Good morning, ladies and gentlemen. And welcome to the Church & Dwight Third Quarter 2020 Earnings Conference Call. Before we begin, I have been asked to remind you that, on this call, the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts.

These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir..

Okay. Good morning, everyone. Thanks for joining us today. I'll begin with a review of the Q3 results, and I'll turn the call over to Rick, our CFO. And when Rick is done, we'll open up the call for questions. The pandemic has given us an opportunity to display our agility as a company. We increased our communications with retailers.

We changed our marketing messages. We shifted investments to categories that are most important to consumers. And we set new production records for VITAFUSION, ARM & HAMMER laundry and ARM & HAMMER baking soda. And we've moved people to focus on the online class of trade.

So we've been proactive in seizing the opportunities presented by the crisis and are increasing manufacturing capacity in our plants and externally with new co-packers. I want to thank all of our employees for their hard work. Their efforts are paying off. The agility and resilience of the Church & Dwight team is showing up in our results.

Our priorities continue to be employee safety, meeting the needs of consumers and retailers, helping the communities where we live and ensuring the strength of our brands. Our plant warehouse and laboratory employees have done an exceptional job keeping safe, which has contributed to our ability to operate our supply chain.

Our office employees continue to work remotely and are doing a super job running the company. So now let's talk about the results. Q3 was another exceptional quarter. Reported sales growth was 13. 9% and adjusted EPS was $0.70.

Revenue, earnings and operating cash flow were all significantly higher in Q3 than last year, driven by the significant increase in demand for many of our products. Organic sales grew 9. 9%, driven by higher consumption. Regarding e-commerce, we were already strong pre COVID and well positioned online.

In Q3, our online sales increased by 77% as all retailer.coms have grown. One example would be gummy vitamins. In 2019, 8% of our full year sales were online. This year, we expect full year to be about 14% online. Recall, we began the year targeting 9% online sales as a percentage of global consumer sales.

In Q1, it was 10% online, Q2 13% and Q3 also 13%. So we expect the full year to be actually close to 13% as well. We continue to conduct research on the purchasing habits of U.S. consumers. There is no surprises here, actually. There is continued consumer concern that stores will run out of stock and websites will face delivery issues.

Consumers report that they are consolidating shopping trips and continue to stockpile to ensure that they have enough product for a couple of weeks at a time. If we look at year-to-date shipment and consumption patterns, our brands remain generally in balance in the 15 categories in which we compete.

With respect to our brands, we had broad based consumption growth in Q3. We saw a double-digit consumption growth in VITAFUSION and L'IL CRITTERS gummy vitamins, ARM & HAMMER Baking Soda, OXICLEAN, FLAWLESS, ORAJEL, NAIR, First Response pregnancy kits and cleaners.

In Household, our laundry business consumption was up 4% and ARM & HAMMER cat litter was up 8%. Water flossers is another bright spot, as consumption turned slightly positive in Q3. Although our lunch and learn activity continues to be significantly curtailed, we intend to continue to address this with incremental advertising.

In addition to VITAFUSION and L'IL CRITTERS, water flossers is another brand we expect to benefit from the heightened consumer focus on health and wellness. BATISTE dry shampoo remains impacted by social distancing, with consumption down 10%, but improved sequentially compared to Q2 when consumption was down 22%.

TROJAN consumption was down 6% Q3, but also improved sequentially when we were down 15% in Q2. There's no doubt that consumers have made health and wellness of priority. VITAFUSION and L'IL CRITTERS gummy vitamins saw the greatest consumption growth of any of our categories in Q3, up 49%. The category consumption was even higher.

Our expectation is that consumer demand for gummy vitamins will remain high. And we have new third-party capacity coming online in late Q4 to take advantage of this trend. Consumers are focusing on health and wellness, but also cleaning, home cooking and new grooming routines.

At a recent investor conference, you may have heard me cite consumer research that suggests it takes 66 days to form a new habit. And only time will tell, if all of these new behaviors will translate into permanently higher levels of consumption. But if they do endure over time, we believe we are well positioned. Now a few words about private label.

As you know, our exposure to private label is limited to five categories. Private label shares have remained generally unchanged for the first, second and third quarters of this year. And now international. Our international business came through with double-digit organic growth in the quarter, driven by strong growth in our GMG business.

That's our Global Markets Group and Canada. In October, our GMG business is off to another strong start, and we continue to see strong POS recovery in Canada and Europe. After three consecutive quarters of growth, our Specialty Products business contracted 3.4% in Q3, primarily due to the poultry segment. Now turning to new products.

Innovative new products will continue to attract consumers even in this economy. In 2020, we've launched many new products, which are described in our press release. VITAFUSION gummy vitamins launched a number of new products. And to capitalize on increased consumer interest in immunity, we launched POWER ZINC and Elderberry Gummies.

