Matthew T. Farrell - Chief Executive Officer Rick Dierker - Executive Vice President Finance and Chief Financial Officer Steven P. Cugine - Executive Vice President Global New Products Innovation Louis H. Tursi - Executive Vice President-North America Sales Paul A.

Siracusa - Executive VP-Global Research & Development Britta Bomhard - EVP Chief Marketing Officer.

Caroline S. Levy - CLSA Americas LLC Jason M. Gere - KeyBanc Capital Markets, Inc. Kevin Grundy - Jefferies LLC Joe B. Lachky - Wells Fargo Securities LLC Lauren Rae Lieberman - Barclays Capital, Inc. Stephen R. Powers - UBS Securities LLC.

Good afternoon, ladies and gentlemen, and welcome to the Church & Dwight Fourth Quarter and Year-End 2015 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 risk and uncertainties and other factors that are described in the detail in the company's SEC filings. I would now like to introduce your host for today's conference, Mr. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir..

Okay. Good afternoon, everybody. We're uptown this year. We normally have this conference at the New York Stock Exchange; it's under construction this year. So, next year we'll be back. Rick Dierker is with me today, our new CFO. We have the entire management team here as well.

We'll come up here when we're done with the presentation and they'll be available for Q&A. So, let's begin. So we have the obligatory Safe Harbor statement. I encourage everybody to read it. And here is the agenda.

I'm going to talk about who we are, the categories that are most important to us, that will be laundry and vitamins, how we deliver, how we run the company, and then Rick is going to take everybody through the financials. Okay. Here is what you're going to hear today.

I'm just going to pull it all up on the screen for you viewers at home, but the short story goes like this. We had a terrific 2015. So we had 8% EPS growth, and on an all-in basis, it's 12% local currency. We had full year organic sales growth of 3.6%. This puts us well above our evergreen target of 3%.

We had a strong finish as we saw the consumer business grow 3.3% in the fourth quarter and we have really good momentum going into 2016. Our new product pipeline is off to a good start. You can ask Lou a few questions about that when we get to Q&A, and we expect 3% organic revenue growth again in 2016.

On the EPS front, 2016 outlook is again up 7% to 9% all-in, and that's 9% to 11% on a total currency basis. That's top since CBG as you know. We announced the dividend increase today, that's to keep our payout ratio at 40%. And finally, we closed a small bolt-on acquisition in early January.

We're always on the hunt for good brand acquisitions, so we're excited about the future. So let's begin. Okay. Church & Dwight was founded in 1846, so we have our 170th birthday coming up this year. And in 19th century, it was founded with ARM & HAMMER baking soda. Today, we have 10 brands that drive our revenues and profits.

These are our 10 power brands. In the year 2000, the only big brand we had was ARM & HAMMER. All nine of those other brands were acquired, since the year 2000. Our most recent power brand is now BATISTE. BATISTE is a business, the dry shampoo that we bought in 2011, and in 2016 the global sales of that brand will cross $100 million.

Okay, those 10 brands drive our revenues and profits, 80% of our sales and over 80% of our profits. And of those 10, four are mega brands. These are four strong brands that have the ability to go into adjacent categories. And of those mega brands, those mega brands drive 60% of our revenue and over 60% of our profits. As I said, we are an acquirer.

Those are the nine brands that we've acquired. And as you can see also, we generally are focused on number one brand. Okay, we're primarily a U.S. companies today; 82% U.S., 18% International. This has the benefit of having minimal exposure to the weakening foreign economies.

And we're very balanced, about half Personal Care and half Household with Specialty Products' business rounding it out at 8%. Okay, we are in the land of the giants. So we are a small company. In 2016, we'll have about $3.5 billion in sales, small company but big returns.

So the shareholder return one-year, three-year, five-year and 10-year period been stellar for our shareholders. Let's talk about the categories that are important to us. So first, laundry. So here is the depiction of the laundry category for the past four years, 2012, 2013, 2014 and 2015.

