Church & Dwight Co Inc. (NYSE:CHD)
June 11, 2013 6:00 am ET
James R. Craigie - Executive Chairman, Chief Executive Officer, Member of Executive Committee and Interim President of Domestic Personal Care Division
Matthew Thomas Farrell - Chief Financial Officer and Executive Vice President of Finance
William Schmitz - Deutsche Bank AG, Research Division
James R. Craigie
Talk about our [indiscernible] and then we have a very [indiscernible] great job [indiscernible] free cash flow. And we already [indiscernible] additional space on the cash flow we had and the tremendous balance sheet we had that we could lever.
So let me tell you the top 10 reasons. What have been the drivers behind our past success and total shareholder return, our future success. But first let me share with you some numbers. My favorite chart, I can stop here all day. During my tenure, I've been in charge of this company for 9 years. I'm in my 10th year now. And within that time period, our total shareholder return, which is the most common factor comparing other companies, you would have made 292% if you invested in Church & Dwight 9 years ago. The blue part of that chart is what stock grew. The yellow gold part is what the dividends were. You can see we're 100 basis points better than anybody else in our industry measured against -- in some cases, 200-, 300-almost basis points better. And the S&P 500, you can see in that time frame, only to 26%, I believe, the number is. So think about that, you have almost tripled your money if you invested in Church & Dwight 9 years ago. And our investors who investment with us love us, and our non-investors keep missing the boat. And they keep telling me, "Well, Jim, we missed you. We're waiting for an opportunity." And I keep telling them, "You don't worry about the opportunities. It's always there." Everything that's driven us in the past is still true for the future. And why we can continue to believe, we can deliver those great TSR results for 10 reasons.
Number one, we have what I call recession-resistant product portfolio. What do I mean by that? It's a very unique product portfolio. 60% of our brands are premium, like most of our competitors. But 40% of our brands are value-based brands. And that's been a real key success of ours, along with the growth of our premium brands. And when I say value, I'm just not talking about a slight advantage. Our value brands we have in the categories you see in the chart are about half the price of leading premium brands. So it's a significant, significant advantage. I mean, 100-ounce bottle of laundry detergent by the premium guys sell for $18. Our 100-ounce bottle sell for $9, a huge advantage that we take in the marketplace. And with the recession that's gone on since 2008, there's been a huge switch at households. This chart shows the laundry category, where households in the premium and mid-tier brands have switched down to the value brands quite significantly. You can see, in fact, the value tier of the laundry category now has passed the mid-priced tier in total dollar sales, almost 29% of the total business versus 26% for mid-priced. Even more importantly, over half of this somewhat U.S. household -- over half of U.S. households buy a value brand today. That's more than the mid-priced tier or premium tier. And as a result of that, with a great product innovation and marketing support, we have grown our share of the laundry category from 9%, up 50%, to 15% of the total category. In fact, we're the only liquid laundry detergent business in America that's grown shares since 2009, up 3.5 share points. If you look within the value tier where we play, we have gained 8 share points in the value tier. We're now larger than the #2, 3 and 4 players in that tier. Importantly, you saw a minute ago, you see Procter holds 60% of dollar sales on laundry. We hold about 15%. But if you look at actual wash loads, what people use, you could see the gap much closer. Procter is only about 37% of total wash loads, what people actually do at home. We're 26%. So we're closing that gap very much on actual usage of the product.
Now you say, "That's great, Jim. Again, what about the future?" And I'm telling you, we expect continued strong growth of our laundry business in 2013 and beyond. We've had tremendous distribution gains in the past year, catching up with our share growth in the accounts and catching -- and then reflecting our great new products out there. Now we're not going to tell you details. We know we have competitors sitting in the crowd. They like to know the details. They can rush on those accounts and try to fight the gains we've had, but -- so I'm not going to tell you any of those, which accounts, what we've got out there. I will tell you, though, part of that. We've got some great new products. We've got both ARM & HAMMER, our 9% share brand, and XTRA, about a 6% share brand. On XTRA, many of you don't know this brand or wouldn't be familiar with it. It's an extreme value brand. It's about 1/3 of the price of the premium brands in the marketplace. It's larger than Procter & Gamble's Era and share combined. It's larger than Sun, which is -- our big competitors, Wisk and the Sun brand combined. And we're launching 2 great new fragrances in 2013 to continue to propel great results here. ARM & HAMMER, our big brand, about a 9-share. We're taking a very aggressive lead this year. We're taking a lead on the next round of laundry compaction by taking water out of the bottles and shrinking the bottles down. It was a huge success with the category back in 2007, 2008. We think it would be a huge success again. And we're not waiting for everybody else. We're launching this. We're launching incrementally. In this case, the product is called Ultra Power. We've actually given back some of the savings from smaller bottles and lower shipping cost from this. 20% more loads in this bottle than it's larger size. It's easier for handling. It's a win for the consumer. It's environmentally friendly, less waste out there. And the consumer can control the dosage of the liquid product. They can't control that or what you've heard about [indiscernible] product. It's a win for the retailers, lower transportation cost, higher shelf return on investment, more bottles on the shelf. It leads to lower out-of-stock, and it helps drive category growth. And a little bit of new news today, it's off to a very good start into the market for about 4 months now. It's propelling the share of ARM & HAMMER Liquid Laundry Detergent. We're about 0.7 share point over the last 13 weeks. 70% of that, from consumer research, is incremental to the brand. And now ARM & HAMMER liquid has surpassed the all brand. It's the #3 brand in America in the latest 52 weeks, so far, early, off to a very good start. And you say, "Why are we leading compaction?" Because compaction is terrific for the laundry category. Last time it was launched back in 2007, 2008, category went up 5%. I think you will hear shortly or hear from Don Knauss at Clorox. Clorox has taken bleach through laundry compaction. That category is up 6%, 7%. So it's a great driver of laundry growth. A little secret to that, people tend to overdose compacted products. There will absolutely be more sales, and we can't stop them from doing that. We don't mind it. So that's a big first factor. We have a very unique, what I call, recession-resistant product portfolio.