We've launched ARM & HAMMER Clean & Simple, which has only six ingredients plus water, compared to 15 to 30 ingredients for typical liquid detergents. And in the second half, we launched ARM & HAMMER AbsorbX clumping cat litter, a new litter, which is 55% lighter than our regular litter. Now let's turn to the outlook. We're having an exceptional year.

We now expect full year adjusted EPS growth of 13% to 14%, which is far above our evergreen target of 8% annual EPS growth. Given our strong performance, we have raised our full year outlook for sales growth to be approximately 11% and organic sales growth to be approximately 9%.

As mentioned many times in the past, we take the long view in managing Church & Dwight, in order to sustain our evergreen model. In the second half, we took the opportunity to increase our marketing spend behind our new products and we made incremental investments in the company. As we wind up the year, we are putting together our 2021 plan.

It's safe to say that we have a high degree of confidence that we will meet our evergreen model in 2021. In February, we'll provide our detailed outlook for next year. Now in conclusion, I would like to remind everyone of the many reasons to have confidence in Church & Dwight.

The great thing about our company is we are positioned to do well in both good and bad economic times. The categories in which we play are largely essential to consumers. And we have a few categories that stand to benefit from the current environment. We have a balance of value and premium products.

Our power brands are number one or number two in our categories. And we have low exposure to private label. We're coming off some of the best growth quarters we've ever had. And with a strong balance sheet, we continue to be open to acquiring TSR-accretive businesses. We believe our company is stronger and more agile than ever.

And finally, we have the resources, the common sense and the ambition to ensure that our brands perform well in the future. Next up is Rick to give you details on the third quarter..

Thank you, Matt, and good morning, everybody. We'll start with EPS. Third quarter adjusted EPS, which excludes an acquisition-related earnout adjustment, grew 6.1% to $0.70 compared to $0.66 in 2019. As we discussed in previous calls, the quarterly earnout adjustment will continue until the conclusion of the earnout period.

Stronger-than-expected sales performance allowed the company to spend incrementally on marketing. Reported revenue was up 13.9%, reflecting a continued increase in consumer demand for our products.

Organic sales was up 9.9%, driven by a volume increase of 10.2%, partially offset by 0.3% of unfavorable product mix and pricing, primarily driven by new product support. Volume growth was driven by higher consumption. Now let's review the segments. First, Consumer Domestic, organic sales increased by 10.7%, largely due to higher volume.

Overall, growth was led by VITAFUSION and L'IL CRITTERS gummy vitamins, WATERPIK oral care products, ARM & HAMMER liquid laundry detergent and OXICLEAN stain fighters. We commonly get asked to bridge the Nielsen reporting to our organic results. This quarter, tracked consumption was 7.7% for our brands compared to an organic sales increase of 10.7%.

In this environment, one might assume that is recessionary retailer inventory. That is not the case. We had 400 basis points of help from strong growth in untracked channels, primarily online, and 100 basis point drag from couponing to support new products.

The good news is, as you heard from Matt, consumption and shipments are in balance, both low double digits. Consumer International delivered 11.6% organic growth due to higher volume, offset by lower price and product mix. This was a great recovery for our international business from a flat Q2.

Growth was primarily driven by the Global Markets Group in Canada. For our SPD business, organic sales decreased 3.4% due to lower volume, offset by higher pricing. The lower volume was primarily driven by the non-dairy animal and food production in sodium bicarbonate business. Turning now to gross margin.

Our third quarter gross margin was 45.5%, a 110 basis point decrease from a year ago. Gross margin was impacted by 110 basis point drag from tariffs and a 90 basis point impact from acquisition accounting.

In addition, to round out the Q3, gross margin bridge is a plus 100 basis points from price, volume mix, plus 160 basis points from productivity programs, offset by a drag of 80 basis points of higher manufacturing costs, inflation and higher distribution costs, as well as a drag of 90 basis points for COVID costs. Moving now to marketing.

Marketing was up $45.7 million year-over-year as we invested behind our brands. Marketing expense as a percentage of net sales increased 230 basis points to 13.8%. For SG&A, Q3 adjusted SG&A decreased 30 basis points year-over-year, primarily due to leverage from strong sales growth.

Other expense all in was $12.3 million and $3.9 million decline due to lower interest expense from lower interest rates. And for income tax, our effective rate for the quarter was 17.3% compared to 21.6% in 2019, a decrease of 430 basis points, primarily driven by higher tax benefits related to stock option exercises. And now turning to cash.

For the first nine months of 2020, cash from operating activities increased 29% to $798 million due to significantly higher cash earnings and an improvement in working capital. As of September 30, cash on hand was $549 million.

