Church & Dwight (CHD) Q4 2016 Results - Earnings Call Transcript

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Church & Dwight Co., Inc. (NYSE:CHD) Q4 2016 Earnings Call February 7, 2017 12:30 PM ET

Executives

Matthew T. Farrell - Church & Dwight Co., Inc.

Richard A. Dierker - Church & Dwight Co., Inc.

Britta Bomhard - Church & Dwight Co., Inc.

Steven P. Cugine - Church & Dwight Co., Inc.

Louis H. Tursi - Church & Dwight Co., Inc.

Analysts

Bill Schmitz - Deutsche Bank Securities, Inc.

William B. Chappell - SunTrust Robinson Humphrey, Inc.

Kevin Grundy - Jefferies LLC

Joe B. Lachky - Wells Fargo Securities LLC

Jason M. Gere - KeyBanc Capital Markets, Inc.

Caroline Levy - CLSA Americas LLC

Olivia Tong - Bank of America Merrill Lynch

Stephen R. Powers - UBS Securities LLC

Jason English - Goldman Sachs & Co.

Operator

Good morning ladies and gentlemen and welcome to the Church & Dwight Fourth Quarter and Year-End Quarter 2016 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, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Thank you, operator. Okay, welcome everybody and everybody that's joining online. We have the whole management team here with us today. We appreciate the opportunity to tell the Church & Dwight story.

I'm going to provide some color on five of our categories. I'm going to talk about our 2017 innovation and consumer insights that led to that innovation. If you read the press release, you know we closed a couple of bolt-on acquisitions recently. So, I say a few words about that.

Rick is going to get up and give us the thinking on 2017 and then we'll have Q&A with the whole management team.

Okay. Here's the safe harbor statement, which I encourage everybody to read and let's just jump right in. So, for those of us who know us, or know the story, but if you're new to the story, we started in 1846 with ARM & HAMMER baking soda. Today we're a $3.5 billion diversified company with dozens of brands and we do on the slide – too fast.

Here we go. Okay. We have 10 brands, we're a little bit out of sequence there. We have 10 brands that represent 80% of our revenues and profits and we're a serial acquirer. So those of you who know us, the only brand that we had in the year 2000 was ARM & HAMMER and since then 9 of our 10 brands have been acquired. So, we have a long history of acquisitions. If you go back to 2004, you can see our sales were $1.5 billion and today we're a $3.5 billion company.

And we have a very specific acquisition criteria. Just to kind of roll through them, we buy number-one or number-two brands, high-margin brands, we like asset-light businesses and we're able to leverage our extensive supply chain, which I'll say a little bit more later on and these brands always deliver a sustainable competitive advantage. Keep moving. Okay. So, we regard ourselves as an acquisition platform. So it's been part of our story over the past 15 years that we acquire businesses but also on top of that we have organic growth. The businesses we acquire we grow, we get operational efficiencies and we have a stellar acquisition track record and we have a fabulous balance sheet which will be plus-rated.

Okay. We're primarily a U.S. company, so there's two good things about that. We have less exposure than others to currencies and the other positive is that we have the opportunity to grow international and you can see over the past couple of years, we had stellar results internationally. Okay. We're pretty balanced, right, so we split household and personal care pretty much 50-50 and then we have a specialty products business which is primarily bulk sodium bicarbonate and we have an animal nutrition business as well. And we've delivered stellar results to our shareholders over time, you can see on this slide.

Okay. I'm going to talk about five categories now, so I want to – it's instructional. So, we're trying to see what's going on. I'm going to showcase our 2017 innovation. I'm going to start with laundry, right.

So, laundry has been a growing category and the growth has been driven by unit dose over time. So, if you go from left to right on this slide, so the leftmost side of this slide is a four-year look. You see 2013 and 2014 the category was down and then started to grow in 2015 and 2016. So, let's take a closer look at 2016, look at the quarters. So Q1, you had an unsustainable organic growth of plus 6%, what does that mean, it means it's going to be a tough comp for the first quarter of 2017.

Q4, you see there's a slowdown, right. So, this is the first quarter by the way in two years that have negative price in this category and it's concentrated in the liquid part of the category. So, let's take a look at that. So, here is liquid again, left to right, similar trend. Down in 2013 and 2014, up 2015 and 2016 and a similar trend for 2016 quarters if you go left to right.

So, let's look at the fourth quarter of 2016 for liquid. So, you have negative price mix of almost 3%. So, what is driving that? So, let's take a closer look, so let's look at the competitor activity in the fourth quarter. So, you have elevated levels of promotion in Q4. So, the category sold on deal is normally mid-30s. The Simply Tide dialed it up to 60% in the fourth quarter. Sun also took it up to 43%. ARM & HAMMER and XTRA, both in the 30s.

So, we didn't promote nearly as much as our competitors in the fourth quarter. Despite this level of spend, so ARM & HAMMER laundry continued to grow share in the fourth quarter. XTRA is where we have the share issue. So, two brands up, this is full-year now, so ARM & HAMMER and OXICLEAN up in 2016, XTRA down. The good news on XTRA is that we grew net sales and gross profit in 2016.

Now, let's look at the share story. So, XTRA has been the drag on share, ARM & HAMMER and OXICLEAN up. Remember, this is only measured channels, too. So, ARM & HAMMER laundry had a very strong year in non-measured channels, especially in club, and that's not reflected in Nielsen.

Okay. Let's talk about unit dose. So, unit dose in 2015 was 14% of the category; in 2016, it's 16% of the category. So, here's the unit dose category trend. You can see 2013, 2014, 2015, 2016. And so, we're up small numbers initially, so big growth in 2013, but it's sort of leveled out into low 20s growth as a category. You can see the quarters on the right-hand side of this slide here for 2016.

So – and this is our history now. So, you can see we have bumbled along here for a couple of years, and in 2016, we finally got some traction. So, in late 2015, we introduced bi-layer powder, and we also introduced a two-chamber pod. So, we got some traction and now it's starting to show up in our shares. So, from a share perspective, we're making progress. So, up 30 bps in 2016, 3.7% going to 4% so the winners were Church & Dwight and Sun, the losers were Procter and Henkel in pods in 2016.

Okay. So, we expect to make much more progress in pods in 2017 with our new triple-chamber pod. So, multiple chambers communicate multiple benefits to consumers.

Now, let's move on to litter. So, litter again a growing category historically. Here's the last four years, 2013 through 2016. Volume was most of the category growth by the way in 2016 of 4.4%. And we have a long history of innovation. So, we have a 12% CAGR. This is at retail sales, but in ARM & HAMMER, litter grew approximately 3% of retail in 2016, and consumer insights drive our innovation. So, the original CLUMP & SEAL was driven by the desire for odor control. This has been a huge winner for us.