As you can see, in 2012, 2013 and 2014, both the total category and the liquid category declined in each of those three years. That turned around in 2015, particularly in the second half. So on a full year basis, the total categories up 1.6% and liquid up 0.7%.

One of the added benefits of 2014, going to 2015, it was actually a stable promotional environment, so that contributed to the rise. Let's continue on the second category I want to talk about is vitamins. As you know, in 2012 we acquired the Avid business, that got us into gummy vitamins.

Why were we attracted to gummy vitamins? It's because it's been a fast growing category. In fact the vitamin, mineral and supplement category has been a mid-single-digit grower for many, many years. That flattened out in 2014. Why? Because of negative press and the growth has been rekindled again in 2015. So the category is growing.

The other thing I want you to focus on is the gummy form. So the reason this is attractive is because pills and capsules becoming less popular and gummies are becoming more popular. So if you look in 2012, you can see only 7% of the category was gummy. Today it's 12%. And if you look at how did the gummy form grow in 2015, it grew 16%.

And the good news is that we are the number one brand in both adult and in children's vitamins, gummy vitamins. Okay. Here's the one I want to end on as far as trends go. This is dry shampoo. As I mentioned earlier that we acquired BATISTE in 2011 and in 2016, we're going to cross $100 million in sales.

We're the number one dry shampoo in the UK and in the U.S. In the UK, we have a 75% share; in U.S. we have a 15% share, round numbers. So here's the interesting factoid. So the UK has a retail category of $60 million with a population of 65 million. In the U.S. where the dry shampoo category is in the early innings, it's only a $90 million category.

We have a population of 319 million. So we see a lot of runway ahead of us in this category and for this brand. Okay how we deliver? If you're a shareholder, you're well aware of the 10 drivers of shareholder return, let's review. First, we have a recession-resistant portfolio. This is very important.

So we have a portfolio that's going to perform well in any economy, 60% premium and 40% value. Okay here's an illustration of some of our products. You can see in many cases, our value brand is about 50%, less expensive than the premium brand. Now let's talk about new products. Okay first up is ARM & HAMMER.

So we're really excited about our 2016 product offerings. On the left hand side, you see CLUMP & SEAL, so we have a new variant coming to CLUMP & SEAL, that's CLUMP & SEAL MicroGuard. Now MicroGuard not only seals and destroys odors, but it also prevents future bacterial odors. On the right hand side, see BioEnzyme.

So we have a new laundry variant in detergent and that's BioEnzyme. It's formulated to meet the Safer Choice environmental standards promulgated by the EPA. The third thing, it's not on the screen is that we also have a dual chamber pod that we're launching under the ARM & HAMMER banner in 2016. A little bit more on CLUMP & SEAL.

So, in 2015 we came out with lightweight and naturals followed by MicroGuard in 2016, but here's a story that's worth telling. We have been an innovator in cat litter for years. So if you go back to 2011, you see Double Duty followed by Ultra Last. And you see what happens when you don't have innovation in the year, you flat line.

So in 2014, we came out with CLUMP & SEAL, the best cat litter that's out there. In 2015, we follow with naturals and lightweight, and then 2016, we follow with MicroGuard. Great story. [Video Presentation] (08:27-09:00) Okay. Let's keep going. Let's turn to OXICLEAN. A couple of things on OXICLEAN this year.

So we have a new liquid laundry detergent called OXICLEAN Preserve. This laundry detergent reduces pilling in your clothing. And just as we have a dual chamber pod for ARM & HAMMER, we also have one for OXICLEAN, called OXICLEAN HD. Just let's review the OXICLEAN mega brands for a minute, so to start with laundry additives.

So laundry additives, we had a record share 45.9% up 130 basis points led by White Revive, which was our entry into the bleach category. Second is the laundry detergent. We ended the year with a 1% share. We had a 0.8% share at the end of 2014. It's not moving as fast as we had hoped.