Our full year CapEx plan continues to be approximately $100 million as we began to expand manufacturing and distribution capacity, primarily focused on laundry, litter and vitamins.

As I mentioned back at the Barclays conference in September, we do expect a step-up in CapEx over the next couple of years to approximately 3.5% of sales for these capacity-related investments. In addition, as you read in the release, due to the strong cash position, the company may resume stock repurchases in the future.

For Q4, we expect reported sales growth of approximately 9%, organic sales growth of approximately 8%. And as Matt mentioned, we have strong consumption across many of our categories. Turning to gross margin. We previously called 150 basis point contraction in the second half. Now we're saying down 190 basis points.

The change is primarily due to nonrecurring supply chain costs. We also expect significant expense, and we have called flat for the year in terms of percent of sales, which implies a step-up in Q4. We also anticipate a lower tax rate.

As a result, we expect Q4 adjusted EPS to be $0.50 to $0.52 per share, excluding the acquisition and earnout adjustment as we exit 2020 with momentum. And now for the full year outlook, we now expect approximately 11% for year 2020 sales growth, which is above our previously 9% to 10% range.

We're also raising our full year organic sales growth to approximately 9%, up from our previous 7% to 8% outlook. We raised our cash from operations outlook to $975 million, which is up 13% versus year ago. Turning to gross margin.

We expect gross margin to be down 20 basis points for the year, primarily due to the impact of acquisition accounting, COVID costs, incremental manufacturing and distribution capacity investments and the higher tariffs on WATERPIK. As to tariffs, remember back in 2018, we got caught up in Tier 2 tariffs for which we were granted exemption in 2019.

That exemption expired and was not extended as of Q3 2020. We continue to work on mitigating that impact. Another word or two on gross margin. Previously, I have said the first half of the year was plus 150 basis points on gross margin and the second half was down 150 basis points on gross margin.

And so our outlook as of last quarter was flat for the year. And then also last quarter, you heard me walk through investments we were making in the second half of 2020.

Examples here included a new third-party logistics provider, outside storage to handle surge inventories, preliminary engineering on capacity, VMS outsourcing costs as well as other investments around automation, consumer research and analytics.

So what changed now we're calling down 190 basis points for the back half or down 20 basis points for the year, and that implies down 250 basis points for the quarter. We have some supply chain nonrecurring costs. Here are a few examples. First, because of our outsized growth, I mentioned last quarter, we're adding a new 3PL distribution center.

In the quarter, we again had stronger sales. And as such, had duplicative outside storage locations and the new 3PL distribution center that wasn't operational. So for a period of time, we had duplicative costs. We're also in the process of going through make-first buy decisions. And that will trigger a couple of asset write-offs likely in Q4.

We have lean training across the plants. And finally, due to the great results this year, higher incentive comp cost that flow through COGS. So our full year tax rate expectations are 19%, and we also raised our adjusted EPS growth to 13% to 14%. Now that we're through the outlook, I also want to spend a minute on FLAWLESS.

As you saw in the release, we had an earnout benefit of approximately $50 million in the quarter in reported earnings. We exclude any of the earnout movements in adjusted EPS. Some color on that swing. As a backdrop, we bought that business for $475 million upfront and a $425 million earnout tied to year-end 2021 sales.

That sales target represented in excess of 15% CAGR for 3 years off of a baseline of $180 million of trailing sales. Our revised 3-year CAGR for this business is closer to 8%. And as such, the earnout liability comes down and earnings go up. We're still positive on this business.

And the strong consumption growth the past 6 months is a great indicator for the future. As you heard from Matt, the company is well positioned as we enter 2021. And with that, Matt and I would be happy to take any questions..

[Operator Instructions] Our first question comes from Olivia Tong with Bank of America. Please go ahead..

Hi, Olivia.

Are you there?.

Hi.

Can you hear me?.

Yes, I hear you now..

Okay. Great. Good morning. First, I want to talk a little bit about some of the expenditures. First, on marketing, can you just talk a little bit about the key buckets of spending and whether is it more about frequency, depth of brands being advertised, more mediums and the e-commerce investment that you're making as well? Thanks..

Yeah. Olivia, about 70% of our advertising right now is digital, and that's been moving up year-after-year. And it was accelerated more this year because of consumers moving online. As far as where to invest, we have a couple of big launches right now. We have ARM & HAMMER CLEAN & SIMPLE, as I described in the opening comments and also in the script.

It's a new platform for us. It's got six ingredients plus water compared to many ingredients for the typical laundry detergent, and we think that's going to be a platform we can build on in the future. So we've been spending behind it. And the second is ARM & HAMMER CLUMP & SEAL ABSORBx. That's a new cat litter.

