Church & Dwight Co. Inc (CHD) — Q4 2021 Earnings Call Transcript

Thank you all for dialing in to join us today. I'm going to begin with the safe harbor statement. I recommend you read it at your leisure. We have our entire management team on the call today. We are all available for Q&A after the formal pitch. We have a lot of slides and several presenters. I’m going to give you the short story upfront. 2021 was the year of supply chain disruption, inflation, and high consumer demand. We acted quickly in response, we raised prices, and we added a significant number of co-packers and suppliers to our network. Consumer demand drove significant sales growth, which enabled us to offset some of the inflation. Because of the demand, we are now planning to significantly expand our capacity for vitamins, litter, and laundry in the next few years. During the past year, we kept our focus on being digitally savvy as our online sales grew to 15% of our global sales. We posted full year 2021 organic sales growth of 4%, which was broad-based across all our businesses, U.S., International, and Specialty Products. Our full year 2021 EPS growth of 7% is in the middle of a 6% to 8% EPS outlook that we announced 12 months ago. We feel very good about hitting our EPS range given all that happened in 2021. Looking ahead to 2022, we expect strong growth in both our U.S. and international businesses driven by consumer demand, which we expect to stay elevated for most of the year. Regarding inflation, we expect an incremental $155 million of cost inflation in 2022, some of which has already been priced. But we expect to take more pricing actions this year. As always, we have innovative new products to announce today. And I'm especially proud of some sustainability news that we will share in a few minutes. On the M&A front, we are quickly integrating our recent acquisition, TheraBreath, which is our 14th power brand, and we are hunting for number 15. As you saw in the press release, we expect 3% to 6% organic sales growth and 4% to 8% EPS growth. The top end of the sales and EPS ranges are dependent upon our ability to improve our fill rates. As supply improves, our shares are also expected to increase as well. Long-term, we believe our evergreen model is alive and well. Now let's jump into the formal part of the program. Let's start with our performance over time. Just about any period you would pick, you would conclude Church & Dwight is a stellar performer within the CPG space, and we are known for our consistency. 2021 was another year with 17.9% total shareholder return. We have an evergreen business model, which calls for 3% organic sales growth and 8% EPS growth. If you said how's that evergreen model working out for you? Well, let's take a look. We've averaged 4.3% organic sales growth for over 10 years. And if we take a look at EPS, we've averaged over 10% EPS growth over the same period. The sources of our 3% organic growth are 2% U.S., 6% International, and 5% specialty products. We have 14 power brands and they drive more than 80% of our revenues and profits. We have a well-balanced portfolio with a pretty even split between household and personal care. Specialty Products rounds out the portfolio, representing 6% of sales. Our business has been known to perform well in virtually any economic environment because we have a balance of 60% premium products and 40% value. We are well-positioned for good times and bad times. About three-quarters of our business is in the U.S., which means we have a lot of room to grow internationally. We believe one of our competitive advantages is we can move fast and adapt to a changing market. That quality was clearly demonstrated over the past 18 months given all the obstacles we have overcome. We have experienced significant headwinds in 2021, which will continue in 2022. You may have heard me say that it feels like we have been chasing a ball downhill. Well, that illustration you see was drawn by Scott Druker, the Head of our Animal Productivity Business. Obviously, we're very frugal here at Church & Dwight. Regarding the inflation headwinds, we will have raised prices on 80% of our portfolio by February, and we are not done. We are planning for more price increases in 2022. And later on in the presentation, Rick Spann, our Supply Chain Leader, will discuss our actions to address supply shortages. We have a long history of growth through acquisitions. Since 2004, we have completed an acquisition in almost every year as we have grown from a $1.5 billion company to over $5 billion today. Later on Barry Bruno, our Chief Marketing Officer, will take us through our most recent acquisition, TheraBreath. Back in the year 2000, we had only one power brand, and that was Arm & Hammer. Today, we have 14 Power brands that are leaders in each of their categories. We've become a digitally savvy company. Only 1% of our sales were online in 2015. Today, it's 15%. This is another example of our ability to adapt. We have low exposure to private label. The weighted average private label share in our categories is 12%. Actually, only five of our 17 categories have meaningful private label exposure. In general, private label has not been a significant factor in our categories over the past year. Now I will turn the mic over to Barry Bruno, our Chief Marketing Officer.