The good news is that trial, repeat and consumption are all up year-over-year. And then finally auto dish detergent category. It's a difficult category. We've got 1.3% share in 2015. Okay, TROJAN. Three new offerings for TROJAN, first condoms. So we have TROJAN GROOVE, so this is a grooved condom that retains the lubricant on the condom during sex.

Number two is TROJAN RIVIERA for those of you have been waiting for a lubricant for use in the shower, you now have one, so long-lasting lubrication. And the third one is TROJAN Divine, which is a multispeed vibrating massager. I'm not sure if one, two or all three of these are in your goody bags today. That'll be a little bit of a surprise. Okay.

Vitamins; so lots of new products in the vitamins space, so first beauty. So a new beauty line with really attractive new packaging, also a couple offerings for teens both teen sport and also teen hair, skin and nails and then licenses. Licenses have become increasingly important in the children's category.

So we had Barbie and Mario launch in 2015, and then this month we have Minions as well, so that bodes well for our children's gummy vitamin. And finally first response, so there is now a Bluetooth Pregnancy Test Kit. So you download the app to your iPhone. You use the pregnancy kit. It sends a result to your app.

And what the app does for you? It provides you lots of information throughout your pregnancy. So we've all heard about the Internet of Things, so this is our first foray into the Internet of Things, so it's our ability to test and learn. All right. Marketing, so you've often heard us talk about how much money we spend on marketing.

We're the 15th largest advertiser in the U.S. So we're in pretty good company here as you can see on the slide. And we've also said that our marketing would generally bang around between 12% and 13% of sales. So you can see over the last four years we've averaged around 12.5%. And it's going to show-up in your shares.

So if I call your attention to the right hand side of this slide, this is our report card. So on the top, you have your mega brands and in the bottom you have your remaining power brands. So, three out of four of our mega brands grew share in 2015. Vitamins is yellow. Why? We went sideways this past year. It's well-known.

We had some difficulties with the new plant start-up, that's well behind us now.

And then with respect to the other six power brands, you see XTRA is red, but actually XTRA profits were up in 2015 versus 2014, as we didn't chase the competition down in discounting, and battery-operated toothbrushes has been a perennial difficult category, that's also red, but seven out of 10 were green. Okay, distribution.

So this is a new information for you. We took a look at our distribution gains over the past six years. So we looked at 2009 to 2012, and then separately 2012 to 2015. So we're happy to report that we've been consistent in expanding our distribution year after year after year. We expect to continue to do this in the future.

And while we're on the topic of distribution, BATISTE with a 15.2% share today, that share is only going to grow because we're expanding top retailers in 2016, another good story. Okay, defense of our brands. It's no secret that the laundry category has been a difficult category for all competitors for several years now.

So in 2014, you had Simply Tide show-up in the value tier, 2015 had Persil show-up in the premium tier; and on top of that you have price wars breaking out. So what happened? So, just left to right; in 2013 we had a 14% share; 2014, 14.2% share; 2015 14.4% share.

So in each of the past years, we've expanded share in spite of the new entrants in the price wars; and we expect to continue expand share in the future. International. So just as I said in the year 2000, the only big brand we had was ARM & HAMMER. Near 2001, we were just a U.S. company.

Today, we're a little bit more diverse, 82% as I said early is U.S., and 18% is International. This is how it's spread out. We have a European business unit, which is our largest business unit that encompasses the UK and France. That's 37% of the business, followed by number two Canada, then Mexico and Australia.

Our International business has been a stellar performer for many years. If you look at the CAGR for the last five years, virtually every business, every country is at or above our 3% evergreen target. Now, gross margin. So here is a six-year look at gross margin.

So if you think about the first three years, 2010, 2011, 2012, we're all still dealing with the commodity super cycle, so that was depressing margins. And then, more recently you had price wars break out. And that's a bit of an offset from commodity abatement, but we've been around 44.5% gross margins for good long time, in spite of all those factors.

