Church & Dwight Co. Inc (CHD) — Q4 2015 Earnings Call Transcript

Good afternoon, everyone. We're in a different location this year as the New York Stock Exchange is under construction, but we'll be back next year. Joining me today is our new CFO, Rick Dierker, along with the entire management team who will be here for questions after the presentation. Let’s get started. I encourage everyone to read our Safe Harbor statement. Today’s agenda includes an overview of our company, key categories such as laundry and vitamins, our operations, and Rick will present the financials. In summary, we had a great 2015 with an 8% growth in EPS, which is 12% when adjusted for local currency. Our full-year organic sales growth was 3.6%, exceeding our evergreen target of 3%. The consumer business finished strong with a 3.3% growth in the fourth quarter and we are moving forward into 2016 with good momentum. Our new product pipeline is promising, and we expect another 3% organic revenue growth in 2016. The outlook for EPS growth in 2016 is 7% to 9% overall, and 9% to 11% in total currency terms. Additionally, we announced a dividend increase to maintain our 40% payout ratio and completed a small acquisition in January as we continue to seek out beneficial brand acquisitions. Church & Dwight was established in 1846, approaching our 170th anniversary. We began with ARM & HAMMER baking soda, and now we have 10 key brands driving our revenues and profits, accounting for more than 80% of our sales and profits. Of those, four are mega brands that contribute over 60% of our revenue and profits. We primarily operate in the U.S., with 82% of sales coming from domestic markets, which provides us with less exposure to economic downturns abroad. Our operations are balanced between Personal Care and Household products, with Specialty Products making up 8% of sales. We project around $3.5 billion in sales for 2016, reflecting strong shareholder returns over one, three, five, and ten-year periods. Focusing on our key categories, the laundry market showed improvement in 2015 after declines in previous years, with total category growth of 1.6% for the year and a 0.7% increase in liquid products. In terms of vitamins, we entered the fast-growing gummy vitamins market with our acquisition of Avid in 2012. While growth in the overall vitamin category slowed in 2014 due to negative press, it rebounded in 2015, particularly in the gummy segment, which we lead in both adult and children's products. Our dry shampoo brand BATISTE sees impressive growth, set to surpass $100 million in sales this year. We dominate the UK market with a 75% share and hold a 15% share in the U.S., indicating substantial growth potential in this early-stage market. Regarding our growth strategy, we have a recession-resistant portfolio and a solid mix of premium and value products. Our marketing investment averages between 12% and 13% of sales, reflected in the growth and performance of our mega brands. Although some brands faced challenges, overall, we maintained or grew share. In terms of distribution, we’ve consistently expanded year after year, with plans to further enhance our presence. The laundry category remains competitive, but we've gained share despite the challenges, and our international business continues to thrive. Our gross margin has been stable, running around 44.5%, despite market pressures, with initiatives in place to drive gross margins through continuous improvement and supply chain optimization. We also have a straightforward compensation structure tied to gross margin targets. We focus on strategic acquisitions to augment our growth, and our efforts in marketing and distribution have proved fruitful. We've demonstrated our capability to grow shares post-acquisition across the board. Rick will now provide more details on our financials.

