Good morning, ladies and gentlemen, and welcome to the Church & Dwight's Third Quarter 2024 Earnings Conference Call. Before we begin, I've 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 uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Farrell, Chairman, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Hi. Good morning, everyone, and thanks for joining us today. I'll begin with a review of the Q3 results, then I'll turn the mic over to Rick Dierker, our CFO and Head of Business Operations. And once Rick is done, we'll open the call up for some Q&A. All right, Q3 was another solid quarter for Church & Dwight. Reported sales growth was 3.8%, which beat our outlook of 2.5%. And that was thanks to strong results from our domestic, international, and specialty products businesses. Organic sales grew 4.3%, which exceeded our 3% Q3 outlook, with volume accounting for a very healthy 3.1% of our growth. Adjusted gross margin expanded by 60 basis points. At the same time, we increased marketing spending, and we gained market share in the majority of our categories. Adjusted EPS was $0.79, which was $0.12 higher than our $0.67 outlook. So nice beat; the quality results were driven by higher than expected sales growth and gross margin expansion. Our online class of trade continues to perform well, with online sales as a percentage of global sales at approximately 21%. Next, I'm going to comment on each of the three businesses. First up will be the U.S. business, with 3.3% organic sales growth. Volume growth was 2.6%, and this is the fifth consecutive quarter of volume growth in our U.S. business, with five of our seven power brands gaining market share in the quarter. Now let's look at a few important categories in the U.S. Innovation, of course, is a big contributor to our success this year, and every year. As I comment on the categories, I'll highlight the success of the new product launches. I'm going to start off with Laundry Detergent ARM & HAMMER Liquid Laundry Detergent consumption grew 2%, which outpaced a flat category with ARM & HAMMER share in the quarter reaching 14.7%. The unit dose category declined 1.1%. However, ARM & HAMMER unit dose saw a consumption growth of 16.5%, and we grew a share of 70 bps to 4.8% in unit dose. Regarding new products, this year we launched two new products into the detergent category, ARM & HAMMER Deep Clean and ARM & HAMMER Power Sheets. Deep Clean is our most proud premium laundry detergent, where we entered the mid-tier of liquid laundry. Deep Clean accounted for a little over 40% of ARM & HAMMER's liquid laundry detergent consumption growth in the quarter, and it's highly incremental to our franchise. The second new product is Power Sheets. This is a new form of laundry detergent, and you may remember in August of 2023, ARM & HAMMER was the first major brand to offer this new unit dose form in the U.S. Our fresh linen scented sheet is now the number two sheet on Amazon, and since launching this product into bricks and mortar this year, we have seen high consumer interest in the form. ARM & HAMMER is the number one sheet brand at Kroger. It's also the number two brand in Whole Foods. We feel great about the future prospects for this new form. Now I'm going to switch over to litter. The category was flat in Q3. That's category consumption. As expected, ARM & HAMMER litter consumption declined 1.5% and this reflects the absence of a competitor out of stock situation, which benefited our prior year's market share. The good news is we've held onto about half of our prior year share gains. Our new lightweight ARM & HAMMER Clumping Litter, which is our new product this year, is outperforming our expectations as our share of the lightweight category continues to grow. This is important because lightweight accounts for 17% of the clumping litter category. Hardball became the number two major brand in the lightweight segment in Q3. Now I'm going to switch over to personal care. The gummy vitamins business continues to be a drag on the company's organic growth. The gummy vitamin category declined 0.3%. We can call that flat in Q3, which is an improvement from the category declines in the past few quarters. The bad news is our consumption was down even greater. We were down 10%. The improvement of this business is taking far longer than we expected, and as you saw in the release, we have reduced our expectations about the long-term growth and profit of the business. This resulted in a $357 million write-down of the book value of the assets. We continue to move forward with our stabilization actions, which include new packaging, upgraded formulas to improve the consumer experience, and higher marketing investments. What gives us some degree of optimism for the business is the innovation that we have coming in 2025. Next up is BATISTE, which continues to see strong growth with consumption up 6% in Q3, growing share to 46%. BATISTE continues to be the global leader in dry shampoo. This year, we launched BATISTE Sweat Activated and BATISTE Touch Activated. These innovations continue to bring new users to the category, which is very important, and already these two new products account for 2% of the dry shampoo category, and Sweat Activated is the number one new product in dry shampoo. Over in mouthwash, THERABREATH continues to perform extremely well. The mouthwash category was up 5% in Q3, but here's a few stats. Alcohol-based mouthwash was down 1%, while the non-alcohol category grew 11%. THERABREATH is the number one alcohol-free mouthwash with a 35% share and is the number three brand in total mouthwash with an 18% share. Again, over to new products, this year we entered the antiseptic segment of the category with the launch of THERABREATH Deep Clean Oral Rinse. It's important to note that the antiseptic subcategory represents about 30% of the $2 billion mouthwash category, and our launch into antiseptics has accounted for 100 basis points of our 400 basis points year-over-year growth in market share. So, a great indicator of the future for the antiseptic line. HERO is the number one brand in acne care, with a 22% share and continues to drive the majority of the growth in the category. The patch category grew 42% while HERO grew patch market share by 1.7 basis points to 57% share. So HERO continues to launch innovative solutions, and we're very bullish about the future of that brand. I want to provide you with a couple of remarks on promotional levels in our household categories. In the liquid laundry detergent, we've seen stable sold-on promotion in the low 30s over the last few quarters. Over in unit dose, it's pretty much the same story. The percentage sold on promotion is also stable, averaging in the low 30s over the last few quarters. Litter is a different story. In litter, conditions are different and promotional levels have increased, and here's the trend line. If you look at Q1, sold-on deal was 15.5%. Q2 was a little over 18%. In Q3, it was 19.5%, but it's going to be even higher in Q4. The increase in litter promotions is primarily driven by one major competitor, where sold-on deal exceeds 40%. All right, turning now to International and Specialty Products, our international business delivered organic growth of 8.1% in Q3. That's right on our algorithm of 8%. This was driven by strong growth in every one of our subsidiaries, as well as our global markets group. Finally, Specialty Products organic sales increased 7.5%. That's three quarters now of solid organic growth for this business. We're confident that this division will achieve 5% organic sales growth this year and will hit our evergreen growth targets. So, I feel great about our progress in Specialty Products. This commentary on the consumer: In July, we noted a deceleration in consumption in our categories. This continued in Q3 as we expected, after seeing 4.5% growth in our categories for the first five months of the year. June, July, and August were closer to 2.5%. Now in September, we saw consumption in our categories strengthen to about 3%. And then in October, category consumption was up 5%. But let's all remind ourselves that the hurricane and the port strike no doubt influenced those results. So we remain cautious in Q4 regarding the U.S. consumer and category growth rates. I want to wrap up my comments by reiterating that the company is performing well with all three divisions delivering strong growth. I want to thank all the Church & Dwighters out there for doing such a great job each and every day. Great team. And now, I'm going to turn it over to Rick to provide more color on the quarter and full-year outlook.