Then certain consumers told us that they were concerned about bacterial odors, so that was the origin of CLUMP & SEAL MicroGuard. And the latest, which Lou took you through before we started this presentation, and we do some more now, cleaning the litter box is a nightmare for consumers.

So, today we're introducing ARM & HAMMER, CLUMP & SEAL SLIDE. So, cat owners love this product. There are three great benefits, the litter slides right out of the box, there's no scrubbing and it doesn't stick to the pan. We have a few commercials to run for you now.

[Video Presentation] (08:31-09:16)

Okay, this is going to be a big winner for us in 2017. Okay. Vitamins is another growth area for us. So, here's the adult vitamin category over the last four years. I could see that also was a big grower initially, but kind of slowed down as the category's gotten bigger, but an 18%, 19% grower in the past year.

So, if you look at the form, so that – how is the transition from pills and capsules going to gummies these days. So, in 2012, it was 3% of the category, 2016 it's 11% of the category, and here's some factoids here. So, almost 70% of U.S. adults take a dietary supplement and of those, 75% take a multivitamin, and we are the number one gummy vitamin both in adult and in children's vitamins. And a new innovation for us, we're entering the energy category. So, less people say they need more energy, so one of our new product launches in 2017 is an energy gummy. So, we're entering the energy space with an energy gummy source from green tea and our new gummy has a great taste consistent with the VITAFUSION line.

Okay. Condoms. The condom category is beginning to shift to online. I want to show you some stats on this now for a second. So, here is the measured channel story over the last few years. You can see down 2013, flat 2014, down 2015, down 2016, yet TROJAN sales and gross profit are up single digits in 2016. So there's a shift to digital going on right now and the shift to digital is becoming increasingly part of the story for many CPG companies. So, 2017 we're introducing a condom aimed at the female buyer. One out of three condoms are purchased by women. So today, we're launching TROJAN XOXO. So, three features there: soft touch, aloe-based lubricant, a unique carrying case and we have more great news. TROJAN XOXO will be advertised on network television in 2017. So, let's hope this one will grow well now. You can roll the commercial.

[Video Presentation] (11:32-12:02)

Okay. Look for that on network television in 2017. Okay. Next stop, Dry Shampoo, so this is – Dry Shampoo is a superfast-growing segment of the hair care category, but this is all of shampoo now. If you look 2012 versus 2016, Dry Shampoo was only 1% of total shampoo; in 2016, it's 4%. And you've heard us talk about this before of this fabulous category to be in, so in 2012 at retail in the U.S. was $32 million; 2016, $115 million. So the question is, where can this go? And this will give you some sense for how fast it's growing, so this thing is going to double again.

So, just a little bit of context. In the UK, this is a $63 million category and the population of the UK is 60 million, so we have five times the population in the United States, so this has the potential of being a $300 million category. Today, only a $150 million category. And there's a big household penetration story here, so look at some of these statistics, so there are 125 million in the U.S. over the age of 18 and two-thirds don't wash their hair every day, but only 13% of that crowd uses dry shampoo. So, a lot of runway ahead of us here and we have the number one brand and we've been growing share as the category has been growing. So, it's just a fabulous story there.

And again, two more variants, keep expanding the line, we have new BATISTE there, it has a light scent, so it doesn't conflict with your perfume and then we have the fun one on the right-hand side of this slide, vibrant & fruity neon. Okay.

So, how we deliver as the company, if you're a shareholder, you're familiar with all of these things I'm going to run through right now, I'm not going to list them, but I'm going to bomb through them one by one. Okay. Very diversified product portfolio. You know the split, right, 60% premium, 40% value. So, how do we build our shares? Pretty simple formula, right. We have great innovation, we have super marketing and we have a great sales team to increase our distribution and that results in share growth.

Okay, innovation I ran through already. So, we have the triple-chamber pod in 2017, we have Slide, we have the energy gummy, we have XOXO and BATISTE. But we have lots of other innovation in in other categories that I'm not going to run through right now, but some of them are depicted on the screen.

And marketing spending, so we're the 18th largest advertiser in the United States. That comes as a surprise to some people. And our sweet spot is anywhere from 12% to 13% marketing as a percentage of sales and you can see the history here, 2013 through 2016. And there is continually a shift to digital. We talked about – I'm going to talk about litter in a second, but 2011, it was 13% and in 2016, it's 28% of our spend.

Here's a good illustration. So, this is the best illustration for us of the efficiency of digital. So, one-third of U.S. households own a cat. So, those are the people we want to target. So, what digital enables you to do is to segment, target, educate, and then engage in conversation on relevant websites like for example Pet360 and then to drive sales online. Yeah. Not only online, but also retail. Okay.

Distribution, you know we're a pretty transparent company. This is 2013 index versus 2016, how do we look distribution for some of our major brands. If it's plus or minus 10%, we have it in gray. We'll call it a wash and the rest are green. Okay.

Finally, share. So, I talked about transparency as a company, you won't find a score card in many CPG presentations. So, let's kind of roll down the page here. So, we had 4 out of our 10 power brands grew share in 2016, and these are measured channels only and as you know the non-measured channel is increasingly part of the story, but this is the information available to everybody through Nielsen.

Okay. So ARM & HAMMER, so the only ARM & HAMMER variant that declined in 2016 was litter. The winner in the litter category was Nestlé with Tidy Cat, Clorox has been flat with their two brands and so we've lost some share, but the total brand for ARM & HAMMER grew sales and profits in 2016.

OXICLEAN, second one on the list, we had record share in the fourth quarter. TROJAN, again, net sales and profits were up, non-measured channels becoming a factor. Vitamins, a very good story for us. FIRST RESPONSE, we were hurt by some discounting in private label, we're turning that around. The fourth quarter for FIRST RESPONSE we had our highest quarterly share ever.

Nair, doing really well there for many years, we have Wax-Ready Strips that are growing in the category. XTRA, we talked about a dip. Skip down to Orajel, so this private label has been hurting us there and BATISTE has been a big winner. So, 4 out of 10, we hope to turn some of these around in 2017 with our innovation.

Okay. International growth, fabulous story for us. So, here's the picture, so you have eight flags up here, but we only have six countries. So, we have two new regional centers; we have one in Asia; and one in Central America. You may have heard us talk about this on previous calls that international is an area of investment for us for the past two years and for obvious reasons.

So, we have a fabulous track record in growing our top line in international. So, you can see and this is broad-based. So, you go from left to right, you can see the CAGRs country by country and all are positive. And the way we run the businesses by the way is in Europe, UK and France are combined. So, we really have five business units within international.

Okay, gross margin. Rick is going to talk about this a little bit later on, but gross margin is a big focus within our company. And we continue to grow year-over-year, 2014, 2015 and 2016. And what are the drivers for that? Number one is our continuous improvement program we call good to great. Second is supply chain optimization. What does that mean? Those are the plants that we've opened over the past couple of years. We have a new vitamin plant, we have a new West Coast plant that we opened up.