Okay. Thank you, Matt. I'm going to cover three topics. We're going talk about the quarter, Q4, and just how we came in. We'll go through 2015, and some of the details there. Then talk about 2015 outlook, but there's one theme to take away from the financials today, that truly 2015 ended well and we have a lot of momentum as we go into 2016, lot of optimism. So Q4, 2.6% organic sales growth. 3.3% for the Consumer Domestic division, largely driven by volume. We'll get into the details in a second, the 2.5% volume growth. Gross margin expanded 50 basis points behind commodity improvement, behind our productivity programs, a lot of our price in the laundry is normalized, the same theme you've been hearing about all year long. Marketing was down 10 basis points, so essentially flat, and SG&A was up 10 basis points. So operating margin was up 50 basis points. So EPS is up 5%, and currency-neutral EPS is up 9%. Great result. So through the quarters of 2015, pretty consistent; 2.6% in Q4, remember versus a year ago, we were at 5.2%. So really strong growth in Q4 off of a high comp year ago. You guys like to look at the stack bars, so, we threw in here for consumer business. This is just the strength – relative strength of the consumer business, a lot of momentum going into Q4, 7.2% in Q4. So, we're exiting the year at a strong rate. Categories are strong. So, volume is the growth driver, 2.5%, at a 2.6% from the organic side for the company; 3.2% for the domestic division. With the international division, we do get a little price as we go into the FX headwinds. And then SPD, we're down 4%, largely on volume because no prices have come down. Great trend, great momentum on gross margin as well, 45.5% for the quarter, and as I said before, normalized pricing environment. Commodities are a tailwind, and productivity programs continue, and a lot of our vitamin issues for start-up happened earlier in the year. Marketing spend, highest percentage, highest dollar amount of the year. And that leads to share growth, seven out of our 10 power brands, and Matt walked you through those details, three or four mega brands grew as well. So, let's recap on the full year, 3.5% organic sales growth, compares to 3% outlook earlier in the year, largely volume-driven. Gross margin is up 40 basis points, for all the reasons I already walked through. Marketing is down 30 basis points; now, we talked about that a little bit on our Q3 call. We reallocated some of the marketing spend and put it in the trade line for OXICLEAN to drive trial, and as Matt alluded to, trial and consumption are both up. Adjusted SG&A is flat, and operating margins are up 70 basis points, so great result. EPS is up 8% and free cash flow is a record at $544 million. Adjusted free cash flow conversions, 125%. That is a very important metric to the company. We'll be talking about that even more as we go forward, and that should be very important to every shareholder as well. So, why can we drive great cash flow productivity is because partly of working capital improvement. Our cash conversion cycle, which is inventory, which is receivables minus payables, has gone from 40 days to 27 days over the last five years. We continue to believe that we can continue to make that go down over time. Free cash flow conversions, 125% in 2015, average for the last five years, 119%; so just stellar result. We did dip our toe in the water in 2015 on AR factoring, so that isn't that 125%. If we take that out, we're still at 119%. So, as Matt alluded to, 118% for the last seven years or so, which is far above the industry average and far above some other competitors who target 90%. We have a strong balance sheet, 1.4 times levered. Why is that important? It's important because we have a lot of firepower, a lot of dry powder waiting to do an acquisition. In this example, we could do a $2.8 billion deal and maintain our credit rating. Okay. So that's 2015. So why don't we go through 2016. First, organic 3%. So, there's a couple of things behind that number. So, that'll be SPD, 1% to 3% type of growth; International, 4% growth; and for the consumer business, domestically 2% to 3%. And you might ask why is that coming down from 3.5% in 2015? There's really two assumptions in there. One is, the international business comes back down to earth. We had a phenomenal year this year behind Steven Cugine and his team, 8% going to 4%, so back down to earth there. And then the categories, our assumption for that is growth of 2% to 3%. So if categories are doing better, then our top line will do better as well. Gross margin, 40 basis points of expansion. The easy way to think about that is really 70 basis points from productivity programs, from commodities, not having any of the start-up costs for York, for the vitamin plant, offset by about a 30 basis point drag from currency. And I'll walk you through it when we talk about currency a little bit more, but we have a 30 basis point drag largely because of transactional currency impacts from the U.S. to Canada. Marketing is flat, but there is a little bit more of a story there as well. SG&A is down 10 basis points, leveraging the top line, operating margins up 50 basis points, EPS, 7% to 9%, currency adjusted 9% to 11%. And then we have a share count number for you, 131 million, what's behind that, $300 million of buyback, and we've already gotten ahead ourselves of $100 million in December, so $200 million left for 2016. Okay. Here's how we stack up versus our evergreen TSR Model of 3%. You can tell we've hit or beat that 3% number over time. Focus on gross margin, absolutely 2010 to 2014 in the face of commodity headwinds, in the face of laundry competitiveness, we maintained our gross margin. In 2015, we expanded and we're going to expand again in 2016. Consistent marketing spend, so 12.3% to 12.3%. So, I just want to leave you guys with this comment. The core business we're increasing marketing spend by around 10 basis points, okay. Where a lot of our competition is cutting 20%, we're actually increasing our core business and the marketing spend associated with that. When we layer on the TOPPIK acquisition, it is a $30 million deal, about a third of that revenue is direct, so the marketing spend is a little bit lower. So when you do the math, it becomes 12.3% to 12.3%. SG&A management is the hallmark of the company. Our people do great things here. This is leveraging the top line, many companies do zero-based planning process, I'd say we've been doing this for many, many years. Operating profit, 2015 was a big year, we hit 20%. So, a lot of personal care premium companies are in the neighborhood of 20%. So we're happy to be there. And then in 2016, we think we're going to expand by 50 basis points again. Now, EBITDA is a good surrogate for cash generation and we think the stair step tells the Church & Dwight story very well; so we've gone from 20%s to the mid-20%s, 24.2%. For EPS, we're $3.48 to $3.54, that's the range of 7% to 9%. Again, once you back out the currency is 9% to 11%. Okay. Here's the FX story. So, in 2015, as a refresher, we had about a 2.5% drag in currency on the top line and a 4% drag for EPS. That was a 30 bps impact on gross margin. In 2016, we had a 1% drag for revenue and a 2% drag on EPS. But we still have a 30 bps drag from gross margin. And that might surprise you, I would just tell you that in 2015, 70% of the drag for currency was translation, and in 2016, 70% is transaction. So that's more of a gross margin impact. Okay, allocation of capital. Number one, by far, TSR-accretive M&A. We want to do the – we look at deals all the time. The management team, the senior leadership team, we look for deals all the time. You'd be shocked with how much time we actually spend on that. What I want to leave you with though is we're looking for the right deal, and it's number one, but we want to make sure it's the right deal. Number two is new product development that drives our organic growth. Number three is CapEx. Number four is return of cash to shareholders through dividends and buyback. And number five is debt reduction. We are not a capital-intensive company. In 2016, our outlook is really $55 million of CapEx. You might say, hey, Rick, you guys have typically been high-$50 millions, low-$70 millions. And I'd say, no, the base business was actually in the $50 millions. And then when we have incremental capacity to manage for vitamins or for a new plant, that's when we spike up to the higher number. And then, as Matt alluded to, a 6% dividend increase to $1.42. That gives us right at our 40% payout ratio that we have been very clear on from many years. And with that, I'll welcome up the rest of the management team and we will take your questions.