All right, thank you, Matt, and good morning, everybody. We'll start with EPS. On a reported basis, we had a loss of $0.31 a share primarily due to non-cash asset impairment of our vitamin business. Third quarter adjusted EPS was $0.79, up almost 7% from the prior year. The $0.79 was better than our $0.67 outlook and is a high-quality beat primarily driven by higher than expected operating profit. Reported revenue was up 3.8% and organic sales were up 4.3%. Organic sales were driven by volume of 3.1% and positive price mix of 1.2%. Volume was again the primary driver of organic growth, and we expect volume growth to continue in Q4. Our third-quarter adjusted gross margin was 45%, a 60 basis point increase from a year ago, primarily due to productivity volume mix, net of the impact of higher manufacturing costs. Let me walk you through the Q3 bridge. Gross margin was made up of the following: a positive 140 basis points impact from volume and mix, a positive 130 basis point impact from productivity, and a 10 basis points positive impact related to acquisitions. This was partially offset by 220 basis points from higher manufacturing costs. Moving to marketing, marketing was up $18 million year-over-year. Marketing expense as a percent of net sales was 12.3%, or 80 basis points higher than Q3 of last year, and helped drive share gains. For Q3 SG&A, adjusted SG&A increased 20 basis points year-over-year, primarily due to international R&D and IT investments. Other expense decreased by $11.9 million. We now expect other expenses for the full year to be approximately $65 million on an adjusted basis. In Q3, there was a tax benefit of 25.9%, and this was related to the vitamin impairment. Excluding that impact, our effective rate was 23.8%, which compares to 24.1% in Q3 of 2023. The expected adjusted effective tax rate for the full year is now approximately 22.5% versus the previous outlook of 23%. And now to cash. For the first nine months of 2024, cash from operating activities was $864 million, an increase of almost $70 million driven by higher cash earnings. We now expect full-year cash flow from operations to be approximately $1.1 billion. We're having a great year regarding cash. CapEx for the first nine months was $125 million, almost a $4 million increase from the prior year. As capacity expansion projects proceeded as planned, we expect 2024 CapEx of approximately $180 million as we complete the majority of those investments that were initiated in 2023. We continue to expect CapEx to return to historical levels of 2% of sales in 2025 and beyond. And now for the full-year outlook. As Matt mentioned, while we saw U.S. consumption in our categories improve slightly towards the end of the third quarter, we remain cautious regarding the U.S. consumer and category growth rates for the remainder of the year. We continue to expect our organic revenue outlook to be approximately 4%, and reported sales growth to be approximately 3.5%. We continue to expect full-year, adjusted EPS to be approximately 8%. Turning to gross margin, we now expect expansion of approximately 110 basis points at the high end of the previous range and we now expect marketing as a percentage of sales to be above 11%. As you read in the release, to the extent our business does better than our outlook, we plan on incrementally investing behind marketing and SG&A to help enter 2025 with momentum. With that, Matt and I would be happy to take any questions.