Thanks, Matt, and hello, everyone. I'm Barry Bruno. And for the last several years, you've been hearing from me about our international business. But in October, I took over as our Chief Marketing Officer, so while I still love our international business and team, you're going to be hearing from me now about our U.S. domestic business. And that business, which, as you heard earlier, represents over 75% of total Church & Dwight sales, is in a great place and is well-positioned for future growth. And I can say that with confidence because, first and foremost, we compete in healthy growing categories in which we often hold the number one or two market share position. Second, there are a number of macro trends, some of which are established and some of which are just emerging, which provide huge tailwinds to our brands going forward. And finally, our two most recent acquisitions have, for different reasons, which I'll get into shortly, huge room to run ahead of them. To my first point about healthy growing categories, here you can see the top 17 categories in which we compete, and whether they've grown in green or contracted in red in each calendar year. And what you'll see overwhelmingly is a lot more growth and contraction. And if you look more closely at 2021 performance, you'll see sequential aggregate weighted growth across all categories of plus 6.1% in 2021, which was on top of exceptional plus 12.5% growth in 2020. And if we drill one level deeper on 2021 performance, here you can see which categories drove that growth, with gummy vitamins, dry shampoo, power water flossers, and pregnancy test kits leading the way and more than offsetting softness in baking soda, electric grooming, and cold shortening, which was driven down by an almost non-existent flu season in 2021. Despite excellent growth, our market share suffered in 2021 as persistent supply challenges and related in-stock levels left us with demand we just couldn't fulfill. This was especially impactful on our fabric care, VMS, and cat litter businesses. As supply improves throughout 2022, we see a corresponding tailwind and expect market shares to improve accordingly. My second reason for confidence in the future, as that multiple trends, both established and emerging point to long-term future growth. The first trend centers around pricing, where you heard Matt confirm earlier that we've taken price on 80% of our portfolio. And we think pricing is a muscle we're going to continue building as we expect a prolonged inflationary environment and see future price increases likely. The second trend is an elevated and we believe permanent consumer focus on maintaining a cleaner and healthier home. The third is a belief that from a health standpoint, both mental and physical prevention is the best medicine. The fourth is that self-care has gone beyond just an occasional splurge and has become an essential and permanent part of so many more consumers' daily routines. And finally, that a gradual return to normalcy, despite what we've seen in the past few weeks, is inevitable. And when consumers are ready to return to their pre-COVID social routines, we're ready for them. So let's dive deeper into each. On pricing, we took price on laundry and litter in mid-year 2021 and we're taking price on VMS and across multiple personal care categories right now. We'll have a full year benefit in 2022 on the majority of those increases, and the early read is that competition has followed or is following in all key categories. Prices are sticking and elasticities are better than our initial forecasts and should we move into a recessionary environment, our value brands, which make up 40% of our portfolio, are well positioned for a consumer who's looking for deeper value. In terms of consumers, who are spending more time at home today and we think will continue to spend increased time at home in the future and will therefore be even more focused on a clean and healthy home. We see great inroads with 3 million incremental households now using ARM & HAMMER and Oxiclean each versus pre-pandemic levels in 2019. We don't see this going backwards, and in fact, see household penetration continuing to build year-over-year. In the spirit of consumers looking to stay healthy, both mentally and physically, we see a continuing trend where consumers are looking to vitamins to help out and not just any vitamins but the gummy form in particular, which is where consumers are migrating to from pills and capsules, is up 7 points since 2019. Equally important, is that we're well positioned in the category with offerings that match-up nicely to all of the growing consumer needs states, including sleep, stress, and mood, among the others you can see here and all of that translates to an incremental 5.7 million households buying VITAFUSION in 2021 than we're buying in 2019. Likewise, brand awareness continues to grow, and our aided brand awareness is an incredible 53 points since 2012. The fourth trend we see that is not so much emerging but is already established is the belief that self-care is not just an occasional splurge, but it's an increasing part of daily routines. A few statistics that bear this out include 87% of consumers now claiming to actively practice self-care, while 70% have established specific self-care goals and 59% are practicing self-care more in 2021 than in 2020. A group of some of our most important brands, including WATERPIK, Spinbrush, VITAFUSION, Viviscal, and TheraBreath, are benefiting from this trend already and stand to benefit even more in the future. WATERPIK, in particular, has a lot of runway ahead since the household penetration for water flossers is 23% compared to power toothbrushes at approximately 40%. Finally, we're as eager as our consumers and each of you for a return to normal. And we're starting to see a reestablishment of social interaction, which is driving categories like skin and nail care, dry shampoo, hair growth, and depilatories to high single-digit or even double-digit growth. And we see that continuing. One interesting statistic to make this runway real is that BATISTE, which is one of our fastest growers in 2021 still has years of runway ahead as U.S. household penetration for dry shampoo is only 4.5% compared to the U.K., where the brand was born, where household penetration is 8%. Finally, one category that continues to lag is condoms, but we don't believe sex is over with just yet. So we're ready with America's number one condom brand when the category inevitably bounces back. And if that's not enough, we still have huge runway ahead on our two most recent acquisitions. With regard to ZICAM, we haven't had a normal cold and flu season since COVID struck. As we emerge from COVID and consumers are increasingly social, experts predict there's an inevitable return of the flu, and those peak seasons that we see in Q1 and Q4 will provide material growth that we haven't experienced since acquiring the brand. And now that we're launching ZICAM in a new gummy form, which I'll talk about more in a bit, there's even more reason to believe. Finally, THERABREATH was a great holiday present when the deal closed on December 24. And when we combine significant new distribution opportunities with our great WATERPIK dental hygienists detailing force, we see significant room for growth ahead. Speaking of THERABREATH, just about everyone suffers from morning breath and over 2.5 billion people worldwide—almost 30% of the world's population—suffer from some sort of chronic bad breath. And that bad breath starts most of the time in the mouth, throat, and tonsils driven by sulfur-producing bacteria that lingers there. Dr. Katz, who we bought the brand from, realized this not only as a dentist himself, but as the father of a daughter who was struggling with chronic bad breath. So Dr. Katz invented this alcohol-free mouthwash designed to specifically target sulfur-producing bacteria. It was a home run with his daughter, and you can see here that it's been a home run with consumers everywhere as it has been materially outpacing total mouthwash category growth and the alcohol-free category subset every year since launch. Better yet, there's still huge room to run ahead of us. This slide captures total retail points of distribution for our top competitors and for THERABREATH and what you'll quickly see is that even though THERABREATH is driving category growth, as you saw in the last slide, we're way behind in total points of distribution with ample room to launch new variants, new sizes, and expand into new channels ahead. So in summary, we participate in great healthy growing categories. Multiple key trends are our friend, and our most recent acquisitions have tremendous room to run. All of which give us confidence in our future. And we haven't even talked about new products yet. Okay. Now, let's move over to new products where we have a long history of launching new product innovation across our portfolio of power brands, and 2022 will be no exception. So let's dive into a sampling of some of our 2022 new products. The new VMS consumer who entered during the pandemic is more likely to purchase gummies, seeks products with multiple benefits, and is a more immune-conscious consumer. As the category continues to shift to gummies, VITAFUSION set out to expand the relevance of gummies in order to continue to win it shelf. Introducing VITAFUSION BI-LAYER GUMMIES, these two-in-one gummies provide two benefits, two flavors, and two colors to deliver multiple benefits in a fun and visually appealing way. This multi-plus platform clearly articulates product benefits to e-shop ability, and researchers told us that the platform is expected to grow the VMS retail market basket, as nearly 30% of respondents said they would take these in addition to their current multivitamin. The immune SKU is a multi-vitamin plus zinc and vitamin C. The beauty SKU is a multi-vitamin plus biotin and retinol, and we're looking forward to both driving great continued growth. Now, moving over to our Specialty Haircare franchise, you heard me say earlier that over the past several years, there has been a shift in consumer priorities towards self-care, and during COVID, this trend has been magnified as consumers are spending much more time at home. One example of desired pampering to treat oneself can be seen in 23% growth in hair treatments, and within that segment 72% growth specifically in hair masks. Hair masks represent an opportunity to care for the health and condition of hair. However, they typically take around 10 minutes to work and need to be rinsed off in the shower. Introducing BATISTE Leave-in Hair Masks, which deliver self-care on her terms. These lightweight conditioning formulas are infused with plant-derived proteins and vitamin E and allow it to nourish hair and seal in moisture between washes with no rinsing required. Now, over to health and well-being, where two-thirds of consumers believe that products sold in the cough, cold, and flu aisle are more effective than those sold in the VMS aisle. And the ZICAM consumer is already buying over $40 worth of competitive immune products sold in the cough, cold, and flu aisle. So, we're losing out on potential sales by not having any immune products in that aisle. So, now I'm pleased to share that ZICAM is launching its immune supplement gummies. The formula features ZICAM Zinc and also has 100% daily value of the top three immune ingredients. The line includes a regular formula and a night-time version with melatonin, as immune plus sleep is one of the fastest growing sub-segments in VMS. Both products are also designed to provide a terrific value versus the competition. Now, over to fabric care, where the baby detergent segment is currently a $136 million category and is the second fastest growing segment and liquid laundry detergent. However, Arm & Hammer doesn’t have a product here today to meet moms' needs, where we know she's looking for a hardworking product at a reasonable price, so she doesn't have to compromise on what's best for her baby. Introducing our first Arm & Hammer baby launch detergent, which is designed to help families do what's best for their babies with zero compromises. Specially created with our Arm & Hammer babies in mind, it's gentle enough for baby skin, tested by pediatricians, and offers a hypoallergenic formula that has zero preservatives, no phosphates, and no dyes, and it's even EPA certified as a safer choice. We're very excited about this launch because a baby liquid laundry detergent also helps us downage the Arm & Hammer brand, increasing the lifetime value of each consumer. Let's take a look at some videos that bring this new offer from Arm & Hammer to life.