Okay, do we have microphones for people? Oh. We do. Okay, Bill.

Thank you. As you highlighted both in the release and a couple of times, the kind of momentum exiting the year, can you just give us a little more color, and I guess particularly, do you see something in vitamins, as you finally get the plant issues behind you that you can maybe point to, where we have momentum going into this year? And also talk about the laundry category, with more competition with Persil, with what you're seeing with XTRA? I mean, help me understand how you're seeing momentum as we move into 2016 for that as well.

Okay. So it's a typical multipart question.

In one part, yeah.

Okay. So first off, so, vitamins. So, right, vitamins, we went sideways this past year. We had issues with supplying customers. We had poor service levels. We had a lot of people unhappy with us. We had – we didn't promote our products. We cut back on advertising, so – because we couldn't service customers. That is behind us now. So now we have lots of new products coming out as I reviewed with you. Customers are jazzed about it. And we're going to get new products on shelf in 2016. So, we're going to benefit from the tailwind of the category starting to grow again. So I feel really great about vitamins. What was your second one? Second was...

Laundry.

Okay. So laundry, so look, laundry down three years in a row. And now, suddenly we had three quarters in a row where the laundry category is growing. So there is more money being spent on laundry, so consumers are willing to spend a bigger pot of money. So that's good news. When a category expands, you're right in that there is new competition in there with Persil. That was certainly not something we saw coming, as was into the category us having then OXICLEAN premium laundry detergent. But you know we're not giving up on OXICLEAN. We have obviously the new two variants coming out this year with the preserve product, and also the pods – the dual chamber pods, and don't underestimate that. So remember, we had a powder pod for many years. We focused on liquid, and we didn't put a lot of effort behind the pod side of the business. We're coming out with a dual chamber this year, because consumers are looking for multiple benefits, and you need multiple chambers. So, we think the innovation is going to help us there. With respect to unit dose, there is no question that Procter has dominated that, same story, right. We have a new product this year, the dual chamber and that's going to help us. Yes. Let's go on this side, Bill.