And we will take our first question from Chris Carey with Wells Fargo Securities. Please go ahead. Your line is open.

Hi, good morning, guys. Thanks for the question. Hi, how are you? I'm going to start with the outlook for Q4. I want to understand if there are any inventory timing dynamics, which are going into Q3 or Q4, or if this outlook is primarily reflecting, I guess, a view that consumption trends should start to decelerate through the quarter, as you lap some of these atypical benefits that maybe you've seen of late. And so, we should be expecting that, and perhaps just some lingering conservatism about not trying to call, any improvement in category growth rates versus, say again some sort of inventory or shipment timing dynamic.

Yes, I'll take the first one, part of it on inventory, and Matt will talk about the category consumption growth rates. We hear small things on retail inventory, but not anything that we would call out, and not enough to impact anything. There are small examples, but not enough to influence what we would be calling.

Yes, and Chris, as far as the categories grow, if you just look at Q1, Q2, and Q3 for some of our major categories. So if you look at liquid laundry detergent Q1, Q2, Q3, the category was up 3%, up 1%, flat. You look at litter up 5%, up 2%, flat, and then go to mouthwash up 13%, up 9%, and then 5%. Patches are pretty steady high double-digits. But the acne category is 14%, 8%, 7%. But obviously HERO being patches. So, we're somewhat unaffected by that. But if you just look at the trend, you can see a deceleration. So that's one of the reasons why we'll say, hi, we're still cautious about the economy, that's the categories. We tend to be doing better because we're taking share, but that's always the only lever you have when things are starting to slow down. So, yes, we feel good about our performance. We called 3% in Q3. We put up to 4%. We had some good performance in our brands, some share take, but kind of like where we are going into Q4.

Okay. That makes sense. Then one quick follow-up would be, there's an expectation over time for the U.S. business to be delivering 4% top-line growth. Clearly, you're still trying to figure out what the appropriate level is in the current environment relative to where the categories are going. But how much visibility do you think you have in that top-line growth objective in the U.S., from here it's not really a 2025 guidance question per se. But just the ability to deliver against an objective, which came up by about a point relative to past in the current environment. And if not, how long you think you'd need to get there again? So thanks so much.

Yes, that was sort of a veiled attempt at 2025 guidance. I want to correct you on one thing. As far as our algorithm goes, when we moved from 3% to 4% top line, the U.S. portion of that was going from 2% to 3%. So—and obviously that's the big dog. It's the lion's share of our business. So, the expectation is that we're going to grow at 3% going forward. So 3% for the domestic business, 8% for international, 5% for SBD. That's how we get to our 4%.

Yes, sorry if I didn't come across. That was really embedded in the question? Thanks.

Yes. And look, we got to look at our portfolio and say when you have a long-term algorithm, it's not just '25, it's '25, '26, '27. And so, we look at the strength of our brands, we look at the innovation we have planned over a three-year basis. '25, '26, '27. And consequently, we encourage that. If you look back, our history is we hit our algorithm just about every year. In fact, over the last 10 years we've hit 4%. That was one of the reasons why we said, hi, why don't we just make that our algorithm going forward?

Yes. And I think just to add to that, why do we take share over time? Well, one of the reasons is we have great innovation and we're putting support behind innovation, to drive trial and grow households. And that's kind of also where we're reinvesting, as we over deliver in 2024. So that's why we think we're going to enter 2025 with momentum.

Yes. So when you have contracting categories, the way home is always going to be innovation and share gain.

Okay. Thanks a lot, guys.

Thank you. We'll take our next question from Rupesh Parikh with Oppenheimer. Your line is open.

Good morning and thanks for taking my question. So just going back to the vitamin business. So an impairment this quarter. How are you thinking about the path to stabilization and then growth? Do you think in '25, we may start to see stabilization in that business, and just any green shoots maybe you're seeing with the efforts there?

Yes. What would be—we've been at this now for probably more than a year and a half, and the things such as graphics and packaging and messaging, those things that we can control are in place. As far as innovation goes, that has not hit the market. We really haven't had any meaningful innovation for a few years now. And that's what, as I said in my earlier remarks, gives us some optimism about stabilizing this business in 2025.

Yes. And maybe some other green shoots. As Matt said, we have probably 10 different things that are happening. The core of it is we got to get the consumer being delighted in our product again, right. And making sure that we're doing all of our reformulations so that consumers are picking our product, and our brand that they know and they love for a long period of time. But some green shoots, I would say we've seen some lifts, and some retailers where a few of these things are ahead of the curve. And so that's been encouraging. We did—one of the 10 levers was looking at price gaps, and we adjusted a price gap in a couple of areas, and units are up dramatically. So there's good progress. Like Matt said, innovation really is coming in March, April of next year. So we got to give that a shot, and we're optimistic.

Yes, if you're looking for green shoots, this is a smaller part of the business, but L'IL CRITTERS has been really responsive so far. In fact, L'IL CRITTERS gained some share in the past quarter. So that's a good thing. But really the lion's share of the business is adult, and that's where we need the innovation.