Now I get ticked off sometimes because people think Church & Dwight is all about value, and that's what drives our success. Wrong. That's a big -- that's a good part of it. The other part of it is we know how to build our power brands, our premium brands. We have 8 power brands out of our 80 total brands. They represent about today 80% of our shares and profits. We focus a lot of our energy on these. They are all market leaders in their categories. You can see the 8 power brands here and where they stand in the categories they're in. Our formula for driving the share growth on this is pretty classic, but we do it extremely well. We have innovative new products I'll talk about in a second. We increase our marketing spending. We increase our distribution, and that leads to share growth. Again, no new news here, but we do all those factors extremely well. Let me show you how. First, our new product platform in 2013. I talked to you about XTRA a moment ago. I won't repeat that. I talked about ARM & HAMMER, some great new laundry products going out there. Ultra Last has a form of Cat Litter we launched late last year. It gives a better odor control in that, #1 new cat litter launch since 2005. And this year, we're launching a bigger size to help drive continued growth. Trojan, our condom business, we have a 76% share in America, a 66% share in total North America, launched a brand-new form of what we call the ECSTASY condom with a new feel to it and an ultrasmooth lubricant. And the ECSTASY line is the biggest part of our Trojan business. And our Nair brand, a depilatory, our #1 worldwide brand, launched a new form of Spa Clay with a trio of products inside one package for preparing the skin, removing the hair and moisturizing the skin afterwards. And then folks, we're taking a lead we started last year. We're expanding some of our core brands into adjacent categories or those called White Space categories. Those are pretty big categories. We're talking about getting into manual toothbrushes. We're just in power toothbrushes. I'm talking about getting the manual toothbrush. That's an $800 million category. I'm talking about taking our Orajel brand on the cold sore category. It's a $200 million category. I'm talking about taking our OxiClean brand, which is a laundry additive, into the dishwashing additive category. It's about $140 million category. I'm talking about taking Trojan, our business in condoms today and vibrators into the sexual lubricant category, about $250 million category. What we're doing? Manual toothbrush. We're taking the ARM & HAMMER Spinbrush brand into a thing called TOOTH TUNES with the technology we acquired from Hasbro into a musical toothbrush. It is really cool. This thing, if you put it in front of you, you wouldn't hear the music. You put it in your mouth, and it plays the music to your jawbone up to your ear bone. I tell you, if you have children who you have a hard time getting them brush their teeth, give them this toothbrush. You'll have a hard time getting them to stop brushing their teeth. It plays 2 minutes of top-rated music, encourages kids to brush longer. So moms love it already top 3 kids manual toothbrushes in Q4 2012. Better than that, we went out there and got the license to do the One Direction boy band, the hottest boy band in the world. You can see their accomplishment there. So your kids can buy and hear the latest and greatest music. Orajel, we took the Orajel brand with all about teeth pain into the cold sore category. We launched this in second half of 2012. It's a patented cold sore technology. The treatment starts healing with 1 dose. And it's already one of the top 10 SKU status in the cold sore category, so expanding the Orajel brand design in teeth pain into cold sores. Dishwashing, we have OxiClean. OxiClean is the #1 laundry additive -- it's the #1 brand laundry additive category. We saw an opportunity in the dishwashing additives category and launched this brand in the second half of 2012. What happened in dishwashing brands in America was the government forced the brand out of using phosphates. Phosphates are a very cheap ingredient to dishwashing brands. They help to make the glasses sparkle and things like that. The government made them take it out because phosphates caused a lot of problems in the water. We saw this opportunity. We took the OxiClean brand and brought it into this category. It's resulted in a tremendous growth of the additives category. We've already achieved a 10% market share, and we're launching a larger size of this in 2013 to further expand our growth. And then last but not least, the Trojan brand, which is one of our key brands. We're adding a special lubricant category. We call the product Trojan Crazy Sexy Feel. We hope to expand the category by appealing to Generation Y on this one. There is 3 SKUs with different benefits you can see there. And this is the product we do very heavy sampling. We're going to sample over 4 million boxes of Trojan condoms to put a sample inside, something the competitor -- the #1 brand in America is K-Y Jelly owned by Johnson & Johnson. They can't touch this. We have the condom business. A natural extension of that is use of lubricant. So we've got a tremendous family behind this great new product and sales force did a tremendous job to get this product on the shelf. You should know this thing, too, is off to a very strong start. We've already achieved a 5 out of 6 Share of Market in the 3 months, and the first-ever Trojan commercial in prime time. In America, we're not allowed to do condom advertising before 10:00 at night. We can, however, do lubricants over 10:00 at night. So I want to show you here for the first time ever, which is big for us. America is very regressive. This is not -- we wish your European mindset was over there. But let me show you this commercial. I got to fill 7 seconds here. If you're not feeling sexy after this, something's wrong with you, okay. So hopefully, the commercial -- this just broke air in America. It's really cool. Watch it. Turn the music up.