We talked a little bit on it briefly, but could you guys do a better job bridging the gross margins, so the puts and takes this year, because it sounds like there was a fairly significant hit from the vitamins stuff? But just given where the commodities are now and probably some mix lift from BATISTE and acquisition growing much faster. I know they're small, but they are massive gross margins. So how are you going to get into 40 bps for the guidance?

Yeah, I've completely forgotten everything about that I've learned in finance. So, I'm going hand this off to...

Right, right.

...our CFO, Rick Dierker.

Yeah, thank you, Matt. Well, we tried to illuminate for you a little bit, Bill, about the transactional drag of 30 basis points of it. While commodities – the core commodities like resins, surfactants and paper are all down, that's a tailwind of course, other costs are still up, transportation and labor and everything else. So, everyone wants to talk about the pure commodity piece, but other costs still – there still is inflation in the business. Mix of BATISTE, yeah, that's helpful, Personal Care margins, and they are down. And like you said, vitamin costs are behind us. We never really quantified that. We said it was about the size of a breadbox is the quote. So by and large, it's really – commodities do benefit us. Productivity programs do benefit us. Mix does benefit. But there are some other headwinds like FX and everything else I just said. Okay.

Okay, great. And then just to follow-up on the vitamin stuff. You did like 3%-plus or minus growth last year in scanned channels, how much do you think you lost because of the capacity outages and the allocation? And now you got it fully up like you can sort of support all the orders you're going to get now with the new supply chain, and maybe what you think that sort of 3% goes to?

Well, I mean you'd assume that if the category grew 3% in 2015, at a minimum what we lost is we're going to hold share, all right? So, that would be our surrogate for that.

Got it. All right. Thank you.

Yeah. Let's go, right here, second row.

Can you comment on vitamin margins. So, versus the average as you get the vitamin business growing again and you're investing, is that actually a negative mix shift that would be affecting gross margins and so on?

Yeah. So, Caroline, it's a good question. Remember, a year ago, we told you that we had actually got our vitamin margins up to the corporate average. That was prior to the investment of the new plant, right. We said, hey, we're going to invest all this capital and fix the right structure for all this future growth. 75% increase in capacity, and we have to grow our way into it over a few years. And so as we grow into our way into it, the margins for vitamins are again below the company average. But we think that with the growth over time, then we'll get back to or above company average.

Thank you. And if I might just on the international, if you could, there have been some markets that are where the consumer is very, very weak. Is your business small enough that you can still grow in that environment overseas?

Yes. Steve, do you want to take a swing at that one?

Yeah, sure. I would say that our business in developed markets has been quite strong actually. So, Europe delivered strong high-single digit domestic growth behind launch of new products, BATISTE, Femfresh. Emerging markets have been something where we've really performed well and you saw from Matt's chart, Mexico in particular is a good sub for us, that's double-digit growth. And then export markets, an area that we really focused on has delivered double-digit growth as well. So, we are feeling pretty confident relative to international playing a strong contributing role in the company's overall growth rate.

Okay.

All right. Thanks. So, obviously, your operating margins are best in class. So, when you talk about aggressive but achievable guidance for 2016, the balance between sales and EPS growth, how can you – I guess, what are some of the levers you can kind of lean on in case sales do come in little bit lighter because of the macro backdrop. I know you got the recession kind of part of the portfolio. But this is a question that we ask you every couple of years when things start to look a little gloomier out there. But I was just wondering if, as you continue to impress us with the margins, like, how do you think about the next levers that you can lean on.

Yeah. Well, we always have the same answer to you by the way, because you have asked this before. So, it's always a what if. So, what if there is some pressure on the top line. Well, obviously, it's always, we know where all the discretionary costs are in the company. So, even with the 12% SG&A, that's always something you can reach for. So, that's always the first stop on the train. And that the last stop on the train is going to be marketing. So, as you saw in the release, our marketing spend was $417 million in 2015; and a year before it was $416 million. So, we did not cut marketing this past year. On a reported basis and on a local currency basis, it went up. So, we're very committed to holding the marketing where it is, but as seen it would be the first stop on a train. And you know we have a very creative supply chain organization as well that's trying to find ways to lower the cost per unit. Go to Kevin.