Great. Thank you. I'll pass it along.

Okay.

Thank you. We'll take our next question from Bonnie Herzog with Goldman Sachs. Your line is open.

All right, thank you. Good morning. I had a question on your marketing investments. You called out expected stepped-up spend in Q4, and you raised your guidance a bit this year to more than 11% as a percentage of sales. So could you give us more color behind the greater investments in terms of types of spend, any changes with strategy, either channel, medium, etc. And then I would be curious to hear if more of the dollars will be shifted internationally. And then, if I may, finally just on a go-forward basis, should we assume you're going to continue to step up this spend as a percentage of sales in the next several years, to support your 4% organic sales growth expectations, as you've called out in your evergreen model? Thank you.

Hi, Bonnie, that's a good detailed question. I'll start and I'm sure Matt wants to add a couple thoughts. But when you look at our raise of marketing spend going to 11% to somewhere between probably 11% and 11.5%, that's meaningful. That's $20 plus million in some cases, and some of that is international across markets, because we're driving different brands and they're doing really well too. But THERABREATH expansion, HERO expansion, STERIMAR BATISTE internationally, but in the U.S. we have a lot of places where we're spending, but most of that spending is behind our innovation. Again, this is one of our best years of innovation. We believe that's why we're getting share in many cases. That's why we're doing so well and over-delivering even our top-line expectations. And so, a lot of the marketing spend goes behind things like Deep Clean on laundry, things like sheets on laundry, things like Hardball on Litter and our new BATISTE and TOUCH.

Yes. And the other thing I would add to that is 85% of our advertising is digital right now. So we have a great ability to move around, and take advantage of different vehicles at different times of the year. So I wouldn't say any more than that and go brand-by-brand. But Rick's right. Internationally is part of where the spend is in the fourth quarter, as is domestic, even a little bit in specialty products.

And as far as our future looking marketing as percentage, our algorithms around 11%. It all depends on how our share, share is the scorecard. So our shares are doing fantastically well. You heard in the release 5% of 7%, I think year-to-date we're 10% of 14% for all of our brands, all of our old power brands. So that scorecard is what really matters. And as long as we're gaining share, and more often than not, I think that's the right level. And if we feel like it's not, then we'll adjust.

All right, thank you. I did ask multiple questions in one, so I'll pass it along. Thank you.

Thank you. We'll take our next question from Steve Powers with Deutsche Bank. Your line is now open.

Thanks very much. Actually to follow-up on that. Sorry, I might have missed it in your answer, but the marketing spend in the third quarter came in a little bit lower than least external expectations, you know, obviously made up for in the fourth quarter. But does any—was there anything from your perspective that shifted that marketing support from 3Q to 4Q, or was it just more of an anomaly versus how we all on the outside modeled it?

Yes, I think it is more of an anomaly. I mean, we're getting very specific, but we were up 80 basis points in Q3, which is a significant increase. We had told everybody that we were going to be down a few hundred in Q4 because we were spreading that spend that was maybe a little higher in Q4 of last year over to Q1, Q2, and Q3, to better support innovation. And I wouldn't even call it timing. It was probably just a disconnect between the outside models, and what we were going to do.

Okay, cool. And I guess more of an overarching question, you've kind of touched upon some of this, some of what I think is going to be in your answer, but the perception among many investors of late is that Church & Dwight's in a relatively fragile position here navigating this second half and heading into next year. Just given that so much growth has been driven by THERABREATH and HERO, whereas investors view the core legacy business as being a bit more choppy, probably with added focus there on categories like vitamins and litter of late. But just how do you respond to that, either with respect to reasons to believe in the resilience of THERABREATH and HERO, or conversely, reasons for more holistic confidence in that legacy core business?

Yes, hey, I'll take a swing at that. Rick can kind of pile on. Look, we manage a portfolio and we're in lots of different categories. And yes, it's true that THERABREATH and HERO have delivered outsized performance over the past year, but this ebbs and flows over the years. If you look back over many years, there are different times where different businesses pull the train. So I think the new products that we have in those, some of the categories that you may be referring to, like laundry and litter are going to be a big part of our growth in the future. That will be sheets and that would be hardball. And also the innovation and other categories outside of patches as well, but if you look long-term, THERABREATH is not done. When we bought this business, we said, hey, this can be a $0.5 billion business over time. So, whereas we'd say, yes, the distribution for that business has probably been achieved as far as number of doors we haven't gotten is spread out on shelf with other variants. So I think there's still significant growth ahead of us for THERABREATH. And as far as HERO goes, we don't want to get distracted by moving into other categories. We want to make sure we nailed and grew patches and created more awareness around that and more household penetration. But the HERO brand has the opportunity to spread into adjacent categories going forward. So I think the investors should be confident that those two brands will continue to grow in the future. Because of the innovation we have in laundry and litter, dry shampoo, etc., we have differentiated products that will drive growth in the future as well.

