unk> higher than our 66 cent EPS outlook and that result was driven by higher than expected sales growth and gross margin expansion.
It is important to call out.
The two 7% positive volume growth in Q3, the first first in eight quarters and our expectation is that positive volume growth will continue in Q4 to finish out the year.
But we continue to grow in the online class of trade, 17% of our global sales were purchased online in Q3 compared to 16% in the year ago quarter, just a few comments on on the economy.
Unemployment remains low in the U S and in most of our major international markets unemployment is a stat that we work closely watch regarding the health of the consumer household balance sheets are more stretched as savings are lower and credit card debt is higher.
Student loan repayments are restarting.
Mortgages and auto loans are more costly why because of higher interest rates and higher oil may lead to higher gasoline prices. So a higher cost environment leads to trade down as consumers look for the best value, especially in our household categories and we are well positioned for this trade down given that 40% of our portfolio is.
Value products now I'm going to comment on each business first up is the U S. The U S consumer business posted strong five 5% organic sales growth of which three 6% was volume driven.
Seven of our 14 power brands held or gained market share in the quarter and for context. The brands grew share represent 65% of our U S sales.
Private label is another stat that we closely watch the good news here is the weighted average private label market share in our categories is stable.
Now I want to look at a few of the more important categories in the U S starting with laundry.
Arm <unk> hammer liquid laundry continues to see consumption growth driven in part by the continued trade down to value brands and by media support behind our new give it the hammer advertising campaign, which celebrates the great value that arm <unk> Hammer offers in tough economic times arm <unk> hammer liquid laundry detergent held share in the.
Quarter as the category grew 5%, we're now at 14, 3% share and extra our extreme value offering grew consumption six 1% and increased market share to three 8%.
Regarding new products, we launched a new unit dose form of detergent arm <unk> hammer power sheets laundry detergent as the first laundry detergent sheet from a major brand in the U S power sheets as a convenient new unit dose form of detergent that delivers an entirely new laundry experience. It is mess free it's light.
<unk> eliminates plastic bottle waste, while delivering the trusted arm an hour arm <unk> hammer powerful cleaning performance that consumers have come to rely on and love.
We launched the product online in August and September power sheets was the number one laundry detergent item during Amazon's September Prime day event. So we're off to a great start with this innovation, which will rollout even more broadly in 2024 now.
Now later arm <unk> Hammer litter also continues to perform extremely well with 11% growth outpacing the category, which was up 8% and growing share to almost 25%.
Consumers continue to choose arm <unk> hammer litter offerings, we have steady demand for our premium litter offering which is a black box, but our orange box in particular is driving the growth as it offers a great value for the cost constrained cat owner or new arm <unk> Hammer hard ball lightweight clumping litter is off to a.
Solid start as distribution expands in the lightweight segment, where we are underrepresented today.
Turning now in personal care.
Batiste grew consumption, 14% in the quarter as we continued to build dry shampoo awareness and drive household penetration.
The dry shampoo category and batiste have room to run as we continue to invest to build awareness and drive trial, especially through sampling.
Hero, which was acquired last October captured the number one market share position in the total acne treatment category.
In the acne patch subcategory mighty patches over 50% share.
Retail distribution continues to grow and we still have room to run as we expand across all classes of trade.
The hero team is doing a spectacular job growing this business as it continues to be a great deal of Buzz here at church, and Dwight around the hero brand and its future growth potential.
Similarly, Sarah breath, which was acquired in 2021 is performing extremely well and has been gaining share at a rapid pace in Q3 their breath took over the number one share position in the non alcohol segment with almost a 29% share.
Distribution of thorough breath has more than doubled since the acquisition date and we expect this brand to be a long term grower for church and Dwight.
Regarding a couple of businesses that depressed our results last year Waterpick continues to stabilize with Q3 coming in close to plan similar to Q2.
Water Pik all channel consumption actually was up slightly in Q3.
Turning to gummy vitamins worldwide infusion was close to our expectations in the first half our consumption was down 11% in Q3.
Partly due to distribution losses at many retailers due to our supply issues in 2022 and <unk>.
Our job now is to win back retailer confidence in and regained lapsed consumers next.
Next up is international our international team is doing a great job delivering organic sales growth of seven 3% in Q3, driven by broad based growth in most of our subsidiaries and our global markets Group volume contributed two 3% of the growth and this was led by stellar Mora nasal hygiene and <unk>.
Clean.
Both Cerro Moro in here are gaining distribution across our international markets and we expect more to follow.
And finally specialty products organic sales decreased 10%, but this is largely due to one product line called <unk>, which is being heard by inexpensive imports excluding mega lack the remainder of SPD delivered positive growth of 2% I'm.
I'm going to wrap up by saying, we just closed out a strong October and we expect positive volume growth for a second consecutive quarter in Q4.
We raised our reported sales outlook to reflect the strength of consumer demand for our products, while maintaining our full year EPS outlook.
Now when we are performing well going into the fourth quarter. It has an opportunity to invest in the business. This is a long standing practice of reinvestment that church <unk> Dwight and is well understood by our long term shareholders. We take the long view with respect to the health of the business.
Our business model is working our value offerings are performing well as our premium offerings innovative new products are contributing to our growth and we have one of our best new product lineups coming in 2024.