You are in this bordello setting. So I hope you have a really hot feeling after this thing. We gave Bill a case of this. So if you want some samples, see him afterwards. By the way, he hasn't used any of them. So it's all left. Anyways, this is our path to take Trojan to be truly a sex megabrand. I told you before we have 55 shares of North American condom market, which is the biggest condom market in the world. We extended a year or 2 ago into the vibration business with a whole line of Trojan vibrators. And now we're getting a lubricant business in that. So we're expanding Trojan to all these natural categories to create a sex megabrand. You can see there we've had share growth. And it's helping -- all this additional advertising we have in all forms is helping to drive the business. We take a good share growth across our condom line in all 3 marketplaces with all new product innovations. We also like vibrators and lubricants because while condom use declines over the years for the user, you can see on the bottom there, vibes and lubes are very steady over those time frame. So it's kind of a cool way to expand the usage of the Trojan brand over a consumer's lifetime. Again, the vibrator business, we have now the full lines, from the small to large size vibrators, a very fascinating category. Nearly 2x more adults use vibrators than condoms. That's pretty amazing. I'm kind of stunned as we got the category. 53% of adult women and 46% of adult men have used a vibrator. Again, I'm talking about America here. Europe, I'm sure, is like 100%, okay. 40 -- get this one, people often think, "Well, it's a vibrator. It's a woman thing." 41% of adult women and men have used it with their partner. And get this, people who have never used a vibrator, more than half of them believe that a vibrator is a healthy part of woman's sex life. Or certainly, 95% of people who have used it believe that. So vibrators are an emerging thing. And we did some interesting things to try to drive this more mainstream usage in America. If there are more mainstream than Fifty Shades of Grey book -- series of books came out, #1 bestsellers out there, so now we know all those mommy porn in America. The movie is coming out in 2014. So sex is becoming mainstream in America. It's been mainstream over here for about 100 years, but it's becoming more mainstream in America. We actually did an interesting thing. We gave away 10,000 vibrators in New York City last August. It shut the city down. It had blocks lined up for 5 blocks. Mayor Bloomberg was out there with a 16-ounce soda and telling people to shut it down. And the front page of the New York Post -- he came and his troops because we're causing such traffic jam. Howard Stern announced it in the morning, and then people lined up for 5 blocks. That's the front page of the Post, Buzz Kill, when they shut it down. The next day, we reopened it up in a meatpacking district of New York. We're not stupid. And the people in line again, they got their vibrators back. It was so successful. We'll expand the program of 13 cities in America this year to drive expanded distribution. We want retailers to understand this is normal. This is mainstream. Don't think it is something for sex shops. All stores should have it. And it's really helped us to drive increased distribution of the vibrator line in America.
So you take those innovative new products and now you want to increase marketing spending behind it. And we've done just that. This chart shows you over the last 4 years, you could take our advertising, our consumer and our trade spending, how we've steadily increased our marketing spending over the past 4 years.
Distribution, I told you about earlier. This is an interesting chart. This shows you -- we're back to 2009 and said what we had in distribution. Market data is a 100 index. How much we can increase distribution just in the last several years. And I told you in 2013, we're not ready to release the data yet. But at 2013, across every one of these core 8 brands, we've increased distribution even more. So we've done great job of growing the distribution of our brands. And pulling the shelf space will hold the share in most cases.
Last but not least, it does lead to greater share growth. Here's a chart of our 8 power brands over the past 5 years, so 8 brands in 5 years, 40 opportunities. In 75% of those opportunities, we have grown share. I know some other major competitors are bragging [indiscernible] 50 finally. We've been at 75% of the time. We have grown our shares on a great program of new products, increased marketing, increased distribution. And you can see some of the results here. ARM & HAMMER Liquid, look at that, 16% compound average growth rate since 2003 until 2012, new products, increased marketing, increased distribution. The Cat Litter business growing a compound average growth rate of 14%. OxiClean has been a huge success. Since we bought this brand in 2006, a 22% growth rate over that time frame. Pregnancy kits, when I came in the business back in 2004, we first bought this in 2001. It was 12% share. Today, it's a 30% share. Later this year, results are 32% share. We told you we're taking this category with great product innovations, strong consistent marketing support. So you can see we had a great year in 2012. 6 of our 8 power brands grew their share to record levels, and we exited 2012 with great momentum. 7 of the 8 power brands grew in Q4. 4 of the 8 hit all-time record quarterly shares. So we know how to grow power brands.