New products obviously is a driver because a lot of the new products that we've launched have higher gross margins than the products they're replacing. And finally, acquisition. So, we try to buy businesses that have higher than corporate gross margins. All right, and here's another secret weapon is that gross margin is 25% of our employees' annual bonus and that's one way we create alignment within the company. People know what gross margin is.

Growth through acquisitions, I listed those earlier, but I want to call one of them out, so that's the fourth one on the page there, we've leveraged CHD capital base. So, what does that mean? We can be agnostic about the businesses that we look at and that's because we can put the liquid in a bottle, powder in a box. We can handle gels, lotions, aerosols, regulated businesses and we have an extensive co-packer network.

So it gives us the confidence to look at a lot of acquisition candidates in various categories. Okay, some statistics then. What happens after you buy the brand? So in every case, we have higher shares, we grow share once we acquire a business. And a couple of ones that you saw on our press release, VIVISCAL and the J&J brand. So, VIVISCAL is a brand that's been around since 1997, 80% of the sales are in the U.S. and its three year sales CAGR is 30%. And so this is a complementary business to our growing hair business which is our BATISTE brand and the TOPPIK brand that we bought a year ago.

And then a couple of brands we bought from J&J, this adds scale to our international business. That's ANUSOL and RECTINOL. 90% of the business is in Canada, the UK, Australia and it's a perfect fit for our international business where we can add some scale. Okay. And then you saw this earlier, $1.4 billion company going to $3.5 billion over time. Okay. Free cash flow, Rick's going to talk about this a little bit later, but we have stellar free cash flow. This is one thing that I think a lot of our shareholders focus on, is that our cash earnings per share is significantly higher than our reported book EPS.

Overhead management, so we run a really tight ship at Church & Dwight. I mean, the only CPG company that's better than us at managing SG&A is Reckitt. Rick's going to say more about this later on to give you some insight into the components of SG&A. But for my part, I want to point out that we've been investing in international. I mentioned that earlier over the past couple of years, we're going to continue to invest in international. Second thing, you're thinking IT investments, we're no different than any other company, but we have an extremely productive employee base, we can become even more productive if you make this investment. And R&D, if it's a natural, this is where you want to continue to invest to drive your innovation.

Okay. So, we have a very simple incentive compensation plan and this is the secret sauce, right. So we have a financially literate company and we have four measures, right. We have sales, gross margin, cash from operations and EPS. And our long-term incentives are aligning with shareholders, it's only options. Okay.

And then, how we run the company? Okay. So, you know we focus on number-one brands, we like to be asset-light and we have a super workforce. If you had these three, which we do, you would have really good results. But when you lever – when you put on top of that the competency we have as a company to acquire businesses, integrate them, and create more value, you get fabulous shareholder returns.

Here's our evergreen model, it's unchanged, a 3% top line, 8% bottom line, and 50% operating margin expansion. Rick is going to spend a little bit of time on that. Cool, thanks. So, we talked about the evergreen model. Our geographic focus were mostly U.S., but we're investing more internationally. Our acquisition criteria we've reviewed, and the allocation of capital, which is very deliberate, Rick's going to run through this but from top to bottom those are in order, where we direct our cash flow. Okay. Rick, you're up.

Richard A. Dierker - Church & Dwight Co., Inc.

Great. Thank you, Matt. I'm going to go through three things with you guys. First the quarter, then the full-year 2016 results, and then we'll go through, spend some time on the 2017 outlook. So, first off is the quarter, 2.7% organic sales growth. Remember our outlook was 1% to 2%, so we overdelivered on all three of the divisions, so that was a great result.

Consumer organic, which is the international and the domestic division added together, that was 3.5% for the quarter. Our organic growth like many quarters was largely volume-driven at 3.2%, gross margin was up 60 basis points. I have a separate slide on the gross margin bridge that – we'll talk through that. And then operating margin was up 50 basis points. EPS was up 7% to $0.44 and remember our outlook was around $0.42, so I'm just really pleased with that result.

So, you saw some late-breaking news in the release this morning, we announced that we're selling our Brazilian chemical business, and now there is a small charge in 2016 of $0.02, small charge in 2017 of $0.02, but at the end of the day that's a good thing for the company, it just allows us to be focused even more on our consumer business in Brazil, small business, but growing.

From a phasing perspective, organically, you can see the stair-step was going down through the quarters, but it's up in Q4, right. Remember our domestic, organically we were 0.8% in the third quarter, we were 2.7% in the fourth quarter. So, again going in the right direction.

We had solid growth throughout the year. This is the two-year stack of the consumer business, domestic plus international, 8% for the two-year number, 4% in 2015, 4% in 2016. You can see the second half is 6% to 7%, which is solid growth as well and that stair-step down is really – probably the most pertinent item is the laundry category, right. Laundry category averaged about 4% category growth in the first half; about 2%, which is probably more of a sustainable number, in the back half.

Okay. Turning to full year, so 3.2% organic, which is fantastic. Domestic was 3.1%, international was 10%, that's a high watermark for that division. Steve and his team did a great job. SPD was a 7% drag. We've been upfront on that all year long as milk pricing has been going down. But the good news is from Q3 to Q4 sequentially, milk pricing has gone up about 6% and you'll hear in our outlook that we expect growth out of that division in 2017.

Again, I'm going to defer the gross margin story for another slide or two. We had a bridge in the full year. Marketing was essentially flat at 12.2%, SG&A was up 50 basis points for all the reasons Matt laid out and also incentive comp as we had really strong cash flow, really strong margin and results overall. EPS was up 9%, $1.77, and cash is a little over $600 million and net adjusted free cash flow of 131%. So, Matt talked to you about the 6- or 7-year average of 120%, 130%, just phenomenal.

Okay. Here's the gross margin detail. If you look at Q4 commodities, it's flat, that kind of marks an inflection point for us, right. The whole year, commodities have been a bit of a tailwind, and you see that in the full year section. So, commodities are starting to turn a little bit, you're going to hear in 2017, we expect there to be some moderate inflation.

Productivity and manufacturing, that's the J&J program that Matt referenced, 100 basis points from there, plus margin accretive acquisitions offset by higher promotional volume and mix, and that's how you get 60 basis points for the quarter. For the full year, the 60 basis points from commodities and the productivity gain of 70 basis points essentially gives 120 basis points for the full year. So, just really, this is the biggest increase we've had in gross margin for a few years. So, very happy about that.

Okay. Free cash flow conversion, we talk about this all the time, we talk about cash all the time, and 120% is top of the consumer sector. Our peers average in general about 100%, some peers target about 90%. So to have 120% year-in, year-out, and 130% this year is a good result.

And how can we do that? Probably one of the biggest reasons that we can do that is the way we manage the balance sheet through our cash conversion cycle. That's inventory plus receivables minus payables. And so, we've gone from 52 days over the last seven years to 21 days. That's hundreds of millions of dollars out of the balance sheet that we can put to use, right. And we have aspirational goals of getting down to zero, and we do have some peers that have done that, actually gone negative. So, we try to look at that all the time.