Acquisitions are on track and significant cash generation positions us to continue to add tsi accretive brands to our portfolio.
And now I am going to turn it over to Rick to give you some color around Q3, and the full year and the investments we'll be making in Q4.
Alright, Thank you, Matt and good morning, everybody, we'll start with EPS third quarter. Adjusted EPS was at 74 cents down two 6% in the prior year as Matt mentioned, the 70 <unk> was better than our 66 outlook, primarily due to higher than expected sales growth and gross margin expansion.
Net sales were up 10, 5% and organic sales were up four 8% over half of our organic growth in the quarter was driven by volume.
Total consumer business was up five 8% organically.
Our third quarter gross margin was 44, 4%, a 270 basis point increase from year ago, primarily due to improved pricing volume productivity and the impact of the hero acquisition net of the impact of higher manufacturing costs.
Let me walk you through the Q3 bridge gross margin was made up the following positive of 140 basis points impact from price volume mix.
Positive of 120 basis points from acquisitions, and a positive 160 basis point impact from productivity, partially offset by a drag of 150 basis points due to inflation.
Moving to marketing marketing was $27 million up year over year marketing expense as a percentage of sales was 11, 5% or 80 basis points higher than Q3 of last year.
For SG&A Q3, adjusted SG&A increased 310 basis points year over year, primarily due to higher incentive comp improved business performance SG&A related to the hero acquisition and investment spending.
Other expense all in was $21 8 million, a $2 4 million increase due to higher average interest rates for the full year. We now expect other expense of approximately $95 million for.
For income tax our effective rate for the quarter was.
It was 24, 1% compared to 22% in 2022, an increase of 390 basis points as the prior year rate included the benefit of a nonrecurring state tax reduction.
We continue to expect the full year rate to be approximately 22%.
And now to cash for the first nine months of 2023 cash from operating activities was $795 million, an increase of $261 million due to higher cash earnings, including the positive impact from recent acquisitions and improvements in working capital.
Turning to the full year outlook, we now expect the full year of 2023 reported sales growth to be approximately 9% up from our previous outlook of 8%.
We continue to expect organic sales growth to be approximately 5%. We now expect full year reported gross margin to expand 210 basis points up from 200 basis points. This is an encouraging trend as we continue to move closer to restore and gross margins to pre COVID-19 levels.
We continue to expect a double digit percentage increase in gross profit in full year 2023.
Looking at inflation, we continue to expect around $120 million of higher manufacturing costs. In 2023. This is well below what we have experienced the last couple of years, while many commodity prices remain below prior year levels resins and oil based commodities are a bit higher.
We continue to expect full year marketing as a percent of sales to be 11% and we continue to expect full year SG&A to be higher in both dollars and as a percent of sales compared to 2022.
SG&A is expected to be higher than our previous outlook driven by incremental R&D investments higher incentive compensation, given our strong performance in our bad debt reserve related to one specific customer situations.
As in past years, when we have strong business performance, we invest for the future our investments will focus on driving future growth with higher marketing dollar investment R&D investment in clinic, including clinical studies and accelerating product registrations in international markets as well as driving efficiency, including investments in automation and technology.
We continue to expect full year adjusted EPS growth to be approximately 6%.
And as a reminder, our EPS guidance includes the step up of marketing that we've been talking about and higher SG&A. We continue to expect full year cash flow from operations to be approximately $1 billion. Our full year. Capex plan is now expected to be approximately $230 million as we continue to make capacity investments.
Expect to return to historical levels of Capex about 2% of sales by 2025.
Moving on to Q4, we have a strong outlook and expect reported sales growth of 5% and approximately 4% for organic with volume contributing 1% or better orgs.
Organic growth rate in Q4 reflects positives from hero litter and thorough breath and negatives from not repeating some low margin laundry promotions.
We expect gross margin expansion, a significant increase year over year in both marketing and SG&A.
And marketing is expected to be in excess of 14% in Q4 adjust.
Adjusted EPS is expected to be 63 per share a 2% increase from last year.
So to summarize our strong nine months of the year behind US we saw the inflection point of volume growth as expected and we are spending on marketing and investments to build momentum for 2024 and beyond and with that Matt and I will be happy to take questions.
Okay.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone you will hear about today, Tom problem technology ever Quest.
You are using speaker phone please lift the handset before pressing any piece.
Okay.
Your first question comes from Amit.
<unk> from Oppenheimer. Please go ahead.
Good morning, and thanks for taking my question. So just starting with the specialty products segment. How are you thinking about the business in the coming quarters.
This quarter, obviously, a larger decline just wanted to get a sense. If we see weakness for a few more quarters until you lap the issue that you cited.
Yeah, it's going to be a repurchase is going to be a drag in Q4.
So when we when recalls of four.
4% number for organic for Q4, that's net of SPD, which kind of reduces the contribution from them from the consumer business, but so yes at least one more quarter, where we're going to be down maybe in Q1 as well, yes, I think the new nuance for Apache also is when you look at it like a 4% growth rate in Q4, when we talk about investing when many times.
About SG&A or marketing, sometimes when we're doing really well we also look at customer profitability we take.
We got ahead of it and coal unprofitable or low profit promotions in some of our businesses like laundry.
Great.