Number three is, hey, sometimes people say, "You're little, Church & Dwight. You're only $3 billion in sales. How do you possibly defend yourself against companies that are 10, 20, 30x your size?" We know how to do it. We faced this problem with OxiClean a few years ago. We were -- we bought this brand in 2006. We took about 27% share to a 40%, almost 41% share by 2009. And then the big dog and the cat, we did that through new product innovations, increased marketing support. You can see that we almost quintupled the marketing support there. And then the big dog in the category decided, "Hey, what the heck is going in the laundry additives? Why aren't we in that category?" They launched their big billion-dollar brand name into the category to go after it. Well, we didn't sit back. We ferociously defended the brand with some great new product innovations. We also co-branded OxiClean and other forms like ARM & HAMMER and OxiClean to increase the brand awareness out there. We increased our ad spending. OxiClean is the #2 most advertised brand in the fabric care category. And the end result was not only didn't we lose share to the big dog, we actually grew our share. We actually now are over a 41% share in the category. And all the share gain that the #2 guy in the chart there got came from other competitors and very formidable. So we know how to defend our brands even though we're relatively small.
Number four, international growth, something you maybe very interested in. Church & Dwight, before the Carter-Wallace acquisition in 2000, was only about 2%. We're almost a U.S. business. With Carter-Wallace, we picked up a fairly good chunk of personal care brands. Today, we're about 18% international. That mix is over 6 countries. We have 96% of that business, about $0.5 billion, very good growth rate. All these core countries, we have subsidiaries. Then we have very strong growth rate except for France, thank you. We're working on that. And the key driver is very similar to what we've done in the rest of the world. We've got some strong, very strong international brands, Batiste; RUB A535, which is the Icy-Hot of Canada, #1 brand. We're expanding our corporate brands, taking ARM & HAMMER to many of these countries with our key brands with key innovations. We are bulking up through acquisitions. We bought a fantastic dry shampoo brand called Batiste in the U.K. We're now expanding to other countries, and we're leveraging our One Company strength. We're doing R&D, new product development across the world as one team across segments, across the world. So we're trying and becoming a set of 6 or 7 subsidiaries acting independently. We're acting as One Company now, which is great for the cost savings and also great for driving the top line.
Number five in our top 10 reasons is gross margin. Gross margin got to us, folks. I mean, we believe that gross margin is one of the major keys that drive a company. We've got a great success record here. We've driven up our gross margin over the past 11 years by 1,500 basis points from little below 30% to 44%. Over the past 5 or 6 years, we're the only company to have -- to lead the pack there with 500-basis-point improvement, almost 2, 3x Colgate out there. And you can see the other competitors in the chart. And there is 4 key reasons doing that: Number one, we have a great internal cost saving program we call Good to Great behind the famous book in that. It's all about reformulation, reducing packaging, reducing SKUs, compacting laundry, hedging our commodities. Number two, we've done a lot of restructuring of our supply chain. We bought from mega plants in York, Pennsylvania and Victorville, California, which save us a lot of money. Three, we always look for acquisitions that have gross margins that are higher than our core business to help improve our gross margin. And we drive cost synergies to make it even better. And number four, we've launched new products with higher gross margins. So you put those 4 factors together, they've been the key drivers behind that tremendous success in gross margin. And those core factors are the same factors going forward.