Yes, and I would just echo a few of those comments. I think THERABREATH and HERO have years of runway, TDPs in some cases, but just household penetration like mouthwash is an example of 65% household penetration and THERABREATH is around nine. It's now the number two mouthwash. So there's lots of runway for those two. But really the crux of your question is, well, what about your base business? And so I would say a lot of optimism on how to have a base business. Litter, for example, it's kind of messy right now as you look at year-over-year comps because some competitor was out of stock for such a long period of time. But if you look back before the outage that they had at our share and at our share today, we've maintained about 40% of those share gains. And so I don't really look at the week-over-week or month-over-month. Numbers are kind of meaningless right now. But if we look at baselines, that's what I look at. And so I feel like litter is strong and getting stronger. Innovation, as Matt said, laundry, we're still at all-time high shares. We feel like over a long period of time, we have the same stair step up that we've experienced before. We're entering the mid-tier with Deep Clean. It's doing well. It's driving incremental category growth for retailers. Unit dose is hitting all-time share highs, and we're going into sheets, which is a category that's growing 30%. So a lot of optimism.

Great. Thank you very much.

Thank you. We'll take our next question from Dara Mohsenian with Morgan Stanley. Your line is now open.

Hi, good morning, guys. So first, just to follow up on category growth. Matt, you didn't sound particularly excited about the pickup in category growth in September, October. Is that just because you think a lot of it was driven by hurricane volume and as you parse the underlying data, you didn't necessarily see as much of a pickup? Is it just a short enough period of time that you're not much more enthusiastic around category growth? And I know you touched on it a bit, but just trying to get a sense as we look beyond Q4, if we're in this more muted category growth environment given a lack of pricing or if you think you're starting to see some green shoots from a category perspective? Thanks.

Yes, I suppose I kept my enthusiasm in check. Dara, if you examine the first few weeks of October, you observed significant consumption growth in certain categories. However, we believe this level of growth is not sustainable as it was markedly different from what we encountered in any week during September or afterward. The hurricane and the port strike certainly had an impact on the results. Therefore, if there was some pantry loading in the initial weeks, that would just be shifting demand from later in Q4. I would consider October to be somewhat of an outlier and think the quarter will align more with September, where we saw a shift in growth from June, July, and August; our categories increased by 2.5% compared to 3% in September. However, our observations are not meant to broadly comment on the U.S. economy; we are specifically addressing our categories. When we analyze our categories, that is what we are discussing. To me, a 3% growth rate is still quite healthy.

Yes. If you look back at history, if we were growing 4% as a company, many times the categories would be growing 2% or 3%; we would be taking share, and that's how we got to the 4%. So I'd say it's kind of in line with history.

Great, that's helpful. And then on HERO and THERABREATH, can you give us an update on how much of the business is international today for each of those brands and how much incrementality you see looking out to 2025 in terms of expansion potential?

Yes. What I can tell you, without quoting numbers for sales, is that we've been running really hard to get THERABREATH and HERO registered in other countries. Our goal was to have HERO registered in 40 countries by the end of 2024, and we're there. So we feel good about that. The impediment, of course, is regulatory bodies, and they vary from country to country. But we're pleasantly surprised that both brands travel well, even THERABREATH. Now, THERABREATH is the highest-priced mouthwash market today in the U.S. Naturally, when you go to international markets, there's a raised eyebrow about how you be successful with such an expensive mouthwash. But yet it has been. So we'll keep that in mind for maybe end of January when we talk to you guys at our Analyst Day. Then we'll frame out a little bit better HERO and THERABREATH percentage, U.S. versus international, how many countries we're registered in, and what expectations are.

Great, thanks. I'll pass it on.

Thank you. We'll take our next question from Peter Grom with UPS. Your line is now open.

Thanks, operator. Good morning, everyone. I just wanted to follow up on Dara's question there. I mean, maybe just to be clear, can you just help us understand what you are assuming for category growth in Q4? Matt, I think you just said you're kind of assuming the September trends for the quarter rather than the stronger October or the weaker July and August. So just—I just wanted to clarify that. And then I guess if that is the case, if you are assuming slightly stronger category growth this quarter, and I apologize if I did miss this, but can you maybe help us understand what's driving the sequential slowdown in the 4Q organic sales? Thanks.

Well, look, let's go to your first question with respect to categories. It was 4.5 for the first five months of the year. The next three months were 2.5. And then we'd say, hey, September was 3% and October was a really big number. We'd say Q4 on average would be 2.5. And we'll say, it will take—will say, hey, the month of October is an anomaly, and that November, December will be a lot like June, July, and August. And that's no different than what we thought in July. So consequently, yes, we had a really good third quarter, but we beat our number organically. But we're saying, yes, for the second half, we still feel good about 3% in total for the second half. And that's why we said 2 to 3 is fine as a call for Q4.

Got it. I'll pass it on. Thank you.

Thank you. We'll take our next question from Anna Lizzul with Bank of America. Your line is open.