Good segue to my next question. So organic sales growth was maintained for the full year. So it sounds like those are lower margin laundry promotions as what May have limited organic sales growth increase for you or for the full year is that correct or is <unk>.
On a lot of organic.
Thats true last year in the fourth quarter, we we had looking.
Looking back now we had a lot of a lot of promotions that we thought were not were.
We're not profitable so we called them.
They're not going to be in place for this fourth quarter, which obviously results in a lower volume.
Great and maybe just a follow up just related to that is there a way to quantify the impact of those the lack of running those promotions.
Easier to do that in the quarter is over and do it right now it's more conjecture, but it is it is a drag.
Okay, great. Thank you I'll pass along thanks refresh.
Thank you. The next question comes from Bill Chapell from <unk> Securities. Please go ahead.
Thanks, Good morning Bill.
Bill.
Pete can you talk a little bit about kind of where we are for both hero in their breath in terms of that as we're moving into next year trying to understand.
The distribution is where you expect to be or we have tougher comps for both of those businesses in terms of.
Growth in year two.
But remember in year, one, let's say it's 2023.
When we were gaining distribution was throughout the year. So we will have full year benefit of all the distribution gains in 2024 versus 23, so that's a positive so naturally.
Comps are more difficult once you've got it in place, but the demand for the product is.
As surprising us in fact, the demand has been it has.
Been exceptional wherever we've launched it the second thing is we will be launching hero in dozens of countries.
Next year through our global markets group and that will happen throughout the year. So that's not a Jan one thing, but see a lot of opportunity there as well now Sarah breath thorough breath was acquired in December of 2021.
And they have far more distribution already then hero did when we acquired <unk>. We did expand that in 2022, but I would say 2023 versus 2020, twos, who less benefit from distribution gains in comparison to hero.
What's happening is because of.
The demand for thorough breadth and the consumer is voting in favor of their breath.
What's happening is our retailers are willing to give us more shelf space and we fully expect to get more shelf space when the resets happen in 2024.
The big difference for 2024 and 2023, we got Tdp's, we got.
New retailers new stores now, it's all about shelf space and expanding our footprint and that's what's happening.
Got it and then second just.
And I'm trying to understand the spend or the accelerated spend.
For Q2 to kind of keep your EPS guidance in check is that more SG&A because it does sound like you'll have some year over year benefit on gross margin I was just pulling back on some of the promotions or is it is there a is it.
SG&A and gross profit in terms of kind of how youre trying to reinvest in the business.
Keep things going in 'twenty four.
Bill, it's mostly SG&A.
It's higher incentive comp, but many of it is the investments we've talked about these last few quarters and just more of that.
<unk> is a good example, as we as we fast forward a product registrations, we're gonna be in a $40 50, new countries pretty rapidly because we are able to do that so we think all of these investments are great and theyre going to help help us in 'twenty 'twenty four and beyond.
Great. Thanks.
Yeah.
Thank you. The next question comes from Chris Carey at Wells Fargo Securities. Please.
Please go ahead.
Okay.
Hey, guys.
One quick follow up on laundry and then a broader question.
The promotions that you're talking about had that been occurring.
Over the course of the year or was that something new that you did because you are responding to the environment or you saw an opportunity because youre tracking ahead I'm trying to understand if we're just lapping something where this is a new decision apologize.
These are these.
These are these are promotions that happened in Q4 22, and it didn't happen in Q3 for Q2 'twenty. Two so it was isolated to Q4 last year and the decision to pull back on those just because we can.
Okay.
And as I said.
Said earlier there.
Where they werent the best payback. So we said you know this is a good time that not to repeat them.
Okay that makes sense.
I know, we'll get we'll get guidance.
'twenty 'twenty four next quarter, but you have given kind of high level thoughts.
As I think about this.
Volumes positive.
You still have gross margin.
Momentum behind productivity and inflation is easing I think you've kind of taken are you on that.
Rebased it investment spending this year.
Is there anything that we should be just thinking about.
Perhaps less obvious going into next year.
And just maybe any any kind of like high level thoughts about.
How you feel about the business and your momentum growing at twice before.
Well, Chris we feel great about the business.
See the kind of numbers, we just posted in Q3 and.
The gigantic number and a five 8% organic growth for the consumer business and <unk>.
And then when thinking about Q4, we got another 4% organic growth and Thats got a drag from SPD as well and we expect the second consecutive quarter of volume growth. So we hope to start stringing. These together, we're going to have volume growth.
Quarter over each quarter.
Next four or five quarters.
Gross margin you're right.
As Rick said growth.
Hit the number that's in the box right now will be 150 basis points short.
Our high watermark for gross margin, which was 45 five.
Back in 2019, so we would expect to get more of that back next year.
Not all of it of course, but we expect gross margin expansion and one of the good things about this year as we came all the way back with marketing as a percentage of sales.
Last year at 10%.
We started the year, saying, hey, let's try to get to 10 and a half.
And we're all the way to 11% so that's behind Us now.
And then as I think I said was we have one of our best new product pipelines coming in in 2024, and it's a it's a pretty broad based so.
There's a lot of things.
We feel real good about it and so we're very confident in the <unk>.
Length of the business.
Okay. Thank you.
Thank you. The next question comes from Steve Powers from Deutsche Bank. Please go ahead.
Hey, good.
Good morning, Thank you.
Steve.