Number six, we have an excellent track record on acquisitions. We have very clear and very tight guidelines on acquisitions. We will only buy a #1 or 2 share brand. I don't believe in buying a weak, old brand and try to revive it. We're not god. We don't believe we can do that. We want top brands that we can drive continued growth. We like higher-growth, higher-margin brands, I mentioned a moment ago. We like what we call asset-light brands. We like to buy businesses we can bring into our internal headquarters, into our internal plants. We don't like to buy additional headquarters, additional plants out there. We want to leverage our existing capital base in manufacturing, logistics and purchasing. And we'd like to find a business we believe we can deliver sustainable, competitive advantage. You can see our track record there over the years of all the acquisitions we've made. We've made a lot. In fact, of our 8 power brands, we've acquired 7 of the 8. And I don't even have the vitamin business. What I'll talk about in a second would be our 8 of 9 power brands going forward. We also quickly integrate those. We generally have a policy within 3 months, we get rid of the people that we don't want. We generally get rid about 90% of the people in the acquired company, put in backbone of our company. I'll tell you how we do that in a second. And then we put our muscle behind it on marketing, on sales and distribution to grow the share of the business. Many talk about the latest acquisition, Avid Health. Avid Health is a fast-growing vitamin/mineral/supplement or VMS business out there driven by one thing, it's a unique gummy form. It's just gummies that have a very superior taste profile. Here's key thing about this business. First of all, health trends, 5 vitamins is terrific. 57% of adults use nutritional supplements and it's going to just stay very strong going forward, so a very good category, which has very steady growth between 5% to 10% going forward. But here's the key what really intrigued us. 58% of kids' vitamins are already gummies. Kids are into it. Kids get it. Only 3% of adult vitamins are gummies today. And as you can see, the adult category is 16x the size of the kids category. So while we seen nice, continued steady growth in the kids side, we see tremendous growth opportunity in the adult side. And what we bought was the #1 brand of kids vitamins, Li'l Critters, and the #1 brand in adult vitamins called Vitafusion. Now again, it's #1 within the 3 share, so we want to keep that #1 as it -- going forward. And guess what, by the way, already, the big dogs in the adult side, Centrum and One A Day, had jumped onto the gummy thing, but they go to through a cold packer. We have our own plant, which I think has huge competitive advantage and a better tasting product. So you can see the other shares on the each side between the adult side and the kids side and tremendous growth. Look at those growth trends on the adult -- the adult side basically is only about 4, 5 years old and has hit tremendous growth rate -- in fact, the size of the adult business is almost as big as the kid business because it's a small share of a monster category versus a large share of a smaller category and tremendous growth rates. On this business, we think we'll have very steady, double-digit rate for many years to come.
We also like the fact that the fragmented category provides an opening for a strong, agile competitor like Church & Dwight. We have a great track record, as I showed you, of building market share in businesses. We have a field sales resources this company didn't have as a small family-owned business to expand the distribution base. So we have -- they had basically one salesperson. We have an army of sales people calling on accounts everyday out there. We have internal manufacturing knowhow on batch business and batch processing systems. Our guys are expert on that. They've already done a tremendous job of driving synergies. We have economies of scale this company didn't have in purchasing and logistics. And we understand the regulatory environment. This is an FDA-regulated product line. We're very familiar with the FDA across many of other businesses.
So we paid -- we bought this company, officially got into the house on October 1. We paid $650 million for it. We expect to realize $15 million in cost savings by 2014. The synergized gross margin is slightly dilutive today to Church & Dwight. It's like high 30s. We expect that to get into our price range at least the mid-40s within the year or 2. And the integration is going tremendous, very much on track. Quarter 2 is already accretive to our business.
Number seven is free cash flow. We are best-in-class in this area. Matt and his team has done a fantastic job. You can see we've increased our free cash flow from less than $100 million to over $400 million today. This chart shows you the blue lines. Our free cash flow conversion from 2007 to 2011, we were 118% on free cash flow conversion. The goal line there is we did it again in 2012. We don't know our competitors yet for 2012, but you can see we were top of the pack at free cash flow conversion, and that's just fantastic.
Number eight, overhead management. This is an area we do a very superior job in. Just in case, we, in my tenure, grew this business from $1.5 billion to $2.9 billion, almost double the size at our revenue base, yet only increased the number of employees by 15%, while growing the earnings 250%. The bottom line of this, we have the highest revenue per employee of any major CPG company. We shouldn't get that. We're a little Church & Dwight. We're $3 billion in sales. These others guys, who have as much as $80 billion in sales, shouldn't dwarf us on revenue per employee, but we beat them because we keep a very low overhead. And my management team and I walk the walk on this one, folks. I don't have a company car. I wish I had one. I don't have a cup [indiscernible] memberships -- I don't have a plane. I had to fly over here over here coach. No, I didn't. I flew first class. But I didn't have my own jet. I keep begging for that. And also going forward, [indiscernible] can you keep it up? My answer is, yes. We have new healthcare plans going to effect that -- which will save us money. Believe it or not, we just put a new SAP system in place, we think, will save us money going forward. So we continue to drive for this. And by the way, when acquire companies, like I said, we put all that revenue into our top line. We put very few additional employees that enter the employee line, the SG&A line. So again, we are steadily going to lower our SG&A as a percent of net revenue.
Number nine, this one is really truly somewhat unique for Church & Dwight other guys haven't do. I believe in the expertise of my top management. What I mean by that is, I don't believe in moving people from finance to sales or sales to marketing, and they have to learn more and develop them as a CEO. We only need one CEO. That's me, okay? I don't need to be moving people around and have them -- try to learn what sales is all about, what's marketing all about. I keep my top people, my top 40 to 50 people, and just drive my company in their jobs forever.