So, I've said we had a strong balance sheet, we're 1.4 times levered, so we have a lot of capacity to do a lot of deals and to use our balance sheet in a good way. So, as an example we could do a $2.8 billion deal, and we believe it would maintain our credit rating at BBB+, which would be really important to us.

Okay, I'm going to spend about 5 minutes on this slide. This is the 2017 outlook, a lot of moving pieces, so I just want to make sure we're all grounded. So, first off, 3% for organic growth, right. That's right in line with our evergreen model. That breaks up 2.5% to 3% for the domestic business, 4% to 5% international and 2% to 3% for the SPD business. So, again, they return to growth in 2017.

So, the backdrop for the domestic business is we're assuming a little bit slower growth in categories, probably around 2%. So, to the extent categories do better, we'll do better and vice versa. All right. Gross margin is up 60 basis points despite moderate inflation, despite higher promotional spending expectations. So these, what I would think about that, is 40 basis points from the acquisitions, these gross margin accretive acquisitions, offset by 40 basis points of higher commodity cost, higher promotional spending, FX drag, it's like it's back to zero and then plus 60 basis points from productivity and just leveraging our volume. So, that's kind of the detail behind the gross margin outlook.

Marketing is up. We're spending back a little bit more money in marketing to help drive those new products and help drive the brands. SG&A is actually up 10 basis points, but you can be assured that we haven't lost our way there, right. We – our TSR model, evergreen model says we typically leverage that 20, 25 basis points. I'm going to walk you through what's going on behind the numbers there. Other income and expenses, a drag of $14 million, and behind that number is about $20 million of interest expense, right. Half of that's because of interest rates are going up and half of that is just having the debt – our debt expectations for the new deals.

For the tax rate – all the adjusted items exclude the three adjustments we've talked about before; the pension, the Brazil, and the stock accounting FASB change. So, we're up 7% and that includes the higher marketing, that includes the slight drag from acquisitions and you might ask why do we have a drag from acquisitions. Well, these small deals are very global in nature. So, there's lots of countries involved. So we have to have transition services agreements all over the world as we integrate these things. So that's really why we have a drag.

On a reported basis, we're at $1.73 midpoint and that includes the Brazil charge, it includes the UK pension contribution. We're out of the pension business, right. That's a great fact. And then of course the new stock option accounting.

And I just want to draw your attention to, we said in the release as well the timing of EPS, right. We said roughly all of our EPS growth will come in the second half of the year. We're moving marketing dollars out of the second half and back into the first half. Over time those numbers would just creep up over time and we want to reallocate and do what's right for the business.

Okay. So I'll just flip through some of the key metrics really quick. So our track record on organic sales, right. Solid track record from 2012 to 2017 and we've been between 3% and 4% over that timeframe and again in 2017 we're calling 3%.

Gross margin is the hallmark of this company and it drives a lot of value. It drives a lot of cash earnings for the company and you can see the stair-step up all the way to 46.3%. So, great progress.

Marketing spend has been pretty consistent and Matt alluded to that between 12% and 13%, we think that's the right number and again it's another year of increased marketing. Now on SG&A, I'll just take a minute to discuss this. So, you can see on reported basis that SG&A is up 60 basis points from 2014 to 2017. But I want to show you what it is on a cash basis. So, on a cash basis, we're pretty much flat. So if you look at 2014 to 2017, 11% to 11.1% and if you just take a second and look at the change of 2016 versus 2017, we're up 10 basis points on a reported basis, but we're down 20 basis points on a cash basis.

So, we haven't lost our way. We have a mindset in this company, we've been doing zero-based planning for many, many years and so we have such a good hold over what our SG&A dollars are doing.

On operating margin, this is a great result, 21.3%, a lot of personal care-type companies are trying to get to the low 20s, so we feel good about that number. EBITDA margin, it's a good surrogate for cash and cash earnings. This drives a lot of value. We've gone from the low-20s over time to the mid-20s and this is fantastic. EPS growth, so everything that came before is what leads to EPS growth and so we've had a few years of high single-digit EPS growth, 9% this year, 7% is the call for next year, $1.89.

Okay. Allocation of capital, this is one of the most important things that we discussed, this doesn't change though. Number one far and away is accretive M&A, so we spent a lot of time, this management team spends a lot of time looking at deals. Number two is new product development, Matt walked you through a lot of those. Number three is CapEx for organic growth. Number four is return of cash to shareholders through dividends or through buybacks. And number five is debt reduction. And of course, if we did do a big deal number five would move to number one.

We're not a capital-intensive company, we've walked through this many times, but our outlook for 2017 is around $55 million. If you take out the one-timers like capacity, installations, we bump around between $50 million to $60 million, so our outlook is right in line with our past practice. We announced this morning that we're increasing the dividend by 7%, high single-digit increase which is great, 40% payout, we're still right at that type number, this is 116 consecutive years of dividend.

And I would be remiss if I didn't give you a comment or two on the proposed tax reform. I would say you guys know 80% of our sales are in the U.S., about 90% of our pre-tax income is in the U.S. 95% of our products sold in the U.S. market are sourced and produced domestically, so about 5% are imported. And so net-net imports and exports largely wash and it's kind of neutral. The best thing that could happen far and away for Church & Dwight is just the general corporate tax rate being lowered. But that's a quick perspective, we get that question a lot, so I want to give context.

And with that, I think we'll invite the management team up and we'll take any sell-side questions we have.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. All right, gang. Come on up. It's not often you get the entire management team, so don't be bashful to ask some questions. We have virtually every function represented here. They're bumping around here. We had a terrific fourth quarter and just a really fabulous 2016. We're optimistic about 2017. So now we'll take your questions. Okay, Bill.

Question-and-Answer Session

Matthew T. Farrell - Church & Dwight Co., Inc.

Two Bills there. Bill Schmitz?

Bill Schmitz - Deutsche Bank Securities, Inc.

Can you guys bridge the organic growth and that negative 1% Nielsen to the roughly 3% in the consumer domestic business you did?

Matthew T. Farrell - Church & Dwight Co., Inc.

Yeah. I used to masquerade as the finance guy. So, I'm going to...

Bill Schmitz - Deutsche Bank Securities, Inc.

I remember, yeah.

Matthew T. Farrell - Church & Dwight Co., Inc.

...let the finance guy do that.

Richard A. Dierker - Church & Dwight Co., Inc.