Thanks, Barry, and good morning, everyone. Over the next few minutes, I'd like to run you through the International consumer highlights, followed by our specialty product story. For the International division, our evergreen model target is 6% in organic sales growth. In 2021, we posted organic growth of 5%, slightly below our evergreen model of 6%, but lapping 8.6% growth in 2020, and while we're below our evergreen model target, 2021 is a strong delivery in the face of widespread global supply disruptions, impacts from COVID-19, and weather-related events. Q4 finished at 4.7% growth, combining our two International segments. First, our subsidiary markets, which are fully staffed Church & Dwight teams in Canada, Mexico, the U.K., France, Germany, and Australia. And secondly, our Global Markets Group that covers more than 130 markets and is represented by over 400 distributed partners around the globe. While their subsidiary and GMG segments posted positive growth in 2021 and continue to have strong consumer demand and improving market share positions in key categories, the result is we built an international consumer business that is now in excess of 900 million in sales and approaching scale in several markets. Let's take a closer look. GMG now represents our largest segment at 35% of total international net sales and has doubled in size over the past five years, followed by Canada at 28%, Europe at 22%, and Australia and Mexico at 8% and 7%. Across all our segments, we continue to gain distribution, introduce new brands and innovation, enter new channels, and widen our geographic reach to drive growth. From a growth standpoint, our subsidiary markets grew 3% in 2021 and GMG grew almost 11%. Important to note, international mix is heavily weighted towards Personal Care and OTC categories versus household, many of which have faced category setbacks due to COVID-19.