A question first just on the on the fourth quarter guidance.
I guess two questions actually the first one.
Maybe my numbers are earnings, but it feels like.
You kind of need to do.
64, even 65 in the fourth quarter to get to $3 15 based on what you've done in the first nine months just wanted to see if I'm missing something in that math.
And then just thinking about that.
Just the gross margins I think implies about a couple of hundred basis points of gross margin expansion.
If you're able to kind of preview of what you think the bridge between.
Volume and productivity.
Inflation will kind of balance out of the mill.
Okay.
Yes no.
A problem on the first one Steve, but if you could repeat the second one it would be healthier breaking up.
Sorry.
It's about 200 basis points of gross margin expansion implied in the fourth quarter.
How do you think thats going to shakeout.
Price and volume versus price.
Typically offset by the lingering inflation.
Yeah got it okay, well the first one is.
On EPS.
If you take a big step back we've looked at.
We typically.
Repurchase shares on a.
Annual basis to offset share creep, we didn't do that this year.
May get ahead of that and Ah in 2023 for 2024.
So that that in rounding will probably get most of the way to the difference on your EPS for Q4, the second thing on.
On your gross margin bridge questions I would say.
Of course, the price component of.
The price volume mix component of gross margin bridge comes down a little bit more.
In Q4, the price piece, but the volume and mix piece are going to go up because we used to have acquisition by itself, which was hero and that gets blended into kind of the mix of the portfolio.
So I would probably say in Q4, a big a big tailwind from price volume mix.
A little bit lower productivity, just because it's timing and those projects are choppy and then of course, we go backwards a little bit on manufacturing costs and inflation year over year. So those are kind of the.
The three pieces to the main three pieces of the gross margin bridge.
Okay.
And if I could.
This is luis.
Four questions.
Quick question.
We go back to 2021.
Coming into 'twenty two the original.
Expectation was that everything is on the table.
It didn't play out that way obviously.
Do you think about that.
We have grown evergreen in 'twenty, two and 'twenty three we would be looking at.
$3 50, or thereabouts of earnings and 23 $3 15.
So I guess the question is.
Look forward.
Are you guys approaching the future trying to claw back that 45 cents overtime or.
Have we sort of written off <unk>.
Two and where we're at.
Kind of philosophically running evergreen from here.
Well Steve.
I mean, I think everybody any.
Any public company.
As.
A question like that.
He's going to say, Hey, 20 2022 was.
Last year with a three year Covid event.
In 2023, there were three things that hit us.
Waterpick and vitamins you know post Covid and then flawless.
So the business Jim gets to re baseline.
Waterpick vitamins and inflows in 2023, and then we kind of grow from there.
I think that's the simplest way to think about it with three isolated incidents that affected us in 2022.
We've got our eyes open about that those.
Those businesses by vitamin has certainly stabilized.
Hum.
Pardon me Waterpick, a stabilized vitamins is still declining, but we have a path back to stabilize that business next year.
Yes. Thanks I appreciate it thank you very much.
Okay.
Thank you. The next question comes from Dara <unk> from Morgan Stanley. Please go ahead.
Hey, guys.
So can you give us.
A little bit more of an update on the Vita fusion business. You. Obviously, you mentioned the weak retail sales we can see in the scanner data with the distribution losses do you have visibility that can snap back going forward in 2024 that you can in fact regained shelf space based on your plans that perhaps that business can return to growth.
At some point and maybe just in general help us understand your plans on that business for 2024.
Well, it's kind of a simple problem and we werent able to supply in 2022.
So we got punished by retailers in 2023.
Losing shelf space, a little interest in taking new product launches et cetera.
And so consequently, the English.
Self space Youre going to lose consumers and so now the whole the whole game is to win in the resets in 2024.
Which now is do we have a lot of visibility to that we have some right now we'll have more when we talk to everybody in January but.
The site is really to win back more and more shelf space in 2024.
Some good news with respect to vitamins, we are the number one gummy vitamin on Amazon.
We have been doing extremely well there this past year, so that's going to be a bigger focus for us going forward as well, but we do think it's.
Execution, and blocking and tackling Steve to get that business on firm footing and Meanwhile, we are investing in a big way on marketing to drive awareness to new packaging to pop at shelf and display.
Displays all those tactical things that you can do as the as the momentum will build back.
Okay, Great and then you touched on that you think you are well positioned for consumer trade down are you actually seeing that and then maybe also can you just give us a sense of the promotional environment Youre seeing youre, obviously, you touched on the laundry issues, specifically, but just in general the promotional environment.
Yeah look.
The trade down as I mentioned in my opening remarks, a litter.
Class of trade litter category, we have a black box in an orange box in a box boxes premium the orange box value and so consumers are staying within the franchise.
Trading down from Black box, the Orange box and it shows in our shares so it shows you almost like 25%.
In litter.
Your other question was more broadly with respect let me comment on laundry as well I mean laundry as we've been joined trade down since the beginning I guess the middle of 2022.
Quarter after quarter end.
This past quarter liquid laundry grew with the category, but extra usage has started to grow and that again is a sign of the times have deep value laundry detergent. So once again, thank our portfolio was well positioned.
For a difficult economic environment of course.
As unemployment stays low and people have jobs. So we think that it's going to people who are going to be discerning when they go shopping but they have money in their pockets to shop. So I think the best value is going to win.