We haven't had a strong cat litter in the category. There's been a lot of growth there over the years. So we came up with a brand-new cat litter that has a different substrate. That's 55% lighter than our existing cat litter. So we're getting behind that in the second half. The third would be FLAWLESS.

FLAWLESS is obviously a new brand that we acquired last year. It's an at-home solution. A lot of people are turning to devices instead of going to salons and spas that are generally closed and have lower volumes. So we've been putting money behind FLAWLESS as well.

And again, the other money would be on just brand building, which we've typically done in the past when we have the ability to spend..

Yes. And I would just add, Olivia, to that, right the brand-building comment is maybe a quarter ago, we did have some met of stocks as such, but 5 of our brands were growing share as of last quarter seven this quarter, and we think it's going to be even stronger than that as we exit the year..

Can I just follow up, too, on the strength in organic sales, obviously very strong, but I'm a bit getting off of that in the SG&A? Because it does seem that peers are growing maybe not 10%, but close to it on the top line, and they're seeing a lot better margin flow through. So can you just talk a little bit about the SG&A? Thank you..

Yeah, sure. No, you're right. We're getting phenomenal growth on the top line. SG&A, we're not getting the leverage maybe that you might think because we're also making investments. When we talked about investments last quarter, that transpired across the P&L. So talking about marketing investment step-up.

We're talking about supply chain investments, and we're talking about SG&A investments. And so as we look at analytics or we look at IT or cybersecurity or things that we can do to just bulletproof the company for many years to come, SG&A is one factor..

Yeah. Olivia, we run Church & Dwight a very lean shop, so there's no shortage of good things in which we can invest across the company. So as Rick said, we got automation projects, not just in the plants, but office environment, new product initiatives, where we do a lot of test and learns, IT projects, R&D. These are all SG&A items..

Olivia, you still there?.

Thank you..

Okay..

Our next question is from Kevin Grundy with Jefferies. Please go ahead..

Great. Thanks. Good morning, guys. And congrats on the strong quarter. Matt, a question for you just on longer term guidance. I mean, this is clearly an exceptional year for the company. I mean, probably the strongest in the company's history from a top line perspective. And you're planning on 9% organic growth this year, clearly investing in capacity.

So there's recognition here that demand is going to be sustainably higher in some of your key categories, expanding relationships with co-manufacturers, et cetera. So I don't expect you to guide for next year at this point. You'll do that in February.

But should investors expect the company to revisit the longer-term algorithm as well? I mean, clearly, it would seem like 3% is not the appropriate number, nor do I think that's what's discounted in stock or in sell-side numbers. So maybe you could just comment on that. And then I have a follow-up for Rick on margins..

Well, in my comments, was it's safe to say we'll hit our number for next year, but we typically don't give the details or the numbers right now, as you know. But there's - we have a lot of tailwinds going into the next year, the biggest being in wellness - health and wellness, but also cleaning at-home grooming and at-home cooking.

All of those things are tailwind for us. And we do also expect an improvement in consumer mobility next year, and that's going to help the PC brands have an up year for those brands that are down this year..

Yeah, I want to make sure you heard that, Kevin. I know we have 12 pages of material that we read through during the call. Matt did say that we have a high degree of confidence on hitting our evergreen model next year..

Got it. Very clear. Rick, quick one for you, and then I'll pass along. A couple of areas that are getting increasing attention from investors would be the normalization or return of trade spending, as well as higher freight costs. With respect to promotion, we're starting to see that a little bit in the Nielsen data.

You guys appear to be spending behind laundry and litter and household. Can you just talk a little bit about your intentions, what you're seeing competitively? And then, Rick, with respect to freight cost as well, maybe talk a little bit about that and maybe even broadly expectations from a planning perspective, and I'll pass it on. Thank you..

Yeah. When thinking about the promotional environment, you have to go to household, and household is laundry and litter. So if you go back to Q2, Kevin, and you look at sold on deal for laundry and litter, if you look year-over-year, Q2 2020, Q2 2019, litter was down like 800 basis points sold on deal and laundry was down 1,700 basis points.

The numbers were in Q2 laundry was sold on deal 19% and litter at 12%. If you go to go to Q3 and you look at laundry and litter sold on deal, you're going to see litter at 15% and laundry at 30%. So, they've stepped up a bit in laundry and litter. But if you still look at year-over-year, this is still a huge gap.

So, 2019 Q3 sold on deal for laundry was 38%. It's 30% in Q3. So, it's still an 800-point gap. And then if you look at litter, it's also similar. Last year Q3, 23% sold on deal. This year, 15% sold on deal. So, an 800-point gap both in laundry and litter.

So, as the in-stock levels have improved, promotional activity has slowly returned to normal, but it's still well below normal..