The four ways we drive gross margin, this is familiar to many of our shareholders and we'll go clockwise here. So good to great, that's the name of our continuous improvement program. Second is supply chain optimization. As you know, we've built a couple of plants in the last five years. Number three, new products.

So, when we launch new products, those new products need to have higher than average gross margins. And finally, acquisitions. And when we buy, one of our requirements is that we buy businesses that at or above are existing corporate gross margin. Okay.

And as you know we have a very simple compensation structure, we promote financial literacy within the company. One of the ways we do that is we tie gross margin is – 25% of all employees' annual bonus is tied to us achieving the gross margin target. Next is acquisitions. So we have a very strict criteria with respect to acquisitions.

Consequently, we're very fussy about the brands and the businesses we're going to buy and this criteria hasn't changed in quite a few years. Long history of acquisitions, obviously that contributed to our top-line growth. 2004, we were about $1.5 billion; we're $3.5 billion today. Good chuck of that was driven by acquisitions.

And a good way to think about Church & Dwight is an acquisition platform. So when we acquire businesses, we grow the revenue and we get cost energies. So, how do we do that? So with respect to the revenue growth, we have veteran marketers within the company. We have a separate new product development process, separate from the business units.

And as a result we expand shares. As far as the cost synergies go, we'll leverage the new brand across all classes of trade, and we have a supply chain and R&D organization that are very versatile. So we can handle liquid, aerosols, powders, gels, devices et cetera.

And our track record is stellar in nine out of 10 power brands so we get costs synergies every time. And Rick's going to tell a little bit more about access to capital when he gets up here. Okay, how have we done? So if we acquire a business, what was the pre-acquisitions share, what's the share today? In every case, you see that we expand shares.

And topic you probably read in the release that we acquired this brand earlier this month; we were entering the hair thinning category. This is a problem solution brand. If you think about the characteristics of it, we think it's very much like the teeth.

We had a couple of non-CHD investors agreed to demo the product, here's the male, before and after. And here's a woman before-and-after. And happily if you've retained more than 50% of your hair, and you know who you are, particularly sell-side analysts, this product is for you.

A nice side benefit of this by the way is that, they have a very robust sales and marketing team online. So, we're going to learn a lot from them. If you want to learn more about the product, you can go to toppik.com. Okay. Best-in-class free cash flow, Rick's going to take you through that, but we've averaged well above our peers for many years.

SG&A, this is a hallmark of the company. You can see that we have extremely productive employees and we're the lowest SG&A of any CPG company and we intend to stay there. We have expert management team with lots of people, lots of experience in all of these seats and driven by a simple compensation program.

I said earlier, that gross margin is 25% of the annual bonus. The rest is cash from operations, EPS and net revenue, very easy to explain, very easy to remember and our long-term compensation is a 100% stock options and we're all required to be heavily invested in the company's stock. And here are the results again.

So stellar returns to our shareholders over the one-year, three-year, five-year and 10 year-period. Okay. How we run the company? We have an evergreen model. So we always target 3% organic growth annually and 50 basis points of operating margin expansion and we're targeting 8% EPS growth. Okay.

As far as our operating system goes, first is the evergreen model; second is we know what geographies we're focusing on, North America first, that's Canada, U.S. and Mexico and secondarily Europe and Asia. Allocation to capital, Rick's going to take you through but at top of the list and these are in order of importance, is TSR accretive acquisitions.

And finally those acquisition criteria haven't changed in years and we have four operating principles. So, we have number one brands that we leverage, we're very asset-light, we're not capital intensive, we generate lots of cash flow so we leverage assets and we have very productive employees, the most productive employees in the CPG space.

All of that combines for good returns, but when you leverage acquisitions on top of that, you get spectacular returns. Okay. Now I'm going to bring Rick up here to talk about 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 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 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 megabrands 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 fire power, 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 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 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. (29:26).