When it comes to the promotional environment.
Liquid laundry just to give you some numbers.
Round numbers, if you look at liquid laundry sold on deal in Q1, it was around 32%.
In Q2, 33, and a half and Q.
Q3 was 35%.
So liquid laundry has been creeping up.
During 2023, so it's it's around where you'd expect it to be pre COVID-19. So it's kind of a come all the way back same is true for unit dose. If you look at unit dose sequentially Q2 Q3.
31% sold on deal in Q2, 36% in Q3 now litter is a it's a different story.
I think that's largely because of the difficulties that one of the competitors has had and is consequently pulled back on promotions. So.
The trend for litter Q1, Q2 Q3s.
15% in Q1 14.
2014, and a half in Q2 and 14 two two in Q3, so that kind of gives you a sense for the trend I would say in vitamins.
Sequentially is up 200 basis points from Q2 to Q3.
There are some competitors that are spending.
55% sold on deal.
You can't make a lot of money that way, but it definitely does go grab volume but.
I think yes.
Those four categories liquid laundry unit dose litter vitamins to give you a sense for what's going on.
The promotional environment Steve.
Great. That's helpful. Thanks, Okay.
Thank you. The next question comes from Lauren Lieberman from Barclays. Please go ahead.
Great. Thanks, Good morning, Adler cleanup question about Hey.
So in the past I think you've talked about being focused on sort of acne related categories.
With hero, but we've seen some press it talks about you expanding into retinal and eye cream and bonds. We have to just curious kind of where you stand.
Overall.
And just just perspective, they're right there.
Yeah, well look our number one objective is to win in.
In acne and Acme patches and also related products to acne and that's pretty broad you know this is a really really big category.
And then the opportunity is marketing.
Plan on launching in dozens of countries.
In 2024 with hero.
We think this is just so much runway.
And there's still needs to be greater awareness of the patch form which is another reason why we don't want to make sure we don't get to get too much of our focus outside the patch category now hero is a fabulous brand it resonates with consumers of all ages, we definitely do have there.
Right and the permission to go to.
Categories that are adjacent to acne and yes that could be in our future but.
In the near in the near term the focus is on is on patches.
Okay, Great and then just sticking with hero and maybe my math is wrong, but just with it moving into organic.
I guess in mid October it looks like I can add.
Two to three points of organic sales growth.
In the fourth quarter. So I just wanted to make sure that with sort of roughly the right order of magnitude for thinking about that.
And then just asked about sort of what that implies for everything else kind of decelerating sequentially.
Frankly is it conservatism or is there something youre seeing.
That would support that modeling that deceleration. Thanks.
Oh, Hey, Lawrence Rick I would say, our math does not lead to two to three points of organic contribution from hero and I remember there was a sell in to new retail distribution in Q4 last year.
For hero, so from a comp perspective, it just doesn't give you that that much that youre calculating.
I think overall, we think.
Consumption is still really strong in Q4 and October is off to a great start.
I think Matt mentioned it was one of our.
Highest shipment months.
Ever in the history of the company. So we feel really good about.
Our momentum right now and we've made some choices to discontinue some promotions and I think thats, what kind of the nuances for folks so they weren't expecting.
Yes, Laurie it all depends on your perspective people, but its on the narrative that you wanted to look at sequential Q3 to Q4 or do you want to look at.
The year over year and look at comps and say what was in last year versus this year, but.
We have total confidence in where we sit right now with respect to the demand for the products as evidenced by such a strong October so.
Yes.
We've got a good number for Q4.
Sometimes people accuse us of being.
Conservative but no.
One thing is for sure about church <unk> Dwight is we take the long view, we don't have short term thinking.
I think that anybody listened to the call and certainly our long term shareholders understand that so we're always pops up.
And try to make sure create understanding for it not to pursue the analysts but for our shareholders and we're really confident not only in Q4, but in our future.
Okay, great. Thanks, so much I appreciate it alright.
Thank you. The next question comes from Andrew <unk> from Bank of America. Please go ahead.
Hi, good morning, and thanks, so much for the question.
Wanted to ask on the higher marketing and investment spend I think some of US were expecting you could potentially benefit in market share in certain categories like layer on our competitors' disruption and maybe that would provide some leverage on the investment side. I was wondering if you could talk more about where you are investing in terms of marketing.
You think you need the most support among that category. Thanks.
You may be referring to.
So litter.
Help from litter sales wise in Q3 and someone else will continue in Q4, but.
There is lots of opportunities to invest when it comes to marketing there's not just the advertising.
Remember, we had some new products, we just launched like laundry.
Sheets, but sampling is another.
Avenue for us.
<unk> had remarkable conversion rates on sampling of thorough breath.
It also can be true for laundry sheets as non working media as well that we can we can.
Get after in Q4 to prepare for them for 2024 over in R&D.
Clinical trials that we can start earlier than expected.
For one product in particular that we're looking at.
There's just a whole whole list a list of things that we can go after but generally we're going to we'll always going to be supporting the businesses.
Need to help so that would be vitamins for example.
But then you want to feed the strong as well and we've got a lot of businesses that are on fire right now.
So we will just pour it on in Q4.
Great. Thanks, very much okay.
Thank you. The next question comes from Andrea Teixeira from Jpmorgan. Please go ahead.