My favorite story is my -- the woman who has my pregnancy kit business and running it for 14 years. She knows that business cold, and she's not going to make mistakes other companies do when they put people in the competitive businesses and don't know the businesses and do things that aren't going to work in that category. So my team has a ton of experience in their categories. How that pays off is, you saw the share results. My people know their businesses. They're not going to make dumb mistakes. Somebody entering a category doesn't understand what drives -- they've driven the power brands. 30 out of 40x, we've had share growth. It'll be to minimize headcount. I don't need to give additional headcount. They can actually do their jobs in less time than before, and that pays off when I take acquisitions. I can afford to get rid of the management team of the acquisitions because my people are saying, "Hey, I got time to handle this. I know my business. I can do my business half the time of the day. Give me something new and different to do." So I give them the acquisitions on top of their current stuff. They could do it because they know their core businesses cold, and they execute outstandingly across the line. So it's a real key to keeping our headcount down, keeping our SG&A down and getting really well-trained people to run their core businesses and pick up the new businesses.
It all adds to what I call total shareholder junkies. Look at these numbers across every one of the P&L line, how we've almost tripled our net revenues, gross margins went up 1,410 basis points, marketing spending has increased, outstanding results across-the-board. And that leads to, what I showed you earlier on, the 292% TSR growth over the past 9 years. So I mean, to naming our company, I asked every investor to come see us and try to beat me up on our performance, I say, "Tell me 1 stock you have that's done 19.2% comp on average growth rate over the past 10 years."
That's my team. We're in the New York Stock Exchange February 5, get the closing bell on that. Thank God it was a decent on Wall Street, and we were up there quite happy. There's my team. There's my heroes on that. And let me tell you something, we're 100% into this game. We have the same 4 bonus factors that everyone in the company from me to the lowest person that the company has: 25% of our bonus is tied to hitting that net revenue growth target, 25% is hitting a gross margin expansion target. That's very unique. I don't know of one other company in this industry that has growth margin as part of their bonus target. 25% EPS hitting that target, 25% cash flow. Our equity compensation is 100% stock options. We don't have restrictive stock or some crazy way to calculate stock. It's stock options. If that stock doesn't go up, we don't win. You win by stock going up. So you -- I think you should be extremely happy to see us on 100% stock options because we're expanding the same game as you are, and we have skin on the game. We have to be heavily invested in the company stock. I mean, 90% of my net worth is in this company. So believe me, I think it's very important. I think you ought to criticize companies who reward their management base with restricted stock or have a calculation of stock that has nothing to do with the stock price. Ours is 100% tied to the stock price. So there's the 10 factors. I think they're the secret sauce to Church & Dwight, the reasons we've been so successful, and those same factors apply going forward. I don't see a reason to change them right now for future success.
So let me bring Matt for a second and talk about our 2012 financial results and then give you an early peek on our first quarter results on 2013 and talk about the rest of the year.
Matthew Thomas Farrell
Okay. Thanks, Jim. I'm going to bomb for these pretty quickly, so we have some time for Q&A. So if there are any investors in the room that own us, you're very familiar with this slide, so this is worth committing to memory. This is our Evergreen Model, and this is what drives our annual operating plan and also our long-range plan. So we -- you'll always hear us talk about 3% to 4% organic growth; gross margin of 25 to 50 basis points expansion on annual basis; getting SG&A leverage in order to get 60 to 70 basis points of operating margin expansion, leading to 8% to 10% EPS growth.
If you look at historically what's happened, here's the EPS growth for the last 5 years. So you can see we've been double digit for 5 years in a row. In fact, this would be our 13th year in a row if we hit our plan for the current year. Here's the organic growth. So you'll hear me talk about 3% to 4% organic growth, so how we've done in the last 5 years. So you can see, even in the last 3 years, we've been 3%, 4% and 5%. And gross margins. So gross margin, we had a big increase in 2009. It's the last time that a compaction showed up in the laundry category. Since then, we've had the commodity headwinds like lots of other CPG companies. But as you can see, we've able to hold the line even last, excluding the Avid acquisition, we actually went to expand gross margin 30 basis points. And marketing. Marketing, when we had that big increase in gross margin in 2009, we spent it back on the marketing line, so you can see a big increase of 109 [ph] basis points in 2009. And over that time, we got a little bit more efficient. Although we're now at 12.2% marketing, x percentage of sales, remember, we've grown our organic growth each in the last 3 years, 3%, 4% and 5%. And as Jim said, this is a really important barometer of the strength of the business. If you look at the 8 power brands in 2012, 6 of the 8 grew share. And then free cash flow. We put a lot of attention on free cash flow within the company. You can see we were over $400 million in 2012. And we are best in class, so if you look at the average over the last number of years, we were averaging 118%. And then part of the reason for that is because our -- we made a lot of headway with our working capital management. So this is the number of days for receivables, payables and inventory. So we're pretty much cut it in half since 2007, so working capital has been a contributor to free cash flow for many years now.
And we're not heavily the levered. So even after the Avid acquisition where we paid $650 million, we're only 1.4x levered at the end of 2012, which means that we still have a whole lot of capacity for additional acquisitions, and we are always looking for others. We're not a capital-intensive business. So if you look at our CapEx as a percentage of sales, we average around 2.5%. It's another one of those long-term algorithms that we look at.