Hi, good morning. Thanks so much for the question. I wanted to touch on gross margin, which outperformed this quarter. The guidance for the full year seems a bit conservative. So I was just wondering if you could talk about your outlook on commodity costs and manufacturing. I think you noted in Q3 that manufacturing costs were a bit higher. Is that also expected to impact Q4? Thank you.

Yes, hey Anna, it's Rick. I think from a gross margin perspective, you're right. We're a bit more conservative. If you say the full year is at 110, it means Q4 is up slightly. I would just remind everyone that Q4 a year ago was our high water mark at 44.6%. That's part of it. Some of the commodities were flat in the first half, like ethylene. They're up in the back half around 9%, same for liner board. We have investments in our warehouse that we talked about at Analyst Day in our network, and that built throughout the year. So yes, could that be a little conservative, maybe? I think also we have—as we look forward, we still are seeing inflation. Like that is— that’s what we're seeing. And our job is to offset that with productivity. So that's what we're focused on. And then the other thing on gross margin is, as we make investments to support these new products, like in trade or couponing, that also impacts gross margin. So that's kind of an eclectic and wide-ranging view. But those are the details.

All right, thank you. That's helpful. And just as a follow-up on the category discussion here, are you seeing any difference in customer purchasing habits between retail channels or on quantities here? Thanks.

No, I would say remember we've been growing volume for five quarters in a row, and we continue to see most of the categories are volume driven growth. Our categories and purchasing patterns are the same.

Okay, great. Thank you so much.

Thank you. We'll take our next question from Lauren Lieberman with Barclays. Your line is now open.

Great, thanks. Good morning. Just want to talk a little bit about the promotional environment and laundry in particular. In last year's fourth quarter, you talked about pulling some of the unprofitable promotional activity and scanner sales were down. So just want to think about 4Q. Is it kind of like an easy comp as you get into fourth quarter or is it like the right base now and last year was the adjustment period? And anything else you'd add on kind of promo environment in laundry? Thanks.

Yes, I'd say you're right about that, Lauren. We did eliminate some what we thought were just unprofitable or uneconomical investments. What's different this year is we have such a great year in new products, particularly in household with litter, with hardball and deep cleaning in laundry detergent. That will be one of the places we'll be investing in Q4 in trade promotion. One of the things that Rick called out in his response to gross margin.

Yes, okay. One thing I noticed also, I know Deep Clean has been really successful and I may be being too picky, but it was interesting to me that in some of the Q&A thus far, when you've been talking about laundry innovation, you're putting, it seems like a bit more emphasis on sheets versus Deep Clean. Can you just maybe talk about the direction of travel you see for category development? How significant do you think sheets can be? Because Proctor, of course, has been doing a trial of this and as they go, probably really helps to amplify awareness in the category of this form. So just curious your thoughts on the relevance of sheets as a new form, and then the profitability of that versus the traditional liquid business, even the higher price point Deep Clean?

Yes, you're right. It is a good question. And it's true. We're very excited about sheets. But let me go back to Deep Clean. So the whole idea around Deep Clean was to have a good, better, best strategy. So the good is the orange bottle; it's the base ARM & HAMMER. The better is ARM & HAMMER with OXICLEAN. And the best is Deep Clean. Deep Clean is in the mid-tier; it's our highest-priced laundry detergent. Just to give you some sense, it's got a 90% premium to the yellow box, not the yellow box, but the yellow bottle. And it's like a 40% premium for the ARM & HAMMER with OXICLEAN. But we're still at a 15-plus percent discount to premium. If you look at the trends, it's mid-tier that's been growing. So we feel good about the timing of our launch. It's important that that sticks so we have good, better, best going forward long term. We think that Deep Clean can be a source of growth for us in the future. And that's, I would say if you go back to Steve Powers' question about why you feel good going forward about your big businesses like laundry and litter laundry in particular, it's reasons like that. And then sheets. Sheets is a brand new form and it's efficacious. There's no plastic. Could it cannibalize some of your existing businesses? That's true. But we're the first major brand to launch in this form. It's good to be first. So we think that'll be a bigger emphasis for us going forward. Unit dose today is like 22%, 23% of the category. We have not had a big share in unit dose historically, which have been bouncing around between 4% and 5% of that very big subcategory. So sheets then, in addition to our existing products, is the way home for us to grow and unit dose. So I appreciate the question because this all fits together and that's why we think we're in a good position going forward in the detergent.

Great. Okay. Thanks so much for all that. I really appreciate it.

Thank you. We'll take our next question from Kevin Grundy with BNP Paribas. Your line is open.

Great, thanks. Good morning, everyone. Question on litter and the promotional environment there and how you potentially intend to respond. Matt, as you mentioned, Clorox has stepped up promotion levels to remarkably high levels. Most of the regained share that they're seeing with Fresh Step is coming at the expense of ARM & HAMMER. So a couple questions. Have you been surprised by the magnitude of the spend here on trade support from Clorox? It's taken dollars out of the category. It doesn't do anything to impact consumption. Seems like you're trying to get the share back in sort of one quick swing. And then how do you intend to respond? It kind of feels like it has year markings of a potential price war like we saw in laundry, like over a decade ago. But Rick, if I'm interpreting your tone correctly, it seems like you're generally okay relinquishing the share gains over the past year. So your thoughts there would be appreciated? And then I have an unrelated follow-up. Thanks.