Thank you good morning, everyone. So I wanted to go back to the 4% organic guide for the fourth quarter will take another swing on that one.
You said the 50 50.
Rick would be even higher now and the fourth quarter.
So it does imply a really much bigger step down in pricing.
And I understand that the discontinuing of some of the nonprofits.
Promo that you had that would imply that obviously.
Obviously, you had pricing realization higher so I was trying to see what is implied in your guide and then related to that also in terms of pricing and then related to that also how long do you think it's going to take because it seems as if you were starting to lap those those promos and with Lucentis promise that the trade how long do you think this is.
Going to linger for another three quarters into 2024.
Okay, Hey, Andrea So I guess first of all in my prepared comments I said.
We thought Q4 would be 1% or better on volume so not half in Q3, it was better than half, but in Q4, we think it's 1% or better and part of that is because of some of the promotional pullback and discontinuing promotions like I talked about.
We don't think that continues at all.
The 2024 those are some discrete promotions, we chose to not repeat in Q4, that's the simple story.
And then any other one of the things as we step back then strategically if at all.
<unk> always told US right you will have 40% of your.
Of your portfolio in value.
Which implies obviously the 616 somewhere between mid tier two above.
And of course, the consumer is moving down is.
Is that like what we've been seeing now is that probably.
Now we are starting to feel their right. It's like it's a race to the borrowing to SaaS that we would rather not to have.
Consumers trade down.
In general to you as well because it's like at the end of the day you want to create growth and you want to work with you all retailers to create growth in the category for innovation. So I was wondering if you can kind of like go back to both laundry and.
Later, because you have on those categories Youll go across and it's great but in some ways you also want to.
Stop that that movement into SaaS that otherwise, it's going to lower the total value of the category. So can you comment a little bit more on those two specific as well as the other one which is the vitamin.
Asian that I thought that at this point you would have lapped a lot of that impact and that retailers would give you back some rates some shelf resets and if you can comment on that first shelf resets into spring for vitamins Nexium.
So I would take that.
Into two parts and.
I'll start with the second one on vitamins, we kind of just talked about that recently over the last quarter or two it's going to take a full 12 months.
To get back into the shelf position that we want to and all those taxes. We would talk through is what's going to enable us to do it. So I know it feels like it's been a long time, but we've only been talking about that relatively for a short period of time.
Your second question on trade down I think Matt and I have been really clear over a long period of time. The company does really well our brand portfolio is really well in good times and in bad times.
The value brands of course to do better, but even our what you would call our mid tier or premium it depends what category you're at in most of our.
Premium brands like their breath or hero are doing.
Astonishingly just fantastic.
Yeah, we do have some rise of private label and in a couple of categories, but in general consumption is strong for the quarter and for October.
And Andrea.
We feel great about having this sort of portfolio that gives consumers.
A choice and can trade down and then you got to keep in mind too is if you look at back at that arm <unk> hammer liquid laundry.
<unk> grown share just about every year that I've been here.
After a year in good times and in Bad times. So it's a it's not simply yes. It gets accelerated when you have an economic downturn, but what happens as people trade down they discover the brand and they stick with it that's true for arm <unk> Hammer.
Laundry now if you go over to litter.
Trade down between Black box and Orange boxes, great keeping.
Consumer in the category and certainly when when the economy recovers people will trade back up to the black box.
And just just one comment for everybody as we move forward because we're starting to get a little tight on time, let's just try to keep it to one question and maybe one follow up question.
Thank you. The next question comes from Olivia Tong from Raymond James. Please go ahead.
Great. Thank you.
First of all marketing can you just talk about what is incremental in Q4 versus your prior expectation, what's driving the 14%.
Particularly if there is a big change in certain category.
And then your flexibility around that because it.
If I remember correctly like Q3 than Q4.
We always thought it would be weighted more towards Q4, we did have some marketing shift out of Q3 into Q4, largely because of MPD support like even our laundry sheets, we sold out so fast that we wanted to make sure that the marketing was turned on when we had the supply. So we shifted some of that into Q4.
Got it and then just laundry.
Can you talk about the shape of your launch of your portfolio, because you're first to market with the heat, which is obviously a premium priced product.
We're cutting back on some promo, but also sounds like youre benefiting from trade down. So how are you thinking about the positioning of your laundry portfolio premium versus mid tier price and sort of that opening price point with extra how you think about that longer term and then also just.
And then midterm as you embark on the next.
Nexium category.
Well, if you look at the value detergent, there's value in it is extreme value. So you're right extra is the extreme value and arm <unk> Hammer is at the high end of value maybe you being at the low end of mid tier and that has been our strategy for a long time.
Pods is an area, where we're underrepresented and we only have a 4% share of pods. When in fact in liquid laundry, we have a 15% share.
No pause as unit dose, but since so is sheets.
And she has an advantage in that its.
More sustainable no more plastic jugs. So we do think that that's going to help us gain even greater share in unit dose yeah could cannibalize some arm <unk> hammer pods, but we do think it's going to be attractive to anybody who's using pods today, because we don't have the plastic pouches comes in it.
In a carton and people, who don't want to be carrying the big jugs anymore, we'll migrate to sheetz as well. So we think there's a lot of positives by adding sheets to the to the portfolio.
Got it thank you.