I'm going to take a few moments to talk about our efforts to secure the performance of our supply chain. Like many manufacturers, we have stepped up our focus on resiliency over the last two years. Here's how we articulate our strategy. Church & Dwight has a short, resilient, and tariff proof supply chain serving Western and APAC markets with local manufacturing. We have implemented several initiatives to reduce the length of our supply chain over the last few years. One example is how we are supplying our growing business in the APAC region. In 2020, 0% of our business sold in APAC was manufactured there. By the end of next year, 40% will be sourced from within the region. Closer to home, we have added 3PLs to our distribution network, which has enabled us to position buffer inventory closer to our customers DCs in the southeast and south-central regions. In order to reduce tariffs and our overall dependency on China, we have started to move WATERPIK manufacturing to other Southeast Asia locations. By the end of 2023, 50% of our volume will be produced outside of China. We do a good job of managing a complex base of suppliers and co-packers. In order to add additional sourcing options, we have increased our co-manufacturing base by 19% since the start of the pandemic and our supplier base by 22%. We now have many more options when we face upstream disruptions. Of course, in addition to a large base of contract manufacturers, we have impressive in-house manufacturing capabilities, with an ability to produce a wide array of products in multiple formats across our 15 plants. We’ve done a lot of work over the last two years to increase throughput out of our plants and to be the best employer in areas where we operate so that we can retain and attract talented employees, and we are making significant capacity investments in-house in order to stay ahead of our growing categories. We have either completed or have active capacity projects underway for scent boosters, liquid laundry, unit dose laundry, trigger products, VMS, and cat litter. We have a dedicated and talented supply chain team. The vision that they march to is to maintain operational excellence while creating the supply chain in the future. Our talented team has done a great job of dealing with the many urgent issues that the pandemic has put in front of them while building more resiliency for the future.