Yes. And I would just add to what the gross margin impact of that is, right. The first half of the year, if you look at price, volume mix because this is where that would show up, price/volume mix for us was, on average, for the first half, a good guy of 180 basis points, 170 basis points or so.

And remember, we pulled back a ton on trade and couponing because we just didn't want to exacerbate out of stocks. In the second half of the year, that number was closer [Technical Difficulty] to a positive 80 basis points as [Technical Difficulty] promotional levels have started to return to normal and we're supporting our new products.

So, while still positive, just a deceleration as a [Technical Difficulty] contributor maybe on margin. Your second question was distribution. [Technical Difficulty] of all spot loads were - wouldn't be picked up or rejected [Technical Difficulty] another way. And now that's up to about 25% of all spot loads in the industry are being rejected.

For us, the good thing is we do have a big - a large significant part that is dedicated lanes, right? We have some customers that are - that pick up. And so it's more on their supply or distribution network. But I would just tell you, it's tight. Costs are increasing. Brokerage costs are increasing.

But at the end of the day, we've done a good job managing that and is not as impactful for us because of our dedicated lanes..

Thanks for the color guys. Good luck..

Okay. Thanks, Kevin..

Thank you. Our next question is from and Andrea Teixeira with JPMorgan..

Yes. Hi, good morning. Thank you. Just following up on the commentary on the gross margin that you just gave now.

Is it fair to assume that given the tariffs that were, I believe, started more in the back half of the year, right, that you had been hit by some of the tariffs, the tariffs in flow in - especially in the water flossing? Is it fair to assume that you're going to have lingering gross margin pressures, at least to the first half of the year, especially as you mentioned now some of the puts and takes? Or we should be seeing some mitigating or pricing as you go into 2021?.

Yes. No, it's a fair question, Andrea. Of course, if the tariffs come into the back half, then there'll be more pressure in the first half of next year. But I would just put you back to Matt's comment is we kind of tried to give kind of an outlook and said that in 2021, we believe that we're going to hit the evergreen model.

And so that does mean margin expansion, as an example, because we have to - it's our job to mitigate things like that, whether it's where we manufacture from, how we can increase productivity. Our supply chain has done a fantastic job. We hit an all-time high this year in terms of productivity. Our good to great program.

And that trend, we think, is going to continue..

Yes. The other thing, Andrew, to keep in mind, it's always - we always tend to focus on what can hurt you. But you say, yes, there's going to be some pressure on because of the tariffs initially. But you got to remember COVID is also going the other way. So that won't be as high, those COVID costs, in 2021 versus 2020. So there's always offsets..

Yes. And let me give you an example because you might say, what happens if COVID spikes back up in 2021? Well, a big part of incremental cove COVID cost for us early on was just trying to ship as much product as we could to customers. And so we were shipping out less than full trucks.

Right now that we've built inventory, now that we're building capacity, we have more flexibility to make sure that we don't run into that same issue again..

And then on the distribution centers, which, obviously, you're - it's the right thing to do.

You're trying to get in third parties and all of that, and you're also investing a lot of money on your own capacity, when would you think on that end, you're going to be having the capacity coming through from a production standpoint and also the distribution? When you think you're going to hit those targets and alleviate those pressures that you said you called out as non-recurring..

Yes. Well, the great news is we just did our first shipments from the new 3PL this past week. And so we believe we'll be up and running almost full board in Q1 of next year, which is fantastic. So that's distribution. That's a meaningful difference in terms of our shipping capacity overall for the network.

For manufacturing, right, if you do something in-house, it always takes about 18 months. But the good news is we said for vitamins specifically as an example, that we're going to go outside. And that's going to be outside for some small quantities already in Q4 and then ramped up really quickly at the beginning of 2021..

Okay. Great. Thank you so much. I'll pass it on..

Thank you. Our next question is from Rupesh Parikh with Oppenheimer. Your line is open..

Good morning. Thanks for taking my question. Also congrats on a nice quarter..

Hey, Rupesh..

I just want to start - hey Matt, so I guess just starting out the M&A. Curious what you're seeing right now on the M&A front.

And does anything change in terms of what you guys are looking at from an M&A perspective, just given the pandemic and maybe some new opportunities you see going forward?.

Well, we've had the same criteria for many years, as you know, Rupesh, so I don't expect that to change. At one point, we thought that there may be a more properties come to market in the back half of the year as the election was looming. I guess that's still possible between next week and the end of the year.

We did do a deal once upon a time that started in mid-November when we closed it by the end of December. So we know that's possible. But I would say, with respect to criteria, it hasn't changed..

Okay. Great. And then you guys also mentioned that you may resume share buybacks.

So is it fair to assume that you may prioritize share buybacks over debt paydown near-term?.