Yes, I'll give you a couple comments, and then Matt will chime in, I'm sure. My comments, we're really happy with where we are at litter. This year-over-year, as Clorox comes back in stock is what it is. Our baseline volumes are higher than they were. Our shares are higher than they were. We are really happy with 40% or so share gain if you look back when this whole stuff started. We're not going to go chase share on a race to the bottom to go promote. If we promote, it's going to be behind our innovation to go drive a fair share in lightweight litter because we think that's where the opportunity is. So that's what we're doing. I'm optimistic that we're going to retain share because that over time, it's difficult for cats to switch litters. It just is. After they've been out for a while and they have one product, that's what they get used to. So that's also why maybe the effectiveness of some of the competitor promotions aren't as high as they used to be because it's hard to switch litters or harder. So anyway, that's some context. Matt, anything like add?

No. When you see numbers like 40% to 45% sold on deal. So we're not going to chase that, Kevin. To the extent we promote, it's going to be behind hardball, which is our new product. And yes, obviously, when you're hit with a cyber event, obviously the expectation was that competitors are going to spend back to try to win back consumers, but we're going to be on the sidelines as far as spending a lot of money to chase that number.

Okay. Quick follow-up and then I'll pass it on. Just on portfolio pruning. So, Rick, I think you've expressed an openness here, which has generally not been part of the company strategy for a very long time. We naturally have the CEO transition which is going to be occurring in March. You need to bring a CFO on board. If you could just give us an update on potential parameters, scope, timing of what seems like it will be a potentially newer sort of leg to the stool, if you will, of the company strategy. And then I'll pass it on. Thank you.

Yes, I mean as a backdrop, we got to remember a lot of stuff that we do we're going to keep doing. The company is performing extremely well. The strategy is sound. We're leaders in e-commerce growth. As an example, M&A is best-in-class. We can identify, acquire, integrate, and grow acquisitions. We do a few things uniquely in the company. Every year, we go value every brand that we have. And we know what brands or businesses are creating value or destroying value. We take that back, and we usually have internal teams that go turn that around or address root causes. To the extent that we don't, then that's when more strategic conversations are had. Now I'm not going to front run any of that. I’d say maybe in early to mid-next year, we'll talk more about that. But it's really, we've been doing it for a long time. It's what we do internally, and we've got to hold a kind of mirror up to all of our brands, just like we do when we do acquisitions. But remember, we have a great portfolio of brands. We have a high-performing company. We're gaining share in most of our businesses. So, we're coming from a position of strength.

Yes. Hi, Kevin, I want to remind everybody too. If I think back to when I got the job in January of '16, within a couple years I had a new Head of Marketing, supply chain, R&D, sales. Three of those four came from the outside. So we've been here before. We just got such a rock-solid core of the company. There’s a lot of talent here. There's no way we could get the numbers that we get, year after year we have a lot of talent up and down the line. So yes, I think we're all excited about a couple searches, and getting some new people in the company, new ideas, new energy. So I think we're in a real good place.

Okay. Very good. I appreciate it. Thank you both.

Yes.

Thank you. We'll take our next question from Andrea Teixeira with JPMorgan. Your line is now open.

Thank you. Good morning. So on the gross margin side, how should we be thinking about the puts and takes ahead of commodities, and the timing of certain contracts influence your view, especially in fiscal 2025? And a follow-up on the M&A? I think that's the only question we haven't answered; we haven't asked yet. In terms of how you're seeing the landscape. I know you're very purposeful and cautious about what your targets are, but just as a follow-up and an update on how you're thinking about inorganic growth? Thank you.

Yes, I would say, I kind of commented already on we do see inflation as we look forward; we see inflation. Our job to offset that through productivity. As you take a big step back though, the different macroeconomic indications like China demand and really the U.S. economy, stable but not outsized growth. We have taken a position of not hedging as much as we usually do, believing that some of those commodities will come down over time. So I would tell you that's probably a good indication of our expectations as we go forward.

Well, look, we're always on the hunt. We generate so much cash. Of course, our criteria is pretty strict. So we do—pretty fussy about the things that we'll buy. It is true that you can buy a couple of businesses that could be fast growing for a couple of years, but then they have to grow 3% to 4% or faster, depending on which categories are going forward. So I would say, no, we're not saying that we're focusing solely on the existing portfolio. But I'll remind everybody, if you go back in time, we've had periods where we've had droughts before where we didn't buy a business. I think the longest one was probably between '08 and '11. When '08, we bought Orajel, and the next one was BATISTE in 2011. But if you look at that through a three-year period, we had three great years. So it's—we're not—our algorithm isn't dependent upon going for an acquisition.