Thanks for the question. So, two unrelated questions, first, good to see innovation on the unit dose front. Can you possibly frame and maybe you don't want to comment, what the trajectory of that looks like? So, Matt, you've made the comment in the past that you intend to get your fair share in unit dose. So, over what period of time should investors sort of expect to see that? And then unrelated question for Rick, you commented on free cash flow conversions. You guys have done a tremendous job on that. What's the runway there? How long can you guys maintain free cash flow conversion like a 115%, maybe even north of that like you did this year? Thanks.

Okay. So, with respect to unit dose and our share today is 2.6%. We said okay, what's your share of ARM & HAMMER today of the total category, it's a 9%. So, clearly we're away under index there. Now, in some accounts, we have a five share, and other accounts we have a zero, we're voids. So, obviously, it is possible to grow, and in some cases, we're already at 5%. As far as the crystal ball goes, it's very difficult to say what the trajectory is, going from a power towards dual-chamber, we think is going to be a big help to the brand. We'd probably be better able to address that question in six months or nine months; let's see how successful we are with the dual-chamber.

And in terms of free cash flow and the runway, so same way we have TSR model for the P&L, I feel like we have kind of an operating model for cash flow generation, whether it's working capital or CapEx, whatever it is. So, I'd say, if – the pure operating model organically for the business, we have years of runway. But the good thing about Church & Dwight and the acquisition platform that we are is when we buy businesses, we just don't have synergies from a P&L perspective, we have it from a working capital perspective too. So, as long as we buy businesses and that's our strategy, then the runway is going to be there for a long time.

Yeah. Kevin, I'd like add – build on something that Matt said. So, I don't want anybody in the room to think we're taking our eye off the liquid business. So, we will continue to support the liquid business moving forward. But as Matt articulated, we're putting a lot of emphasis on building our share in the unit dose. So, I think that should make you happy. I know that's one of the questions you asked me for real. And so, but I don't want you to think we're taking our eye off the liquid business either.

Okay. You pick, Joe. How about, Joe?

Just going back to gross margin for a second, what are you baking in in terms of the promotional environment, particularly in laundry and litter, for example, which is a category that you've done very well? And how do we think about the quarterly progression this year, because your competitors get tougher, but the transactional impact of that, that should ease as well?

Yeah, so on a promotional perspective, right, promotional spending is pretty consistent with the year ago. But remember in Q4 this year, promotional volume for laundry, for example, came down from 36% in Q3 to 33% in Q4. So, that we believe the trends are going to be pretty consistent year-over-year for both laundry and litter, nothing surprising in other competitive launches, but we have competitive launches as well. And the other one was transactional currency, and just timing of when that's – it's as you would expect, it's probably more front-half weighted, because currency rates, spot rates are pretty much unchanged now versus what they were in late Q4. So, it's more front-half weighted than back-half.

So, even though the competitors get tougher throughout the year, you think you see more expansion in the back-half on the gross margin side?

Oh!, for gross margin...

Yeah.

I thought your conversation was more on the top line. So, gross margin, it's pretty actually balanced throughout the year. We're going to – we said called an expansion in Q1. So I'd tell you gross margin is potentially pretty balanced throughout the year.

And just one quick one on the balance sheet, the inventories were up 11% year-over-year in the fourth quarter?

Right. No doubt. Working capital was phenomenal. I think your cash conversion cycle was down to 26 days, inventory was going the wrong way. Part of that is our vitamin business, right, and we want to make sure we're not cutting customers and our fill rates are 99.7%, but we've probably over-corrected there, but over time, we'll bring that back in line, but for now it's great where it's at.

Okay, Joe. This side. And then, you can pass it down to Lauren when you're done.