Yeah. I think I might – yeah, no problem. So, you'll see there in the Nielsen data for example, before we paid out, has been relatively weak and that's really track channels. So, we were slightly negative in track channels. We said in the release though about – if you think about it, we're slightly negative in track channels, but we're 2.8% organic from the consumer domestic division. And we said that that entire delta can be really explained by two things, about 300 basis points in total, about half in club and about half in the online channels. So, I would say that trend's probably going to continue. It's not going to get better over time, so that disconnect is going to be there.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. So, why isn't it like going into the first quarter, do you know what I mean because those trends, it seems like the club stuff is distribution more than growth, yeah, or is it growth have been club – do you know what I'm saying, like obviously, the e-commerce piece also should continue to grow. But I know that comp's a lot harder in the first quarter, but you'd think those trends would...

Richard A. Dierker - Church & Dwight Co., Inc.

Yeah. I think you hit it on the head, Bill. I think if anything, that the comp is overwhelming any trends that we're going to see in Q1, right. To be comping a 5% organic or 6% even household business growth in Q1 is going to be very difficult. But, so with all that said, we're going to have better growth than is in track channels, but the comp in Q1 just is very high, so our outlook is 1% to 2% Q1.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. And then what percentage of sales is e-commerce now?

Richard A. Dierker - Church & Dwight Co., Inc.

We've just said in the past, we're right in line with the 1% to 3%. So it's growing very quickly.

Bill Schmitz - Deutsche Bank Securities, Inc.

Yeah.

Richard A. Dierker - Church & Dwight Co., Inc.

But that's probably the....

Matthew T. Farrell - Church & Dwight Co., Inc.

Yeah. We're right in the middle, around 2%.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. And do you have big...

Matthew T. Farrell - Church & Dwight Co., Inc.

Hey, hey.

Bill Schmitz - Deutsche Bank Securities, Inc.

What's that?

Matthew T. Farrell - Church & Dwight Co., Inc.

We have a field of people.

Bill Schmitz - Deutsche Bank Securities, Inc.

I'm sorry.

Matthew T. Farrell - Church & Dwight Co., Inc.

You're on number four. Let's get the other Bill.

William B. Chappell - SunTrust Robinson Humphrey, Inc.

Yeah. Just on the laundry section, can you maybe, now over four or five months since the Henkel-Sun merger. Kind of thoughts of is this going to be good for the category in 2017, do you think it's good for the category in the long run, do you not have an idea at this point?

Matthew T. Farrell - Church & Dwight Co., Inc.

Yeah. That's a crystal ball question. So it's fair to say that when a large company buys another pretty good-sized company, a lot of their plans are already in place. So whatever Sun had in place for Q3, Q4, maybe even for 2017 is already in place.

So, we don't really know – there's no evidence that says there's some obvious change in tactics because it's been going on for a few months. So here, we have to wait and see. There's one camp that says okay, you book, you get very promotional. The other camp would say, hey, people are going to be rational and it will be great for the category. So, we need a few quarters to figure that out and I'm sure it's going to be a question from everybody in Q1 and Q2, what's going on in the laundry. But as Rick points out, the comps, back to Bill's question, we have a 1% to 2% number in Q1 because our biggest quarter last year, we posted over a 5% organic number last year Q1, so that's a tough one to comp.

William B. Chappell - SunTrust Robinson Humphrey, Inc.

And just related to that, I mean, I didn't – I may have missed the thoughts of how you turnaround XTRA, that didn't seem to like there's any innovation, it's a price value-type position and that seems to be the one that's probably hit most by Sun. Are you optimistic you can turnaround this year and how do we do that?

Matthew T. Farrell - Church & Dwight Co., Inc.

Yeah – no, you're absolutely right. So, XTRA has lost share for three years in a row. As I pointed out, in 2016 XTRA grew our profit, so, and we haven't spent. So if you look at what we spent on a full-year basis for XTRA, we're around 37%, 38% sold on deal where it was simply tied and Sun 40% plus. So the question is, okay, you got to get into the game now to try to offset that because it's not indeed value, it's not really an innovation story, it's more of a price story.

Yeah, Kevin. Only Kevin that we have.

Kevin Grundy - Jefferies LLC

Thanks. Two questions if I may. So, Matt, can you comment on balancing a bit the market share performance, you guys lost market share in six of your largest 10 brands.

Matthew T. Farrell - Church & Dwight Co., Inc.

In measured channels.

Kevin Grundy - Jefferies LLC

I'm sorry – in measured channel, in measured channel. With the advertising marketing relatively flat, I know it's sort of consistent with your evergreen target. Does that lend itself, the market share dynamic, to the argument that maybe advertising marketing needs to step up a bit to stem some of these losses, if not gain share and then I have a follow-up question.

Matthew T. Farrell - Church & Dwight Co., Inc.

Yeah. Well, I'm going to give you a couple of opening remarks and then I'm going to ask our CMO to comment. I'm may say what she's going to say. So, marketing is 12%-plus of your revenue, so it's a pot, you have to decide how you're going to deploy it. So you're going to move things around from one brand to the other. Now, some brands have tremendous equity and they can withstand having less spend on them in a given year and then you move the chips over to another brand. So, we will have to deploy it smartly so that we're going to get the right effect. And some of that measured channel versus unmeasured channel stuff we're pretty relaxed about, because we know, we see the numbers and everybody can't see it. It's going to create greater unease going forward, I think, if you're an investor and analyst to try to see what's going on in unmeasured channels, but I'll let Britta comment on that.

Britta Bomhard - Church & Dwight Co., Inc.

Sure, sir. Just building on what Matt said, I think we have different reactions in different categories of advertising, so what you will see, Slide is very obvious, great innovation, you can see it, so advertising will drive a change very quickly, whereas other categories where advertising is constant, you can't see that change as quickly.

I think we're very confident that the advertising we have or the communication we have is driving different categories. Then if you look at the overall, there's many, how would I say, noise overlaying it. We talked about laundry and the promotional effect overlaying the noise or we talked about TROJAN, that shift in channels is actually overlaying the true brand performance. So we look at it holistically across all the channels we have.

Matthew T. Farrell - Church & Dwight Co., Inc.

A follow-up, Kevin. Another one?

Kevin Grundy - Jefferies LLC

I'm sorry?

Matthew T. Farrell - Church & Dwight Co., Inc.

Another one.

Kevin Grundy - Jefferies LLC

Yeah. Sorry, Matt. Just a follow-up as, just to stick with online for a second, maybe talk a little bit about some of the opportunities, and maybe some of the risks you've seen in other categories whether it's – like blades, wet shave, some personal care categories like beauty where sort of have been demonstrated that the barriers to entry are a bit lower and there's been some risk to the incumbents. So, talk about how you guys are sort of looking at that. Britta, if you could chime in too particularly like in contraceptives as an example, to some of these categories that lend themselves a bit more to online? Thanks.

Britta Bomhard - Church & Dwight Co., Inc.

Sure. So I would say categories are very, very different, so lower barriers to entry in beauty for example and cosmetics, yeah, or in skin care, if you look at our categories like condoms needs trust, yes, so we've seen across the world plenty of small condom pop-ups, right. None of them has stuck really anywhere in the world, because this is a category where long-term trust in the brand is absolutely essential.