Thank you, Matt, and good morning, everybody. We have some great results to share. Across the board, we finished 2021 better than expected, led by strong consumer demand for our products, and we're entering 2022 with momentum. Today we'll walk through four areas. First, the Evergreen model; second, on 2021 results; third, our 2022 outlook; and then finally, I'll wrap up with capital allocation. Here's our Evergreen business model. We've had this for a very long time, and our long-term investors know this: 3% organic sales growth, 8% EPS growth. The details would be plus 3% organic sales growth, 25 basis points of gross margin expansion, marketing is typically flat, SG&A is leveraged, and we get 50 basis points of operating margin expansion, which leads to 8% EPS growth. We have a lot of different levers to pull in order to get 3% and 8%. So for 2021, we ended the year in the quarter with 4.3% organic sales growth. Domestic was 3.5%, International was a little bit better than 4.5%, and SPD was 12%. Gross margin declined by 50 basis points, but this was better than we expected. Marketing change was down 90 basis points at 14.7%, a lot higher than 13% our outlook had. This is really because we had a great tax benefit that we will spend back in marketing. SG&A was plus 50 basis points, and EPS was $0.64 or $0.06 better than our $0.58 outlook. Our full year 2021, we ended the year with 4.3% organic sales growth, 3.5% for Domestic, 5% for International, and 12% for SPD. Gross margin was down 160 basis points as we faced 9% of COGS inflation year-over-year or $250 million. Marketing was down 100 basis points to 11.1%, and adjusted SG&A was down 50 basis points, all to get adjusted EPS at 7% or $3.02 per share. Cash from operations was $994 million, and free cash flow conversion was 116%. That's free cash flow divided by net income. How much net income have we turned into cash flow? Gross margin contracted in 2021, and in Q4, we were down 50 basis points. But price volume mix was plus 290, which was partially offsetting the inflation, the massive headwind of inflation, commodities, distribution, labor. Productivity programs added 110 basis points, and then the acquisition was plus 30 basis points. So that's how we get to minus 50. As you can see, when you compare Q4 2021 full year, you can see the gap between price volume mix and inflation narrowing, and we expect that to continue in 2022. Now turning to the outlook. 5% to 8% reported sales growth, 3% to 6% organic sales growth, operating profit margin of plus-60 to plus-70 basis points, and adjusted EPS growth of 4% to 8%. And here's the detail. The 3.6% organic sales growth is made up of domestic at 3% to 6%, International at 5% to 7%, and SPD at 5%. All these divisions are at or above their Evergreen model for organic sales growth. Gross margins contract, marketing dollars are higher. We leverage SG&A. And that's how we get to 60 to 70 basis points of operating margin expansion. The effective tax rates higher year-over-year by 320 basis points or 23%. This is a huge headwind to face, but our profit is actually going to be up 10% plus as a result, just showing and demonstrating the strength of our business. Adjusted EPS growth is 48%, and cash from operations is about $920 million, as we build back safety stocks on inventory. Here's organic sales over the 10-year horizon. Our Evergreen model is 3%. Our 10-year average is closer to 4.1%. And our 2022 outlook is 3% to 6%. And we're focused on gross margin. And we have been for a long time. Very few companies have it in their incentive targets. We believe it drives not only cash earnings but cash flows as well. In 2021, way to step down, partly due to inflation with a 9% increase in COGS. In 2022, we expect a 5% to 6% increase in COGS. All the pricing work that we're doing is offsetting that, but we're going to continue to chase that ball downhill. So we're committed to offset dollar-for-dollar, but margin will be down in 2022.