And we have, like I said before, we have a lot of capacity to borrow. So if you made the assumption that we were going to acquire a 12x EBITDA, this will tell you how much additional leverage we can take on and maintain our credit rating of BBB.
And we're very deliberate about the destinations for free cash flow, so we think about this. So number one is, TSR-accretive acquisitions; number two would be any CapEx for new product development; the third is base CapEx; number four is returning cash to shareholders, so that's dividends and buybacks; and number five would be debt reduction. Were we to do a very large acquisition, debt reduction will become #1 until such time as we got the credit metrics down to make the rating agencies happy.
And we've been steadily increasing our dividends over the last few years. So today, our targeted payout ratio is 40%. The most recent raise was in February, where we raised 17%. And just a couple of comments on -- it's a fun chart. So here is -- you can see this is the 13th year in a row we hit $2.79. We're planning on being up 14% in 2013. And again, it's no surprise here, our target for 2013, 3% to 4%, 25 to 50 basis points x Avid. That, actually, was the guidance that we gave in the 1st week of February. Right now, at the end of the first quarter, 1st week of May, we changed that guidance to 25 to 50, including Avid. And remember, Avid is dilutive to the company.
And then the first quarter, just to give you a little bit of sense for where we are, almost 13% year-over-year growth. That was largely driven by the Avid acquisition. The organic sales were 2%. We were comping at 8% a quarter in the first quarter of 2012. I guess, it's 7 of the 8 power brands group in the first quarter. Remember that chart, the red-green chart previously. And we had a big increase in gross margin in the first quarter. That's -- we had 3 quarters in a row where we had over 100 basis points gross margin expansion, so Q3, Q4 and then Q1 of 2013. Operating margin is up 100 basis points and then EPS, up 15%. And there's the free cash flow number.
And now we're ready for questions.
James R. Craigie
Mr. Schmitz, I'm sure you have questions. You never...
William Schmitz - Deutsche Bank AG, Research Division
I have plenty for you. How about the U.S. in terms of -- we talked a little this morning, the retail data is not so great, the Nielsen data looks like garbage still. I mean, what do you think is going on there?
James R. Craigie
I don't know. It's a little weird. Since 2008, we're in 13 categories in total. Since 2008, usually 5 or 6 have been down versus a year ago, and we were kind of used to that and delivering still great results. First quarter this year, 7 of the categories were down. Categories, again, down versus a year ago. Despite that, we drove organic growth in that. So I mean, I read what you read. I think the whole thing about the 2% extra payroll tax wasn't helpful. Don't forget, in America, the average household makes $50,000. 2% is $1,000 a year. I mean, after tax, that's a hurt in their pocketbook. Gas prices have been going up. I -- and you've seen the retailer results, the Walmarts, Kmarts, Targets, Costcos of the world had, had results less than they expected, not very good. So it's weak. I don't think it's -- I'm not ready to declare it's a permanent decline or a second dip on the recession there, but it's a little nervous as far as what's going on up there. Maybe it's a temporary thing. People talk [indiscernible] of about how the weather was. It's been horrible over there in America, North America. Now we've got a very rainy, cold year, the whole spring. If you're -- thank God, we're not too seasonal. Those kinds of seasonal business are getting clocked. I think if you've heard our friends at Clorox, so their charcoal business was way off, the suntan lotion business is getting killed and things like that. And you hear the optimism that's all about health sales and auto sales. Well, I'd be a little careful in my mind. The average age of an automobile in America is 11 years. So I think, to some extent, people got to the point they had to buy a new car. On the increase -- new sales of households out there, well, I think people got a little nervous about interest rates starting to back up. So if you were waiting to buy a house, I think you've seen prices kind of bottom out and in -- the mortgage rates are as low as ever it's going to get and they're starting to rise. So I think there's a temporary surge into buying new houses for people who've been waiting on it. And the stock market has been good. So I think people who made some money in the stock market decided to jump in the housing market. But I get a little worried when I see everyday products, toothpaste and laundry detergent, these categories start to be weaker than they were in the past several years. So hopefully, it's a short-term blip. But if not, again, we have our recession-resistant portfolio. We're -- of all the competitors we face, we're better able to deal with this than anybody else. And we have a great new product pipeline this year and started off the year with a good first quarter, so we'll hope -- I hope this is not a long-term trend. I hope it's a short-term blip. Yes, sir?
Your major competitor in the U.S., Procter & Gamble, is not overly successful in recent quarters and years. Do you expect a change in the competitive landscape going forward with the new CEO, that they start to do more promotions to put more pressure on prices? Or are you quite relaxed going forward?