Other categories I would talk about, it's a huge opportunity for us actually online because there are categories where you don't really feel comfortable if you go in the store and purchase them. So, we have a brand, for example, Replens/RepHresh, yeah. You don't really want to be seen with a basket and saying I have personal odor. So, these categories were doing extremely well online, so I think the hard one is you have to differentiate on online very closely, think about what the consumer wants and what they're looking for. So, I personally see it as a huge opportunity for us. I'm not really worried. I don't see it as a threat or disruptive.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Joe?

Joe B. Lachky - Wells Fargo Securities LLC

Thanks. First question I guess in terms of this move from tracked and non-tracked channels, what's the margin delta between your businesses in those two different channels. And then, secondly, on the acquisitions, it looks like you're paying roughly 4 times trailing revenue, call it 14 times EBITDA. For businesses that are in smaller categories, what's the goal there, is it geographic expansion for those two acquisitions you announced this morning?

Matthew T. Farrell - Church & Dwight Co., Inc.

Yes. So, when we look at online contribution versus bricks-and-mortar contribution, we're looking at the basket, because some are actually going to have better margins online, some are going to have worse. But in total portfolio, they're about equivalent. We're not seeing an erosion from our online business. Your other question was on multiples?

Joe B. Lachky - Wells Fargo Securities LLC

Yeah. It looks like you paid a pretty hefty multiple for some of these acquisitions, I'm curious what the growth opportunity is.

Richard A. Dierker - Church & Dwight Co., Inc.

Yes, so we spent $290 million on those two. I'd tell you, what we paid was a little sub-12 and we think synergies is sub-10. So we think it's still a great deal whether it's international, domestic, wherever it would be. And I think – by the way, we also get some more scale for some key countries internationally, but I'd say it met all of our financial criteria.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Jason?

Jason M. Gere - KeyBanc Capital Markets, Inc.

Okay. So, I have two questions. One, just on international. Obviously, years ago really didn't get that much of a discussion, now we talk a little bit more about it. So you're talking about some of the investments you're making there, maybe just to dovetail on Joe's question just about the acquisitions there, how should we be thinking, what percentage of sales if you think 5 years, 10 years down the road, will international be part of the story?

And then the second question, I guess, so really wanted to talk about the gross margin guidance and the promotional and the commodity, maybe if you can flesh that out a little bit. The comfort level that you have in case the promotional environment does get worse, 60 basis points does seem a lot for a CPG company just in this environment. So I'm just, I know you lean on the productivity, but can you just maybe put a little more color behind that?

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay, well. We have the good fortune of having the head of our international business with this here today, so I'm going to let Steve take a swing at your question.

Steven P. Cugine - Church & Dwight Co., Inc.

Thank you. So at Church & Dwight, we really haven't focused that intently in international expansion. Several years ago when Matt asked me to come in, I really viewed international as a wonderful opportunity to be a growth engine, just another piece of our growth strategy long-term. So we do feel that international represents a significant growth opportunity for us, we're making investments and Matt alluded to two new sales and marketing offices that we just opened this year, one in Panama to service Latin America and one in Singapore to service Southeast Asia, both of which are very dramatic growth opportunities for the company. So, we'll continue to make acquisitions and investments in terms of driving growth behind the brands that we exist both domestically and internationally. So, we see this continue to play out as a source of growth, incremental growth for the company. Where do we see it going long-term, you want my answer or Matt's answer? But I would say that we would – we think that as you look at CPG across the world that we would see this playing out to be a much more significant part of our overall portfolio than it has in the past.

Matthew T. Farrell - Church & Dwight Co., Inc.

Yes. So where we have that earlier slide on international, they remember me saying that we're doing what a lot of the CPG companies did decades ago. During the last couple of years, we said, hey, we have to get after international. We have really good brands. We have some brands that can travel. Not all, but some can and Steve and his squad were doing a great job. But we're going to have above average, so just think about our model, 3% organic growth, above-average organic growth from international for years to come. That's going to help us, total company.

And the ambition, we're a $500 million business today. What's our ambition? Our ambition is to be a $1 billion business. Will I be in a nursing home when that happens, maybe not, but that's not – that's organic and acquisitions, right. So, we've done acquisitions in the past. We did BATISTE a few years ago in 2011, listed these J&J brands and we're always on the hunt for other brands, but we're not slaves to our numbers. I'm not going to say, hey, we want to be $1 billion by this year. Not going to happen, but we do have high expectations of the business.

Richard A. Dierker - Church & Dwight Co., Inc.

And then on the gross margin question, right. I'll just reiterate what I said. So, we're getting 40 basis points from acquisitions, great. It's been offset by commodities and promotional spending in FX and then we're getting the balance of it through litters in volume and productivity.

To your early estimate of that 40 basis points, are we comfortable with that 40 basis points? Well, I'm not going to break out the 40 basis points in any more detail. I'll just tell you that it assumes double-digit increases in our surfactants. It assumes a mid single-digit increase in our resin. So we have commodity inflation built-in, since 20%-plus increases on diesel, right. I mean, so we have expectations and if it's more than that then we'll do what we need to do to help offset that and whether it's productivity program stepping on that or whether it's SG&A, whatever it is, we always have a whole array of levers that we pull if things don't go as expected.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Caroline?

Caroline Levy - CLSA Americas LLC

Thank you. I have to follow tradition and ask two questions. Could you dive into the leaning on online margins because I thought it was really fascinating, most companies are up, they're saying they make more online?

Matthew T. Farrell - Church & Dwight Co., Inc.

In some categories.

Caroline Levy - CLSA Americas LLC

But they, you start to wonder if you factor in all the investments in digital and the human resources you have to apply them in, I just want to understand a little bit more about that?

Matthew T. Farrell - Church & Dwight Co., Inc.

Yeah. There's some truth in the fact that digital advertising is more efficient. We went through that example with litter. So instead of bombing away with TV advertising, you get to affect, to reach everybody. You're only going after the cat owners, so there are efficiencies in the advertising side, and – remember, that's going to be 12% of your sales.

So you can be more efficient there, if I'm just going to improve your margins. Heavy things don't travel well. So when you think about online, so heavy things like a laundry detergent, litter, those are categories where you're going to be more challenged to have the same margins as you have in store, but then if you have some personal care brands on the other side, you're going to make more money than you do in retail. It is a balance.

Matthew T. Farrell - Church & Dwight Co., Inc.

Right. So net-net, our online margins are at or above company average because of the personal care mix, right. So that's – we've said that the last few quarters and that's still the truth.

Caroline Levy - CLSA Americas LLC

Okay. And then the other one is just how do you get the operating leverage that you look for when you buy overseas because you just don't have the scale you have here, not that you're the biggest company here, but in a way opening the offices in Singapore, and so how do you also get margin expansion while you're doing that?