Hi, good morning, everyone. Just a question on pricing relative to volumes. Kind of a wide range on organic sales. As you get through the year, are you embedding the potential that elasticity is starting to become a bigger factor as you get through the year; perhaps the consumer is less able to handle the additional pricing? And then in the near-term just on Q1, clearly, the organic sales outlook with the pricing and consciousness some is coming later in the quarter still seem relatively low to the momentum that you've been seeing cognizant of some of the supply chain headwinds. Can you just frame the potential flex in that Q1 top line outlook as well? Thank you.

Yes, sure. I'll take the quarter and some of those answers are going to be explained when we’re talking about the full year as well. So on Q1, our outlook is 1% to 2%, Chris. And it's largely two reasons, but let me talk about price/volume mix first for the year. So if you take our midpoint of our outlook for organic growth, it's about 4.5%, right, 3% to 6%, midpoint is 4.5%. We would say that price mix is about 5.5% and then we have a drag of volume of about 1%. All that 1% in Q4 and Q1, though, so that's 4%. And the rationale is three things. One is volume elasticities, right? All the price increases that we're effective in 2021, we're really in the second half of the year. Number two, we discontinued some club programs for WATERPIK. And then as we always do, we rationalize low margin volume for laundry. So those are three reasons why we're 1% to 2% in the quarter. And that's also why price/volume mix actually improves throughout the year. Organic improves throughout the year and gross margin also improves throughout the year.

Chris, does that answer your question?

Oh, yes, yes. Thanks so much. And then just following up on your spending levels for this year, marketing back to the lower end of the historical range. Can you just talk about how you view that as a flex item in the outlook through the year? Do you stay committed to that level of spending, should volume elasticity become more of a dynamic? Would you look to spend more behind, say, bringing back promotional levels, just the sorts of actions that you'd look to should elasticity become more of a factor as we get through the year? Thanks.

Yes, that's exactly what we would do, Chris, and obviously we have a wide range for both reported and for organic. So I saw our supply chain issues abate and we're getting more shipments outdoor; got the opportunity to spend more on marketing. And the expectation is anyway for '22 versus '21 that our marketing dollars are going to be up year-over-year. Just said, if you look at the percentage may not be lower than '21, but you got to keep in mind, you get big price increases that are driving the top line. So, the relationship is a little bit different percentage of sales, but our dollar spent is up in '22 versus '21.

Great. Thank you. Good morning, everybody. I was wondering if you could talk a little bit about the organic sales outlook because perhaps for the full year, the widest range we've seen in a while, obviously, starting at a relatively low point in Q1, but I mean, your comps are only about 120 basis points of a range from low to high end. So that's a really substantial step up as the year progresses. And you just noted that every year you rationalize similar margin sales. So that should be in the comp presumably, as well. So just, a little bit more granularity with respect to your views as you implement the price increases. And what seems like a fairly favorable view on the volume elasticity as the year progresses? Thank you.

Yes. You are right about our elasticities. Our elasticities are actually much better than we had expected. So if you took a liquid laundry, for example, it's in a 20 to 30 range, and we expected it to be worth actually, and that'll actually probably improve going forward simply because we know that both Proctor and Nickel are now raising prices. Or as the range grows, it’s kind of a wide range, we haven't had a range like that in the past, but it's with good reason. Our fill levels have been low for not just the past 12 months, but it's almost the past 18 months, and we've had difficulty raising them. So to the extent that our labor issues are big and not only in-house, but also out-house. Suppliers and co-packers are also struggling with labor. That's we get more and more product to ship. We're going to have much higher top line. Now look, we also know we have a high single-digit price increase. So you think well, if you get a high single-digit price increase you would think that you're going to have a pretty robust reported top line and an organic top line, which we will, if we can ship the product. But that's - we had to leave ourselves some room because we're anticipating things getting better, but it hasn't happened yet.

Yes, the only thing I would add to that, Olivia, it's Rick, is 2021 was the most volatile year in many, many years. And so we're used to giving tight ranges, but 2022 we expect to be very volatile as well. And so, like a lot of companies, we just ensure we have a range of possibilities for the revenue line and the earnings line.

Can you elaborate on the improvement in the North American supply and so rates that you're anticipating, just in terms of your latest best case timing? And just do we improve all the way back to normal by the end of the year or second half, or is it - are you still expecting tightness throughout 2022?