James R. Craigie
That's a great question. I mean, A.G. Lafley is new, but he's old, great CEO. I have the highest respect for him. Procter, don't forget, has a terrible challenge. I mean, they have $23 billion superpremium price brands. It's the recession, folks. So right away, they had a macro issue that they're continuing to deal with. When I showed you the people trading down just on the laundry category, it's happening across-the-board. Their products are terrific, but their people are facing -- they're facing the challenge of people don't have the money they used to have, so there's nothing wrong with their product line. And it's just that the people aren't there. I'll tell you a little story. A.G. Lafley and I have quite a similar history, it's kind of interesting. After college, he was a naval officer for 6 years, so was I. In fact, he was a naval supply core officer which is the business side of navy, so was I. After that time, he went to Harvard Business School, so did I. We both graduated. We both became CEOs. When I started at Kraft Foods, he went to Procter. He approximately had 9 years as a CEO. I have just finished 9 years as a CEO of Church & Dwight. We both have 2 children. We both had hip transplants. So I like A.G. And again, he had a tremendous record at Procter & Gamble. I think Procter & Gamble, even under Bob, was singing the right tune. Innovations are going to drive the game. As the premium price guys, they actually focus on innovations. It'd be a terrible mistake, I think, if they pull the price lever of some of their businesses. Nobody wins a price game, a price war game. Everybody can match. What we will -- I will guarantee you anything they -- we will hold our price gaps that we knew even brands versus their brands. So if they were to pull the pricing lever on that one, we would, too. And we all have to deal with the negative benefit to our revenue line in that, so I don't think they'll do. I think they're a very smart company. They've had some good stuff. And I think they're just dealing with a major macro issue, which anybody would deal with who's leading that company. But I have the highest respect, and I welcome back A.G. to the fold. I think he's a good move for Procter, kind of help them deal with these struggles they're going forward with.
Then why does it seem there hasn't been more consolidation in the industry? I mean, volume stinks. Guys need cost saving. They've been through multiple years restructuring, minus 3.
James R. Craigie
Where's the question?
Why hasn't there been more consolidation, do you think?
James R. Craigie
Well, I don't know. It's funny -- on my Board of Directors is the CFO -- now the former CFO of Heinz is the CEO of OfficeMax merging with Office Depot, so my own Board of Directors is done with a lot of stuff. I don't know, Bill. It's -- on the M&A side front, I mean, we've talked to the highest players in the industry in that and the M&A, investments and bankers of the world are very frustrated right now. It should be a great M&A environment. I mean, that is as low as it's ever going to get. Organic growth is difficult, so it should be a perfect environment for companies who want to make acquisitions, drive their synergies out, help drive the bottom line, but it's not happening. There are folks or M&A bankers are having a pretty bad year. They've had a pretty bad couple of years here. I'll tell you the story we've heard from them. Two things going on. First of all, the sellers, and put yourself in the sellers' pocket right now, especially a seller of a private business, a privately-owned business. I won't name the bank, but the bank told us, one of the biggest members in the world, told us a very interesting story. They were asked to go out and sell the company. The man was getting older, he want to retire. They wanted $1 billion -- he wanted $1 billion for his business. The bank went out and got a $1 billion buyer, came back with a seller and said, "I got it for you. Let's make the deal." They got -- and the seller said, "I changed my mind." And the banker went, "What do you mean? I got exactly what you wanted to." And the guy said, "Well, I thought about this more." And he said, "I was making, in my business, $60 million to $70 million of free cash flow a year. If I take the $1 billion as the purchase price, I subtract the cash I owe and then I invest that in the fixed income markets, I can only do $20 million to $30 million a year in interest or I will make out bonds in that because the rates are so low. So why would I want to trade off my business who makes a $50 million to $70 million a year in cash flow for $20 million to $30 million? Not doing it, back out of the deal." And that was giving us a reason for -- it's either you have somebody who's overpaid for the business, so you get them enough interest to make up for the cash flow, which isn't happening out there or they're going to accept the deal. So a lot of the sellers right now are finding no use or where they're going to put the money they get from selling the business and this bank even set super corporations. What are you going to do with your cash? For the bank, you make nothing. So it's kind of a big block to the world today. The only thing I would tell you is, there's no great pure plays out there, or it's just say pure company you want. I mean, we got [indiscernible] with the vitamin business. It was just vitamins, we wanted it. I coveted the SSL business. We would've loved to buy the SSL business but only 40% of that business was condoms. 60% was other businesses you really didn't want. I couldn't find a way to get around paying the multiple that I would pay on condoms for the rest of the business, Reckitt did. And I think they're struggling with -- a bit like that. So if -- for anything you really want, there's a whole bunch of, I could say, junk that goes with it. So the buyers are being very smart and saying, "I don't want to pay this high multiple for all of it when I only deserve part of it." The seller wants a high multiple on everything. So I think those 2 things are kind of falling down right now, and I would say to you if, just for some reason, the economic outlook does get worse, I think you might see a little more M&A pick up in that. But right now, there seems to be a stalemate, with the sellers finding no place to put their proceeds from deals and buyers going, "Well, I don't want to buy the opportunities out of there because I'm buying a lot of junk. We have the good jewel I want to buy in the business."
All right, lunchtime.
James R. Craigie
Where did you get that tie?
James R. Craigie
It's a gift.
James R. Craigie
What is it, Halloween? Thank you. You can clap. Thank you very much.
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