Well, I mean, you got to keep in mind, Rupesh, that our debt-to-EBITDA levels are still 1 point - net debt to EBITDA is 1.1 times by end of the year. So in my mind, we can do both, no problem..

Okay. Great. And then maybe just one last question. So there's been some question just around thinking about gross margins going forward. So clearly, you have some headwinds this year. We also have tailwinds from a lower promotional environment.

How do you think about the base level of gross margin as we look to next year? Like is it flat? I guess, is it modestly - I guess, a 20 basis point decline in gross margins? Is that the right way to think about the new base level, or could there be more? I don't know.

More headwinds this year that are artificially depressing that base level in first quarter..

Well, I mean, you heard Matt, and we talked about the COVID costs as an example that we think are extraordinarily high this year that won't be as high next year. But again, in January, February, when we go through our outlook, we'll go through it in detail.

Today, we just want to leave you guys with that we're confident in achieving our evergreen model, and that means gross margin expansion..

Okay, great. Thank you..

All right. Thanks, Rupesh..

Thank you. Our next question is from Lauren Lieberman with Barclays..

Great. Thanks. Good morning. I wanted to talk a little bit about the vitamin business. I know you guys have expressed a high degree of confidence in both it being taking a sticky habit. And I think, assuming that you can lap the performance this year with growth in 2021 has to be a key part of the outlook.

Because as I look at it, at least using the Nielsen, not knowing, I don't have the full look of all channel. Vitamins is growing, is contributing maybe 50% of the top line growth in Consumer Domestic right now. So I mean, historically, BMS has been a fairly cyclical business overall for the industry.

So can you just maybe talk a little bit about why you think this time is different, why you think that taking vitamins is going to be something that really persists as people's degree of belief that immunity comes from vitamins? I just think that would be really helpful perspective that feels pretty critical to the outlook. Thanks..

Yes. I think you're a little bit high in the 50% estimate..

Okay. Am just using Nielsen. That's why I try to clarify..

Yes. You're a bit over the line there. I think you have to remember that, when we bought this business, Gummies were 3% of BMS. And obviously, that's grown over time. And I think a lot of people have discovered gummy vitamins as a result of the pandemic. So you have a lot more consumers oriented towards gummy vitamins than they were in the past.

So that's number one. Number two is we're not growing as fast as the category. In Q2 and Q3, the category, on average, grew 55%, and we grew 40%. We grew 35% in Q2. And this is consumption, Lauren, and 49% in Q3. So consumers are looking for product. We're the number one brand, and we're sold out. We're capacity constrained.

So we're going to take the governor off the business as soon as we get this third-party capacity online, and we expect to get our fair share, which we're missing out on right now. And like I said in my remarks, it does take a while for a new habit to stick. But I don't expect the current levels to return back to 2019 levels.

If anybody is thinking that's a possibility, I would steal that to worry..

And just to give you some color, Lauren, on - we usually don't do this, but since you asked the question directly, we'll do it. VMS, and this is out of the 9.9% organic, it was about 1/3. So 1/3 of the growth out of the company's growth. Laundry was about 10%. WATERPIK was about 20%. OXICLEAN, it was about 10%. Litter was about 10%, baking soda was 10%.

So it was pretty broad-based in my mind this quarter..

Okay. Great. That's super helpful, helpful color. And then just on the CapEx….

The other thing, too, I think, that with respect to health and wellness, you got to also keep in mind, WATERPIK water flossers. So they took a big hit in the second quarter as far as the sales being down year-over-year. So that business is not going to grow year-over-year in 2020 versus 2019. That's - but this is a perennial grower.

And this is a business that have been growing 10% a year since we bought it. So you got kind of a reset this year for WATERPIK. But there's so much growth ahead of us both in the U.S. and internationally. That's just going to get restarted next year. So long term, that's another one that's going to benefit from this focus on health and wellness..

Okay. That's great. And then on the CapEx, just - and I know you've spoken around it, and maybe I've kind of missed the specifics, but the usual run rate is about 2% of sales, and I think you're going up to 3% to 4% over the next couple of years. It sounds though like for vitamin, it's more going to be a third party.

So I just wanted to understand a lot of where this extra CapEx is going because I think laundry was added this year, to get just some more color.

And for how long you think that higher rate of CapEx continues?.

Yeah. I said in my remarks is approximately 3.5%. So - and I said it for the first time at your conference, and I think I did say 3% or 4% then, but it's about 3.5% for about two years, and its laundry, litter and vitamins, laundry, we just had - we just are experiencing three or four years of growth in one year in many of our categories.

And laundry is not - there's no exception. We just - I think we talked publicly last quarter about how we were sometimes better to be lucky than good, and we had a line come on in late March, early April. And that's already fully utilized.