Yes. And the reason we— as you look back, the reason we are more successful than most to identify and acquire, integrate, and grow acquisitions, because we're really fussy. And so, that's part of the model, and that's what we're going to continue to be. We want to make sure we do the right deal when we do the deal.

Okay. Thank you.

Thank you. We'll take our next question from Filippo Falorni with Citi. Your line is open.

Hi, good morning everyone. I wanted to ask you about innovation, and maybe you can give us some context of the contribution from innovation this year in laundry, and the rest of your business? And just any plans for 2025, and like areas of potential further innovation. And then a quick follow-up. So on the gross margin, as we think about elections and potential for tariffs, last time, there was some implication on the WATERPIK business from some portion that were reported from China. Maybe can you remind us any potential exposure on China tariffs? Thank you.

Yes, thanks for the question. On innovation, we're actually super excited about innovation. It's close to around 2% incremental net sales for us in 2024. Remember, we have a high bar. We don't call gross sales. We don't call gross new product contribution, that's incremental net sales. So about half of our growth is kind of coming from innovation, which is fantastic. That's been accelerated. It used to be 1%, 1.5%. And so we've built that muscle. We have a lot of different inputs. Carlos, our leader in R&D; Leslie, our leader in NPP, all across the commercial team, we are doing really well on innovation. I expect that to continue. I think as we look forward, we have great pipelines over the next two or three years. We're not really even talking about 2025 right now. We're talking about 2026 and even early conversations on '27. So that muscle's alive and well, and we're going to keep investing behind it and driving investment behind it. On China, right, just like everybody, we're well aware of implications there. I would say two things. One is we did reclass a lot of our SIC codes, import codes. And so that has helped and as you draw a circle around what may or may not be impacted. The second thing is we have moved some production outside of China. It's most material for the WATERPIK business, but there are plans in place and actions that we've taken to mitigate that impact.

All right. Thank you.

Thank you. We'll take our next question from Bill Chappell with Truist Securities. Your line is open.

Good morning and thanks for squeezing me in. Going back to vitamins. So I guess I'm having a tough time at work. Help me understand two things. One, just from a business standpoint, I mean, are you now thinking you need to spend more money behind it in '25? Or is it because with you being down 10% and the category being down basically flat, I'm not sure I understand the green shoots. It seems like things are getting worse. And so you can either step up and put a lot of money behind it, or you can kind of ease back and manage it more for cash. So are we at that point in a decision standpoint? And then, second, kind of related. I also don't fully understand maybe the impairment charge 10 years after acquiring the business. So maybe you can help me understand why that was there and the timing and what that says, if anything? Thanks so much.

Yes. Sure, Bill. I would say, let me take the—I guess, the second one first, is when we do an impairment charge; all that is, is just looking forward of our model on what our growth rates growth rate assumption is and what the category is growing at, and what our expectations are as well as our margin expectations, and they've come down since we originally put all those assets on the book. And so it's kind of a reconciling of that, right? The original expectations to what our current number is after we have amortization or—and we have value that versus the intangible numbers, and we say, oh, we have a gap and future growth and profits aren't as strong as they used to be. And so that's how you take a charge 10 years after. Your first question was on why do we think will we be putting more money behind it? We're not going to go chase incremental spending on promotions and trade and advertising. That was a few of the levers that we pulled this year. And you're right, some of that is not working as we had hoped. Some of the things are working, and they do have green shoots—the biggest, most important single thing that we can do is make sure that our core products are delighting the consumer. And that's why we're so focused on the innovation piece. We think this is the first time in a few years that we've put the full strength of the company on reformulating vitamins so that they—we have our taste advantage back. We're hitting key marks in the market on sugar free, on plusing up our vitamins. So all those things are, I think, putting us in a better position to compete, and they're way more important than spending more on trade or getting displays or do another packaging spend.

Yes. And the only thing I'd add to that is when you buy a business, the excess that we purchased pre-over tangible assets is largely going to be goodwill. So that's always going to be a big part of any write-off, and it's all dependent upon the DCF model. And as far as green shoots, though, that was not in our commentary. I think somebody offered up that we're asking about green shoots; we would say that we've done the things we can control. We have seen some benefit and some growth in L'IL CRITTERS. It's not the lion's share of the business. And as we—this business really struggled through and post COVID, and realized by the retailers. And in the meantime, we've been just working on improving our supply chain, which is now we have in a good place and in doing the work on new products. So innovation is ahead of us. And we thought 2024 was going to be an inflection point, it was not. That was dependent upon all the things we have talked about, meaning packaging and graphics and positioning and messaging advertising. But in the end, it's going to be the innovation, Bill, and as Rick went through some of the things, we're changing that's ahead of us in 2025. So this time next year, we hope we have a different conversation with you.

Got it. Which leads me to just on next year, we won't be having a conversation. So congratulations on the—I know we'll have you for a few more months, Matt, on the retirement and Rick on the promotion? Thanks.

Okay. Bill, I hope you make it to New York in January.

I wouldn't miss it.

Thanks, Bill.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.