Matthew T. Farrell - Church & Dwight Co., Inc.

When you acquire a business, you mean? Well, when you acquire, the interesting thing about acquiring a business is you're buying marketing contribution. So essentially it's gross profit minus marketing. So we don't add a whole lot of SG&A when you're buying a business. So, right off the bat if you can get leverage on what you bought, you're going to improve the operating margins of the business, so. It's something that – all this SG&A doesn't come with it when we acquire a business.

So we have to acquire smart, so you have to buy where you have some infrastructure in different countries, particularly internationally. So that limits us a little bit more. It's hard for us to buy a business in a country we're not in and not bringing the SG&A. And then some of the math starts to fall down because we're oriented towards cash, how much cash the business throws off. I hope that helps you.

Richard A. Dierker - Church & Dwight Co., Inc.

Yeah. And the only thing is what Matt told you before, that small ANUSOL deal for example 80%, 90% of those volumes are going through Canada, we have sub Europe, right and Australia. So we feel like we do have a platform to leverage there. Those headquarters are really the jumping off point for regions, right. That's just a few SG&A heads and that's really the jumping off point for future expansion.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. How are you?

Unknown Speaker

Just sticking with international, I was still curious about the portfolio cohesiveness question, right. You talked about the financial attributes and I know that even domestically, right, the business has its chunks of businesses that don't necessarily have the most traditional strategic cohesion across the board and you've done wonderfully well with that. But you did it in one country, right? So to try to build an international business which is whatever it is, six or seven countries with a sort of feeling a little bit scattershot brand portfolio. I'm just curious if strategic fit is part of it beyond the financial attributes and the ability to leverage your infrastructure and so on? Thanks.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. That sounds like an indictment, so I think, Steve is ready for that beach ball.

Steven P. Cugine - Church & Dwight Co., Inc.

Sure, not a problem. It's a great question. Many of these international subsidiaries, the countries that Matt puts on the chart were acquired, right. When we did other acquisitions, Carter-Wallace has been the primary one and it had some cats and dogs for sure. So, three years ago, what we decided to do is to make this an engine of growth. We had to have a strategy. Both what markets, what brands, what capabilities and where from an acquisition standpoint we would like to go. So, what we did is we identified key brands that we knew we could grow in international markets, right? That's one.

Two is, we have a North America focus, so we take the capabilities that the U.S. has and we extend them north, Canada, south into Mexico, so you saw Mexico, fabulous performance. We expect that to continue to grow, the biggest brand growing the fastest is our ARM & HAMMER franchise, so we feel like we have a long runway and we can continue to extend that further south through Latin America and the new sales and marketing offices will be a jumping-off point for that.

Around the world is mostly a personal care business, so it's our personal care brands that we've been able to really ignite in many parts around the world. BATISTE, fast-growing in every market that we launched in, right. STERIMAR, so we sell STERIMAR in 87 countries around the world. It's a unique phenomena that doesn't really exist in the United States, it's this concept of nasal hygiene. So we look at countries like China as a great opportunity to leverage our capability, all the clinicals that we do in this space into emerging markets and they've really taken hold.

So, one of our most successful markets for STERIMAR is in Mexico City for those same reasons. So we're exporting that same technology, talent, and capability in markets where we believe we have a right to compete and win. Femfresh is another category that is growing quite nicely for us.

So we really selected down for international markets, key brands that we know where we have a competitive advantage and a right to win and then we're deploying our capabilities in markets, so then we select countries that we want to win in and that's been the magic of success, really driving significant growth.

Last year, we did over 8% organic growth. This year, we're doing 10%, really based on that very strategic model.

Unknown Speaker

That's great. That's really helpful. Thank you.

Matthew T. Farrell - Church & Dwight Co., Inc.

Olivia?

Olivia Tong - Bank of America Merrill Lynch

Thank you. First question on laundry, we didn't really talk a lot about liquid laundry detergent, it's been a while since we've seen something in terms of innovation there and it's still a much larger category than unit dose despite the growth there. So I was just wondering if you can give it a little bit more color on that? And then back to international, clearly the growth has been phenomenal there, but for 2017, you're looking for growth about half the level what you achieved in 2016. So can you sort of bridge that gap a little bit, realizing that of course it's tough to expect double-digit growth in perpetuity? Thank you.

Matthew T. Farrell - Church & Dwight Co., Inc.

Yeah. The liquid laundry category, you're right. There isn't a lot of innovation in liquid laundry, so it's more of a brand story and brand equity, so all the growth has been driven by unit dose over time. I think that's going to continue in the future, so it's – no expectation, there was an expectation actually at one point there'll be further compaction in liquid laundry that clearly is not obvious today. Once upon a time, it was believed in 2017, liquid laundry will be compacted again because Wal-Mart announced that years ago. That is not on the radar screen right now.

So, with respect to liquid laundry, it's more of a brand story. I'll ask Britta or Lou, if they want to add anything on liquid laundry detergent? You want to add to that?

Louis H. Tursi - Church & Dwight Co., Inc.

The only thing that I would add to that would be that over the years, we have launched a lot in laundry detergent, and some of those sub-segments have done better than others. And so, there's distribution opportunities on some of those that we still haven't capitalized on, as we launched a different flavor or in the free category sensitive, that's what I mean, so we have opportunity in the sensitive category as an example. So, we are looking to expand our distribution in some of the great items that we've launched in the past that haven't capitalized on all the distribution opportunities.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay, what's the second question you had, that was a two-parter?

Louis H. Tursi - Church & Dwight Co., Inc.

Yeah. I would love to commit to 10% or double-digit growth from here into infinity. But I think what we see is some of our core markets, like developed markets in Europe which had a fabulous year last year, we don't expect that to continue long-term, we expect that to moderate to kind of the company average growth. Last year, they really over-delivered.

Same thing with Canada with a great performance last year, we don't expect that long-term to continue. But we do expect the 4% to 5% at a minimum. We have higher expectations for ourselves in international markets, but I think we do see developed markets slowing down from their high point last year.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Steve?

Stephen R. Powers - UBS Securities LLC

I'm actually going to build on both of those questions. On the laundry side, your main competitors are – speaking of branding and marketing, are branding a lot right now, right. Both of them in the Super Bowl with various properties. So it sounds like you're going to go to market in liquid with basically your current portfolio, is that a big area of focus for stepped-up marketing next year or – is – what's the strategy in liquid as your competitors do a lot?

Matthew T. Farrell - Church & Dwight Co., Inc.

Yeah. There's no way we would – we'd go through our laundry strategy today for 2017. Is that what you're asking?

Stephen R. Powers - UBS Securities LLC

So, I guess, yes. There's no real incremental news that you're....

Britta Bomhard - Church & Dwight Co., Inc.

Maybe I can help.

Stephen R. Powers - UBS Securities LLC

Yeah.