Thank you. The next question comes from Peter Oklahoma at UBS. Please go ahead.
Thanks, operator, and good morning, everyone. So I wanted to ask specifically about gross margin.
You made a lot of progress this year in <unk>.
You mentioned that you saw this opportunity to kind of get back to this 45, 5% target, but you also said.
Your response to Christy's question that you wouldn't get it all back next year. So can you maybe help us unpack the reasons why that might be the case just given the momentum you are exiting the year with and then just maybe building on that Rick last year. You had mentioned that you were less hedge heading into the year than previously can you maybe just give a comment also on your outlook for them.
<unk> and whether or not you're kind of deploying a similar hedging strategy looking ahead. Thanks.
Yeah.
This is a lot to do with our forward looking guidance for 2024. So I would just tell you we'll get into all those details in January February.
We do think point of gross margin expansion.
There is tailwind on gross margin because for the first time in a long time productivity can can outpace inflation inflation, we think still.
Higher than normal next year, but not anywhere near.
What it's been like these past few years.
So that's kind of what I would tell you in a heartbeat.
Other nuances you know really when we look ahead, our pre COVID-19 margin should be higher because we have some better faster growing personal care.
Products like your own thorough breath, so we fully recognize that as well, but it's going to be like I said at the Deutsche Bank Conference and Barclays conferences as well.
It's gonna be two to three years to get to get there and so we're gonna take Ah Ah Ah.
Good step each and every year.
Thanks, So much I'll pass it on.
Thank you. Your next question comes from Nik Modi from RBC capital markets. Please go ahead.
Thanks, Good morning, everyone.
Yes.
Can you just talk about what youre seeing in the M&A environment.
Kind of the.
The situation continues to evolve or you're seeing any potential assets out there brands that might look interesting and then I have just a follow up question on the promotional situation.
Okay, Yeah, Nick we're always on the hunt.
If you look at the Euro was acquired.
Last October.
2002, and we've looked at three other.
Potential acquisitions since then all of which we passed on.
But we're always on a hot and we got a quite a quite a strong balance sheet.
Right now a lot of cash.
Cash.
Building up so it's got a bit of a war chest I would say that the interest rates will obviously effect.
The bidding process in any one of these.
Acquisitions or auction processes, and obviously, we're affected by that as well, but you didn't want to buy brands that you know.
The long term are going to be able to grow and interest rates, yes. They may be high for a few years, but they do moderate from it seems so you got to take the long view when you're when you're looking at assets, but there's always something to buy and we've been pretty active.
Looking at what's available.
You had a second question Nick on a promo.
Yeah.
Usually when you see these kind of unprofitable promos get cold.
Usually part of our revenue growth management initiatives more focused revenue growth management initiatives.
Over the years I haven't heard you guys talk too much about revenue growth management. So I'm. Just curious is there just a more concerted effort to really focus in that area and thats whats really whats driving some of these choices for the fourth quarter any any perspective around that would be helpful.
Yeah no.
That's a timely question Nick.
Our international business was really first out of the gate on revenue gross growth management and so we have we have six subsidiaries and we have all those six subsidiaries have all been linked up regularly regularly discuss the tactics in an improving revenue and you know it's all of the levers between <unk>.
Gross and net.
And more recently, our U S business reorganized.
So that we can we can adapt.
More of those practices that our international business as home, but also linked the U S into the into those six international subsidiary. So so yes, the whole concept of revenue growth management.
Is taking hold in the company and that contributes to making decisions about unprofitable promotions.
Great.
Thanks, Matt.
Thank you.
Thank you. The next question comes from Jason English from Goldman Sachs. Please go ahead, Hey, Jason Hey, Hi, folks. Thanks for Slotting Me Ann.
So a couple of quick questions in response to Mr. <unk> question. All surprising are surprised to hear you say that you expect inflation next year to be above average.
So I guess two questions related to that first what's driving it and second in context of that.
Sort of pricing environment do you expect next year would you expect to see positive price growth in your key categories from you in the domestic market.
Yeah, Thanks, Jason It's Rick I would say.
From I'm going to comment on 2024, a little bit more than we normally would but.
What's normal for us in Cogs inflation is around 2% of Cogs inflation, that's been true for many years 2013 to 2019 and then it went to 8% during the Covid years 'twenty to 2022, and then in 2023, 4%.
My belief is it will be lower than what it is this year.
For sure.
But a little bit higher than.
What we've had in the past and what's driving that is some of the oil based.
And resin based commodities.
And that's probably the extent I'll go into right now the good news. The good news is that our productivity, it's not going to be as apparent because productivity for the first time in a long time can actually offset some of these headwinds.
And that wasn't the case during the last few years with Covid.
And that type of environment I don't I don't think that pricing will play a major role.
When manufacturers can cover a lot of their cost headwinds and other other categories. The other companies you know theres other commodities that are going the other way and so that's why there's deflation in some some commodity categories.
So that's that kind of the short answer from our perspective, we have one price increase that we just rolled out.
You heard us talk last quarter about soda ash and baking soda and those cost inputs being up 40%, 50%. We did rollout our price increase on Bacon soda in October and that's going to be out in retail and.
We don't have further plans to take take price really.
Okay. That's helpful and speaking of commodities among the website for this mega lock product it looks like a pretty commoditized product.