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 (31:58)?.

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 like 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, like, 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, (32:35) 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 minimal 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 has 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..

So, Jason, you look like you have the mic. So....

Yeah..

That's – you got the power..

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 a 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 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 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..

And then can I get one more on the M&A?.

Yeah..

Sorry. Thanks. No one took the microphone..

Okay..

It was on TOPPIK, and I guess when you showed the list of acquisitions, the two that don't get mentioned in the recent past would be I guess FELINE PINE and then REPHRESH and REPLENS from last year. So just, I guess one, a big picture question on M&A.

When you set out to look at these brands be they tuck-in or big scale, do you have a vision for whether or not you think they're going to be a power brand one day, right. So like BATISTE – or BATISTE and FELINE PINE the same on day one and BATISTE just really worked and FELINE PINE less so.

Like, are there roles that the different acquisitions are meant to play when you bring them in? And then where would TOPPIK kind of fit in that continuum?.

Yeah, okay. So SIMPLY SALINE, so we acquired SIMPLY SALINE a couple of years ago. For those of you who don't know, that's a nasal hygiene product. And keep in mind that we have the number one nasal hygiene product in Europe, that's called STERIMAR. So we thought, hey, you know we know a little bit about this category.

It's not only successful in Europe, but it's successful in export markets. This is a pretty safe move for us to move into nasal hygiene. Now, has it caught on in the U.S. the way it is in other countries? No. But it's a high margin business, no plant came along with it, so we thought okay this makes some sense for us.

FELINE PINE, it was a number one or number two natural cat litter that was really in vogue at the time. When we looked at it, we said, hey this looks like one that might make some sense for us, again no plant, it's co-packed. So we had the criteria and we had – it was a solid brand that one hasn't taken off.

But when you buy it, when we're looking at trends to see does it make sense, you mention REPHRESH and REPLENS. So a year ago, we buy REPHRESH and REPLENS. So this is the number one gel, vaginal moisturizer, people with that issue will look high and low for a product that's going to solve their problem. So, again problem solution brand.

We put some money behind that as soon as we bought it and it's grown really nicely in 2015. So we're real happy about that acquisition. And coming back to TOPPIK again from solution, we learned a lot about the hair category through BATISTE.

We're not going to get into be a shampoo company, liquid shampoo, but we feel really good about hair thinning and that is an issue that you don't have a good solution there, because today the big brand in hair thinning is ROGAINE, it's a J&J product and it's putting chemicals, right.

And if you look at the consumer research, people aren't happy with what offerings are out there to solve the problem. And we think TOPPIK, if you go online look at Amazon, some of the reviews for their product, people love it. And this business has people that have been customers for 20 years.

So again, it's the kind of thing we say, hey this looks like a really solid brand. It's not going to go backwards. It's going to grow quite a bit and again asset-light, high margins, throws off a lot of cash..

Matt, can I add something to that..

Yeah. Sure..

For each acquisition, we really do a deep dive and look at what the global opportunities are. So when you look at something like FELINE PINE, we know that's really a domestic U.S. play period, and does it work with the portfolio that we have. I'll take out BATISTE as an example or TOPPIK.

TOPPIK, a third of their sales are in fact in international markets with good overlay over what we do today and it complements our capability to deliver in specialty Personal Care Products. I would say, REPHRESH, REPLENS internationally off to a very good start as well. Again, we do a lot of a doctor detailing, for example in international markets.

We feel that's a great product for us. We have a great way to access those markets and educate doctors on the benefits of these great products. So, we have a model per acquisition in terms of where we think we can play and how to win..

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 at 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 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 (54:53). Oh....

Sorry. Jason (54:55), 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..

Okay. Thanks..

Caroline?.

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 a 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 (01:00:30), 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 may be 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 (01:01:39) 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 our of our – your book this morning, right....

Yep. American-isms..

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..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day..