Sure. Maybe. Can you talk a little bit more about the distribution slide? I thought that was a great slide, and I didn't realize actually that you had gained that much distribution for something like liquid detergent. Can you tell us kind of, maybe for detergent and cat litter and vitamins, those are the three categories I care the most about, what inning are you in? How much more distribution expansion is there to be had? And then sort of related to that, particularly on vitamins, the innovation is awesome, but the trade-off is the rest, that there are too many SKUs on the shelf. So how are you managing that and what's retailer response been? Are they giving you enough shelf space to take all of that assortment?

I am going to let Lou comment on the distribution gains, because he does take a bow for that particular slide and Lou will tell you that the game is never over and we're always in the middle innings.

No, thanks, Matt. So first of all, I'd like to answer by saying, it's a team effort from everybody, all functions. It really helps a salesperson when you're out at retail and when you have great innovation to sell against. Secondly, supported by a marketing team that really believes in the products that we have. If you put that combination together and a great sales team, and you deliver the results that Matt showed on that slide. All the modules aren't done and completed yet in 2016. But we are expecting very similar, there is nothing – the ones that we are hearing about are all positive and in line, that we have. But I really would put my hat off to everybody else at this table, because it requires all of us to work together to get those results.

Yeah. And the other part of your question was vitamins. So, yeah, you're right, it's a very crowded space. And, obviously, as I said before in 2015, we didn't get any new products on shelf because of our own issues. But the retailers are very excited about us when you're the number one brand. So we have over 30% share, both in adult and in children's gummy vitamins, that's all outlets. We have the ability to get product on shelf. And so, if you have the innovation, you're going to get the shelf space.

Yeah, one thing to add on that. So if you remember last year, it was a difficult year for us with the start-up of the plant issues that we had. And we took a very measured approach to 2015 that being, as you know, vitamins is a category that's highly promoted. And so, since we're having trouble supplying to retailers, we cut back on some of those promotions in 2015, that we would put back in in 2016. And so also when you're having trouble supplying the customer, no one is looking to really expand on your distribution base, right. So we have those opportunities – missed opportunities from 2015 that will be carried into 2016. You saw the innovation platform that we have for 2016 and we feel very confident on that.

Okay, Lauren.

Thank you. So just following up actually on vitamins and this would apply to OXICLEAN as well. Sometimes I think when you launch new products, clearly your P&L structure can afford a lot, but I am curious the cost of keeping things on shelf, when I look like in the Nielsen data at some of the vitamin products you've launched over the years, the different variants beyond like the basic multivitamin, they kind of get shared then they lose it, right? And that's been a pretty repeated pattern when you look at the sort of not SKU-by-SKU but the title-by-title in the Nielsen data on vitamins. So what's the cost to keep stuff on shelf when it's not really felling through? What pressure are you under from retailers to get it out, and get something new and the same would go for OXICLEAN. So when the retailers where 20 basis points of share gain this will be starting year three, how easy is it to keep it on shelf when you're at those share levels?

Yeah. Lou, you can add to this but I want to give you some color with respect to vitamins. So, when you think about vitamins, there are lots of different variants. It's lots of different vitamins, vitamin B, vitamin C, vitamin D, et cetera, and there is also some specialty vitamins as well. Multivitamins in general, round numbers at 40% of the vitamin category, so that's sort of your anchor. So that one is the one you pay the most attention to. And it is common knowledge within the company that you can have a lot of SKUs which drives the supply chain guys crazy that need to be on shelf because some consumers are looking for them. So that is the way to think about it. And yeah, you're right. Some things cost money to get on shelf; you may have to pay slotting, et cetera. We do have a process that meets monthly, just SKU rationalization team, so we're always looking at these and say okay, is this something we should take off-shelf. And in 2015, we did eliminate a half a dozen SKUs for exactly the reason that you're pointing out. Anything you want to add to that, Lou?