And it sounds like you have.
A new competitive threats coming in undercutting you.
First one talking about it so I'm, assuming it's now im assuming its still early inning.
Can you give us some context to assess the risk obviously, if everything else was up two and this drove without tenants big how big is it like how big was it before this how big is it this quarter.
And how do you plan to deal with that headwind going forward.
Yes.
<unk> has faced in low priced imports for years, even pre COVID-19.
We were a little protected from that because of how difficult. It was to get shipping containers and so the the U S market was a little bit more protected and so.
It did really well during those few years.
So once you know shipping constraints were lifted.
<unk> came back at low prices.
<unk> were there and we've lost share. This is a very low profit business. This one SKU. This one product line.
And so we are looking hard at how to restructure that business and so not a lot.
Talk about today, but.
I would just tell you, yes revenue was down or volatile, but the impact on profit is minimal.
Okay. That's helpful. I appreciate it I'll pass it up.
Thank you. The next question comes from Jon Andersen from William Blair. Please go ahead.
Hey, good morning, everyone. Thanks for the question just one.
That's a shot it may be too early for you to comment in detail but.
You mentioned a couple of times that.
You have one of the better or best.
You broke up.
And then last Boston.
Hey, John Yes, you can hear US you broke up.
We will give it to understand given the right.
Given kind of the current macro is the innovation for 'twenty for likely could be tilted more towards value.
Premium and if you could just kind of characterize it a little bit given matt's comments that it's one of the best or better new product lineups that you've had.
Yeah, well look I'm.
It's a logical question, but it is a.
As the first week in November and we're going to unveil all those new products.
And the January 1st week of February when we give our outlook for next year. So it's best to just stay tuned on that one John.
Great. Thanks can I squeeze one more in.
So we didn't really whiffed on the first one so just yet.
The second one.
I'll try again.
Just water Pik could you give us a little bit more detail around where that business is versus your plan year to date and really more importantly, what your expectations are going forward you should look to 2024 things.
Well look.
This was a reset year for order pick you know the whole idea was to get close to plan.
To have a level year when it comes to <unk>. It comes to sales. So the business has been struggling because during COVID-19 pretty flush people staying home a lot of lot of waterflood shares got sold.
In 2021, and even some in 'twenty two so that's where the struggle is in 'twenty three and then Theres always.
Knock offs that we have to deal with.
We see more and more of those as well as some private label.
Which is which is.
There is not a new thing, but it's been more more significantly in 2023, but that business has been around for four decades.
It is the Cadillac when it comes to.
Pluses and we have innovation coming as well.
For water Pik, which we'll talk about.
At the end of January or first week of February but.
Innovation and maintaining.
Maintaining the brand equity that the water pick is the premier waterflood is our strategy going forward.
Yes.
Thank you. The next question comes from Javier Escalante from Evercore ISI. Please go ahead.
Good morning, everyone. My question has to do with volumes.
If you can comment what was in the comp.
Versus your growth of <unk>.
One 3%.
Is it something that is going on <unk> in Q4.
Also if you can give us a sense of underlying category growth in terms of volumes.
And then the old channel basis.
On how you stand vis vis that thank you.
Yes. The first one is similar to what I said with Warren there's two things that are kind of impacting the comp in Q4 one is.
Even for.
Hero is we did have some.
Big.
So that was a higher comp.
Second thing was the lender promotions, we had some discrete laundry promotions and revenue growth management activities that Matt alluded to.
<unk>.
Is what got pared down.
In Q4 this year. So those are the two things and it's as far as.
I can't really help you with.
The volumes for our for our 17 categories.
What I can I can tell you is that if you if you look at October.
We had consumption growth in 12 of our 17 category So continues to.
Sustain what we saw in Q3 and remember Q3 was.
Half of our growth was driven by <unk>.
Bye.
<unk>.
We see that to be 1% or better in Q4, but the good news is the <unk> and.
12 of our 17 categories.
We're seeing growth in October so it's the.
The beat goes on.
But you don't have a sense of whether.
Given the amount of pricing.
There has been a pullback in actual usage or purchase frequency.
No. When you have volume growth that would suggest that you are seeing.
Consumers migrate to your product year over year, we have higher we're shipping more cases or more units.
And like I said, we expect that to continue in Q4.
Okay. Thank you.
Thank you. The last question comes from Paul <unk> from Citi. Please go ahead.
Hey, good morning, everyone.
Keep it quick.
So just a quick question on the marketing expense as a percent of sales.
You're clearly returning to 11% is should we consider it as a new normal for you guys or in the past you've also done closer to 12. So just wondering if there's a new normal level of investment. Thank you.
We've said that 11% is where we wanted to get back to and we thought it was going to be a stair step.
It would go from 10% in 'twenty, two to 10 and a half of 'twenty three and then 11.
24, and we're already now at 11% and we think that's a good level of spend to.
To sustain and grow our brands.
Great. Thank you.
Okay.
Thank you there are no further questions I will turn the call back over to Mr. Farrell for closing comments, Okay, Alright, hey, thanks for joining US today, we had a great Q3, a lot of momentum going into Q4 and in 2024 and really looking forward to talking to you guys. At the end of January or early February with our outlook for 'twenty four so thanks.
Joining us today.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and we ask that you. Please disconnect your lines.