Britta Bomhard - Church & Dwight Co., Inc.

Maybe I can help a little bit. So, first of all, Super Bowl, I think – I want to be very clear, I think it's a great PR for most of them, but value. We are value-driven. We are very clear now on our metrics where we invest, and where we don't invest. So I think that's my number one to say about Super Bowl ads, right. We all enjoy watching them, but if you think about it you want to reach consumers at affordable cost, they're not the greatest.

Secondly, I want to say, laundry, I mean, strip out a little bit of the noise, how much innovation has really been in liquid laundry over the last couple of years. You get a new flavor and a new flavor gets promoted and then it drops off again. And that's true for many of our competitors and I think we're making a decision to be much more clear that this is the area where consumers are not looking for something new every single time. They want good great performing products at a great value and that's what we are driving, what we have been driving. And just to come back to our shares, I think that's the secret formula of ARM & HAMMER and we've proven even in 2016 with all that kind of laundry battle going on, that ARM & HAMMER was a big winner. So, I think that's just to put it in context and distract a little bit of the noise around.

Olivia Tong - Bank of America Merrill Lynch

Okay. Fair enough. And then on international, just trying to get a sense of it sounds like, it feels like it's an increased priority. When it comes to M&A, is the financial bar higher or lower internationally versus domestic?

Matthew T. Farrell - Church & Dwight Co., Inc.

No. it's not lower. The financial bar is universal, whether it's international or domestic and the businesses we just bought have cleared those hurdles.

Stephen R. Powers - UBS Securities LLC

Okay.

Matthew T. Farrell - Church & Dwight Co., Inc.

So, there's no relaxation on our standards.

Stephen R. Powers - UBS Securities LLC

Okay. Thanks.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Jason?

Jason English - Goldman Sachs & Co.

Thank you for the question and congratulations again on a strong finish to the year. A couple of quick questions. First, kind of housekeeping on the stock options accounting change. If you look at your 10-K filing for last year, it would have been around a $0.14 benefit, the year before $0.06, the year before $0.07, why only $0.03 benefit as we look into next year and I guess what I'm getting is, is there a degree of conservatism embedded in that?

Richard A. Dierker - Church & Dwight Co., Inc.

Yeah. I'd probably answer that a couple of different ways. So, quantitatively, you're right. It's a bigger benefit if you take 2016, our math has a dime, $0.10 if it was 2016. If you take the five-year average, it's a nickel. If we take Q4, annualize it, zero, right? So, it all depends on how the stock price moves and it's kind of a circular relationship. So, you can't have a low target price and high expectations stock option exercises, right? It just doesn't work in the modeling. So, that's on the stock option exercises.

So net-net, $0.03, about $1.8 million of stock option exercises is our expectation. That could change, right? And we've seen our peer group, a lot of volatility, you guys see it even more than I do, right, people have raised and lowered multiple times already on this new accounting standard and so we're trying to take the noise out of it and if – hey, if it's worth it we're going to – we'll raise the number, we're going to be really clear about it.

Jason English - Goldman Sachs & Co.

I appreciate the visibility. Let's talk – go back to a question where we don't have the visibility and that's back to the unmeasured channel performance. It's hard, it's difficult since we can't see it, feel it, touch it and we're used to seeing, feeling and touching the performance. It's also hard because if we look at your performance and we compare it to what we can see, the spread, the delta is quite volatile.

We have a really wide gap this quarter, a pretty narrow gap the quarter before. Implicitly you're guiding to a fairly narrow gap in the next quarter. I guess, we'll see how consumption comes out but what we've seen so far suggests a pretty narrow gap. Can you give us a little more color in terms of what drives the volatility quarter-to-quarter, why that isn't sort of a steadier state magnitude of relative outperformance? And maybe if there were some real lumpy volatility from last year, you can give us some color just so we hopefully can anticipate it coming?

Matthew T. Farrell - Church & Dwight Co., Inc.

Well, some of it can be distribution, the timing of distribution from year-over-year. Let's say you're right about online, it should be pretty steady if you have X sales online in one quarter it should be that or more in the next quarter. But, yeah, I think there's definitely going to be some distribution and portfolio mix year-over-year, but it's something we struggle with too, it's hard to forecast actually.

Richard A. Dierker - Church & Dwight Co., Inc.

I would say the same thing, it's a little lumpy for us too, so we tried to give you guys the best all-in algorithm that we can and sometimes we are under and sometimes we are over, but visibility is still tough.

Matthew T. Farrell - Church & Dwight Co., Inc.

There's something else you should be aware of too, you can be online on, say, Amazon with plenty of products this month and next month, you're not. So you can get in and out because of their algorithms and how much you're selling online, et cetera, and that does create some wide fluctuations within a quarter and sometimes quarter-to-quarter. I'm sure you've heard that.

Britta Bomhard - Church & Dwight Co., Inc.

Maybe I can help with one little one. So how many of you took a New Year's resolution? We had a big campaign, New Year, New Me on vitamins, which is, we are the number one brand on Amazon online. So these kinds of effects and how successful one of these campaigns is going to be as we are all learning about online is hard to predict. So I would say that's also to invisible parts, these accelerating factors, which is certain categories perform well, certain timing of the year perform well. So that's for example, why the gap in Q4 where we shipped for that New Year, New Me was already, not visible to you guys.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Right here.

Unknown Speaker

Thanks. I have a general question on pricing and your ability and willingness to pull the pricing lever in 2017 especially given the heightened competitive environment. That would be first. And then second, your price mix internationally during the quarter deteriorated sequentially. So if you could touch on that as well as in terms of your ability to do it internationally, thinking about rising or increasing FX headwinds?

Matthew T. Farrell - Church & Dwight Co., Inc.

When you say the price lever in 2017, you're saying our ability to raise price? Yeah. Okay, well, as far as raising prices goes, typically the categories you may be able to do that are categories where you're most dominant. So, say, baking soda, you have a 75%-plus share. Condoms, you have a 75%-plus share.

But if you don't have that kind of leverage it's more difficult, number one. Number two is you need to have the support of the commodity cost rising. So, there are a lot of retailers, we will be able to pull the lever if you can support it with input costs which of course we have, but it remains to be seen if we can pass that on in 2017. A lot of retailers are very reluctant to take price as you probably know. What's your second part of your question?

Unknown Speaker

Just the same concept internationally, because in the fourth quarter price mix deteriorated sequentially, so just thinking about it internationally as well as you think about your mix?

Richard A. Dierker - Church & Dwight Co., Inc.

If anything it's probably just mix rather than in terms of country, right. If Canada's doing better, it's more of a household-type product, that's probably more than anything. I wouldn't read into it.

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Anybody else before we wrap it up here?

Matthew T. Farrell - Church & Dwight Co., Inc.

Okay. Well, thanks you all for coming today. Thanks for joining online, as I said super fourth quarter and optimistic about 2017. Thank you.

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