Yes, okay. Thanks, Steve. We think it's going to be sequential improvement throughout the year. We normally have fill rates around 98%, 99%, we're low 80s right now. So what we hope to be exiting the year in the mid-90s, but we have Rick Spann on the phone, who's our Head of Supply Chain, so he's the guy who’s going to make it happen. Anything to add, Rick?

Yes. Thanks, Matt. So we're doing a lot, as you saw from the presentation, we're investing in incremental capacity. Those projects take time, of course. So we need to, where we're increasing our third-party manufacturing, to supplement supply to hold us over until the capacity projects come on stream. But as Matt said, we will progress up through the mid-90s by the end of the year. Omicron gave us a step back with high absenteeism, but we're already starting to see absenteeism improving in our plants, and now we're focusing on upstream supply of materials.

Hi, there’s a few kind of quick ones, one on pricing, the 80% level, why isn't that a 100% now just because it seems like everybody's pricing everything? And as we look forward over the next few months, will that number go to a 100% or is the next vendor pricing more incremental pricing on the first 80%?

Hey, Bill, that's very critical to…

And there are some areas where there hasn't been cost inflation like they’re small but there are some areas where that hasn't happened, and you don't have the cost to go back to retailers on a few brands.

Yes, like condoms, for example, Latex isn't rocketing. But I would say overall, we expect the 80% to go a little bit higher, and we also expect to revisit price increases we've made.

Thank you. Good morning, everybody. I just wanted to find out like obviously the M&A priority in your cash allocation. What are the areas that you're thinking there's to white spaces for you to go inorganically?

Yes, and as far as acquisitions go, we've had this question from time to time, what categories are we interested in? And if you asked us that two years ago, I think we probably would not have come up with - going into call it shortening or going into mouthwash. But - so what we do, because we have a competency in making so many different types of products in our manufacturing facility, we can put liquid in a bottle, we can make aerosols, we can put the powder in a box, gels, et cetera. There's a lot of things that we know how to make and can manage, so consequently, we throw a very wide net when we're looking at potential acquisitions.

Thanks and good morning everyone. So, I was kind of hoping to drill down or get back to that slide that showed category growth that Kevin alluded to in his question earlier. I think you look back to 2017, 2019, it was kind of hovering around that 4% range, obviously accelerated a lot in 2022 and I think it showed like up 6% in 2021. So, I'm just curious how do you see category growth unfolding as you move ahead and then there's a lot of puts and takes, some categories are going to be getting better, some probably getting worse, but like what is the right category growth rate longer term as we move further away from this like COVID environment?

Yes, well, Barry can take a swing at that, but I'll just say historically, if you're referring to that particular slide, generally, the categories that we're in, and remember every company is different. So, the organic growth rates are a function of what categories you're in. So, we're different than lots of other companies, I'm sure that you follow, but historically, our average if you took 2017, 2018, 2019, its around 4%. 2020 was gigantic, 12.5%, 6.5% in 2021. So, it's going to float down over time. We expect to go back to around 4%, 4.5%, but I think the expectation for 2022 would be higher than that. Barry, anything you want to add to that?

Yes, you got it right. Again, historically, Peter 3%, 4% has been kind of the weighted average growth of the categories that we're in, obviously elevated in 2020, still high in 2021. There are a number of them that are going to benefit from some of the trends that I touched on when I look at vitamins as a new behavior that's more permanent and we're in more and more households and vitamins overall, of course. So, there's a few that'll continue to benefit, but I think there's a reversion to more normal levels as things return back to normal. So, is that in the 4% range versus 6%? I think that's a safe assumption.

Yes, and then as - in terms of the operating expansion where that's coming from? You're right Olivia, we've said that gross margin is going to be down, marketing as a percent of sales will be down, dollars will be up and that means we're going to also leverage SG&A. We've said for many years when you look at our Evergreen model for SG&A, we're trying to get 25 basis points from that. And we've done the math and we've said, hey, if we can grow our SG&A dollars at half the rate of sales in the Evergreen model, right, 3% of sales then it starts 15 basis points. And so our revenue is growing anywhere between 5% and 8% next year, so we're going to be able to leverage that because we're still having the same type of dollar increase on SG&A.

Hey, thanks, everybody for joining us. We had a spectacular '21 and hope to have another good one in '22. We'll talk to everybody at the end of April after Q1. Thanks for joining us today.