I mean, really, a brand-new line fully utilized within four to six months, right? And so we have great plans for laundry. That business is doing extremely well. And so we know that we have to add capacity there. Litter, I think you heard from Matt, I think in the quarter, as an example, it was up 8% on consumption. We have some great new products.

So again, we need to lay the groundwork for litter. For vitamins, you're right, we said initially you're going to go outside, but you have to go outside, if you need volume within months. Over the long term, of course, that's one of those businesses that we want to have in-house because we have expertise in gummy manufacturing..

Okay. That's great. Thanks for all the time. I appreciate it..

Okay..

Thank you. Our next question is from Kaumil Gajrawala with Credit Suisse..

Good afternoon.

Would you mind giving us a little more on ad spend, the increase here - your plans on increase to net spend maybe percentage of sales into 4Q? And also maybe some context of how much of the ad spend you're maybe pulling forward from 2021 into the back half of this year, given the strength of your P&L year-to-date?.

I wouldn't necessarily think of it as a pull forward. Remember, Rick said that on a full year basis, we're going to be comparable to 2019. It's just that in Q2 we have pulled the way back because we had lots of in stocks. So we were spending at a 10% level. We're in the 13s, meaning 10% as a percentage of sale in Q2.

Q3 was obviously higher, 13% and change. And then our fourth quarter, we'll be around 14.5%. So we have a lot of spending coming in the fourth quarter. And again, it's behind these big new product launches. We just happen to have two big ones coinciding at the same time. And so we're concentrating our effort in the second half..

Yes. The only thing I'd add to that is, last quarter, when I was asked, for the full year outlook on marketing, I said - somebody said, 'Hey, 11.5% to 12%, is that sweet spot?' And I said, 'Yes, it is.' And if you do the math based on our gross margin outlook and everything else, it would have put you at maybe the lower end of that range.

And now we're saying we're at closer to 11.8% for the full year, which implies kind of a step-up from where we thought even three months ago..

Okay. Got it. And if I could - I know we talked about gross margins a lot, but just to try to understand a little bit better from some of the information you gave us is, some of the gross margin pressure sounds like it will continue into the first half of next year. But some of it such as duplicative storage and such sound like they are more temporary.

Can you give us maybe a read on how much of the pressure is temporary? How much might be permanent as it relates to some of the things, you're putting in place?.

Yes. No, it's a fair question. I would say we kind of - I would just go through a couple of different lines. We talked about COVID, right? And those costs should be rolling back in terms of some of inefficiencies on how we shipped, especially early on in the front half. The WATERPIK tariffs, that will be probably a headwind in the first half.

The FLAWLESS accounting, the good news is we're out of that, the acquisition accounting. We've lapped all that noise, and there's going to be no impact next year from acquisition accounting, which has been a 40 basis point drag this year. So that's fairly significant.

Commodities, for us, have actually - we've discussed this last few calls and resins and ethylene, for us, has been up the last few quarters. So nothing really new there. That will likely be a bit of a headwind.

But then our productivity program, which I just said, was kind of hit an all-time record this year is going to be a tailwind and will offset that. So I'm not going to get into the quarterly cadence. I would just tell you that at this point in time we're confident of gross margin expansion for next year.

And a lot of those investments you heard me walk through, for Q4 specifically, are discrete onetime non-recurring items..

Okay. Got it. Thank you..

Thank you. Our next question is from Joe Altobello with Raymond James..

Thanks. Hey, guys. Good morning. So first question you guys have been very clear that you're extremely confident in hitting your evergreen targets next year. I know, Matt, you talked about a lot of permanent changes going on in consumer habits, which are clearly net-net beneficial to you.

So I guess, what do you guys need to see to maybe rethink those evergreen targets, at least on the top line heading into 2021 and beyond?.

Yes, Joe, you got to give us a few months. I mean, we typically come out in February with these numbers. We just want to give everybody assurance that the evergreen models intact for next year. As far as how high is high, we have to - we'll come out with that in February..

Well, you said 66 days. So I think you were beyond that period, but just kidding. Secondly, on FLAWLESS. In terms of the revised outlook, 8% is obviously still a good number, but it's not 15%.

How much of that delta is COVID-related? And how much of that is coming from other factors?.

Yes. I mean, we're not going to get into that. But I mean, just know that, right, especially retailers were closed for a period of time, right? So that jumping-off point, the baseline is really was depressed. But if you look at consumption right now, and you guys see this, but consumption for that business is just really strong.

And it has been strong for the last six months. So it's a good indicator..

Okay. And just one last one, if I could. In terms of online sales, you mentioned it was up, I think, 77% this quarter, I think it was up 75% last quarter.

So do you think that takes a step back next year? Or do you think this is a new plateau and we could increase penetration off of that 13% base going forward?.