The only addition would be that this is a category where you have to stay on trend, and so we continually innovate in this class, in this business. We will continue to do so. So you do need a good mixture of the base business that Matt talked about and continuing to add productive ideas that are on trend, and deleting some non-productive SKUs as you go forward. On OXICLEAN, you asked an OXICLEAN question, I would step back and provide this input because there're a lot of really good things; I think, we all should feel terrific about. Those being as Matt showed, the category is growing again, right so first time in a while that's happened. Second big thing is that there are two new premium products in the category. That's a good thing for a couple of reasons, one being it promotes a healthy competitive environment; and two, it allows us to build our business. And last year, if you remember on OXICLEAN, we said we would incrementally spend against that brand, and we did, and as Matt showed on his slide, our consumption is up 25%, our trial is up about 50% and our repeat purchase is up about 40%. So although it's a difficult environment because consumers are used to buying for over 50 years one particular brand, we believe in our brand, we will continue to support that brand moving forward.

Okay, it's a good add. One more up here.

Thanks for taking my question. So recently in the news has been more negative commentary following the PBS documentary on vitamins and supplements. Just wanted to get a sense of whether you guys have seen any impact on your business related to that?

Well, you know what the results were for this past year. We went sideways. I think the only way to react to that is just to look at what happened to the category. It continued to grow in 2015 and it's growing in the first quarter. So I would say, no, then – by the way, that has generally been the reason why the category has flattened out, because there was a lot of press in 2014 and you saw up on the screen today it flattened out that year with the category.

Okay. And the second question on the BATISTE. You highlighted in your slide an opportunity to expand with your top retailers this year. Just want to get a sense of what your penetration is currently with those retailers?

With these top retailers?

Yeah.

Next to zero for some of them. So when I said we had a 15.2% share, that's going to grow in 2016. So we have voids in other words.

So I'll add to that. So clearly when we bought BATISTE, it was more of an International opportunity, and so there is kind of a reversal in what Steve said where we're all looking at it globally, but it started more in out of states and we bought it to United States about 18 months ago. We're very pleased to say within the United States that we became the number one dry shampoo brand in the United States in that short window of time. And that's been through a constant charge from our group and our team across all functions to deliver the best products out there which we think we have and there's a lot of distribution opportunities still in front of us.

Here's another fun fact for you is that, remember we said that the retail category for dry shampoo is $90 million in 2015. In 2014 it was $60 million. So it's grown significantly year-over-year. Anybody else? Jason.

Oh...

Sorry. Jason, I'll come back. You're the next.

Thank you, guys. Thank you for the question. Congratulations on a strong finish to the year. I want to come back to the gross margin questions we had earlier. Pricing appears to be a dramatic swing factor in your resumption of gross margin growth last year where the first time in many years you reported positive price growth. You kind of closed out the year with a little bit of price leakage. What drove the price leakage into the year? As we think about moving into 2016, what should we expect in the price line of the P&L?

Yeah. I wouldn't characterize it as – so here's the story on price. If you think back, Q4 year ago was when we started saying it was normalized pricing environment in laundry. So Q1, Q2, Q3 on paper looks like favorable pricing year-over-year in 2015 versus 2014, but that was just the normalized pricing environment. So in Q4, there wasn't – you're comping a time period that didn't have any pricing difference. So in general, I'd say, 2015 versus 2014 was the absence of the competitiveness in the pricing laundry category. 2016 as I said earlier, I think, it's going to be very comparable to 2015.

Thanks.

Okay. Steve?

Thanks. Just – you touched upon to some degree on OXICLEAN. You talked about how you're behind where you want to be one share or just over. I think last year you'd said you want to be at two. So I'm just trying to figure out where you are in that arc and how much additional commitment in terms of trade or spending behind that brand we should expect as we track it in 2016?

Well as we've said, we're not going away when it comes to OXICLEAN. So as you know in the second half of 2015, we took some money out of marketing and put it up in the promotional spend area, do wanted to promote trial. We're going to need to continue to do that in the future. Does that help you?

It does. So, we should expect that to continue on?

Yeah. We're going to need to do that, definitely.

Okay. And then, are there other pockets of – should we expect, I'm assuming, those are going to get additional promotional support, maybe vitamins as it comes back. Are there pockets where we should be expecting and looking for year-over-year increases and integration?

Well, typically we're going to put the muscle behind the new products. So some of the new products you saw up today, generally, their first quarter is our lowest marketing spend quarter and it picks up in Q2. So we move marketing around depending on where our new products are landing.

Yeah. It would be incorrect to walk out of here to think that our promotional spend is up year-over-year and is essentially flat year-over-year. All the commodity benefits are now being piled back into price issues in the category.

Right.

Hi. You talk about this BioEnzyme product formulated to meet Safer Choice. Can you elaborate on what that is? And is there are any pressures from environmental group store, any sort of ingredients that look to be under pressure right now?

Okay. We have somebody who's been waiting for that question for about 45 minutes now and that's Paul Siracusa, our Head of R&D.

Thank you. The Safer Choice logo or label is an EPA designation. There's plenty of green or partner organizations out there that try to certify the safety and efficacy and environmental compatibility of products. The EPA has a program used to be called design for the environment. It never gained a lot of traction because the consumers didn't have a clue what it was for. So they repurpose their whole program. They went on and talked to consumers, and then came back with a Safer Choice approach, which means all the chemicals in there have to be certified by the EPA to be best-in-class from a consumer toxicity, from an environmental toxicity, and biodegradability perspective. So you have to formulate to those targets, and that's we've done with the BioEnzyme product. So we wanted to go after efficacy with the BioEnzymes. So it's an enzyme-based product that does great cleaning and strain removal. At the same time, we did it with materials that meet the EPA's Safer Choice program.

And are there opportunities to do this in other brands that you have?

You could do it across the line if you want to formulate to these targets. And what we're doing inside the company is we're looking for where those opportunities make the most sense because ARM & HAMMER is a safe brand to begin with. So differentiating safer and safest is a difficult challenge, as you can imagine, but we took this approach because we added enzymes into the ARM & HAMMER franchise, which were never there before.

And I'm just jumping topic to last question. On vitamins, and gummy vitamins, private label is a big sector in that category, is there any other category where you compete with the private labels as big and how do you do things differently just in the face of private label?

Yeah. I mean with respect to private label, the way to compete with private label frankly is your features and benefits. So if you keep your features and benefits different than private label, you're going to be able to command the premium and we do compete in private label and lots of categories. So for example in baking soda, 25% is private label, the cat litter is for high-teens in private label. So we're no strangers to private label. And by the way in vitamins it's pretty stable. It's been around 12% of the category. Okay. Well, coming up on – Bill, did you have one more important question? Your last question, so make it a good one.

Well since you did that, I will turn it to Britta since you're new. Can you just talk, actually as you're looking since you're new to the role, what you're looking at in marketing and advertising and actually from a cost standpoint. Is there any changes in terms of TV versus print versus digital which you're doing differently? So as we look into marketing spend being kind of flat year-over-year really there's some savings that you're actually getting, can you maybe talk about your approach and then costs?

Britta before you answer, let me just introduce Britta. So, Britta Bomhard is our EVP of Marketing. She's Chief Marketing Officer for the company. She just joined us earlier this month. Bruce Fleming lead a stellar career with Church & Dwight, retired at the end of 2015. And Britta comes to us from our European business. So she ran our European operation, which is most 37% of the International business with fabulous results. And you can tell the folks a little bit more about your background and then help Bill with his question.

Hi, guys. Well, thank you. So I think coming back to that question, I am three weeks into the job. I'd say it's a little bit early or you can tell if you look at the results that we've seen, very successful with the approach we have. And I would like to compliment my predecessor, Bruce Fleming, on the kind of parameter he had set up, very clear longevity on brand assets and on communication. Yeah. So I would say, this isn't broke. This is a winning formula we currently have. Obviously, we all look at ways of optimizing. I will do that in due course, but currently I would say it's a winning formula. There's no reason to upset the apple cart, it's not a nice American expression.

Very nice. You got that out of our – your book this morning, right... Okay. And just to build on that, I think one of the things was a kind of side question is what are we spending on digital and has that changed much over the years? And it has, but we were around 26% in 2015. We'll be a little higher, 27% is what we're targeting right now. So it's about a quarter of our spend. Going back a few years, five years ago, it was less than 10%, so we're moving in that direction. I want to thank everybody for coming today. We're going to wrap it up. We're about an hour now, and we'll talk to you again at the end of the first quarter, and we'll see you again next year at the exchange. Thank you.