Yeah. Well, look, one of the things that we found is that there are many consumers that rarely used - order online and now have discovered it. And more and more people are discovering it. And I think as we get into the winter months, and it sounds like this COVID thing is not going away, there could be a resurgence, more and more people get use of it.

So I do think you may have one more quarter, Q1 where you'll have a big growth year-over-year just because Q1 of 2020 didn't spike as much as Q2 and Q3. But I do think it's going to - this March is going to continue, Joe, over time. We went back to 2015. We had 1% of our sales online, just 1%. And this year, it will be 13%.

Now last year was 9% or 8%, this 8% going to 13%. So we had a big pop this year, 500 basis points, but we fully expect that this is going to be a significant part of our sales - online sales in the future. So we'll be well over 2020 in a few years..

Got it. Okay. Thank you, guys..

Thank you. Our next question is from Bill Chappell with Truist Securities. Please go ahead..

Thanks. Good morning..

Hey, Bill..

I guess, first question on FLAWLESS.

Just any color around the timing of, I guess, the change of the payout? And is it just COVID related they couldn't get to the three-year numbers in part because of that and the weak start? Or is there something else on the outlook where you - that you were seeing that you need to make a change now?.

Joe just asked a similar question, Bill. I would say that our original methodology was an extremely aggressive growth number, right? And it was 15%-plus. It was in excess of 15%. So as we go through and time gets closer to that end of 2021, we have to right-size those expectations.

And yeah, it's been a little bit choppy because of the current economic environment. But like I said to Joe, we've had some really good consumption. We feel confident in that business and an 8% plus CAGR, we had sign up for that business every day of the week..

It may not be as big earnout as might initially been contemplated, but the prospects for the business are bright. So we think it's - the math is going to work out. This is going to be a real good acquisition for us..

Got you. Well, in the same vein of Joe's questioning, how do you figure out on contract manufacturing versus internal expansion for some of the categories like vitamins or other at-home type categories that you're spiking now, which maybe they continue to grow in 2022 at this rate. But certainly, it would seem like it would come back to earth.

I mean are there areas where you're thinking, look, contract manufacturing makes sense for the next couple of years until we know more? Or are you changing your CapEx budget for next year at this point we need to step it up even faster?.

It's a good question, Bill. It's a fair question. I'd tell you that, for those businesses, those are the keystones of the company, right? Those are the growth drivers. And we've had capacity plans in place. We have an outlook on three, four, five-year capacity and volume forecast. And it's not like it's a new demand.

It's just fast-forwarding some of those plans that were already in place..

Okay.

So, did you change your CapEx budget for next year over the past year?.

Yes. Yes. I announced that at Barclays, and I reemphasize it today that for the next two years we're going to approximate 3.5% of sales as we invest in capacity for laundry, litter and vitamins and distribution capacity as well..

Okay, great. Thank you..

Thank you. And our next question is from Mark Astrachan with Stifel. Please go ahead..

Thanks and good morning everybody.

Wanted to ask on promotional activity, just out of curiosity, who's pushing increasing promotions or point of sale or any sort of step-up there? Is it being done because, as you've talked about, you've got some upside to numbers, want to reinvest, I know not all of that goes into the promotional activity, I know some of that's in marketing, but is it the CPG companies? Is it the retailer? Is it both? And kind of how do you think about that looking out to 2021, obviously, with a lot of uncertainty, but would seem greater than this year, at least in absolute? So, anything that could be helpful..

Yes. My comments earlier were that if you looked at Q2 versus Q3, that sold on deal has increased sequentially, but it's still down significantly year-over-year. So, the shorthand is both laundry and litter sold on deal is 800 basis points lower in Q3 of 2020 compared to Q3 2019.

So - and the reason for that's recovered a bit is because of in-stock levels.

As far as you're trying to figure out what's going to happen in 2021, look, it's possible that it could stay where it is right now for a period of time as opposed to keep creeping up because, obviously, all the competitors are benefiting from the lower sold on deal year-over-year, and it doesn't seem to be affecting consumption.

But I think we'll just - we'll update everybody with our thinking about 2021 sold on deal or promotion when we get to February, but it's too soon to speculate on that..

Got it. Okay. And then just quickly back to FLAWLESS.

So maybe building on the other questions, I guess, why now in terms of changing the payout and the CAGR, especially given your commentary last quarter about seeing increasing at-home consumption given salon closings and such? And maybe bigger picture, does this at all change your thinking about which categories you focus on from an M&A standpoint, meaning more kind of the legacy HPC business versus some of the hardware businesses that you've acquired in recent times?.

Yes. Maybe I'll take the first part, and then Matt can talk about M&A. But the reason we do it now is the accounting guidance says we need to look at it every quarter. And last quarter - in the last - really, the last two quarters, it's tough to go through the haze of the macro environment when there's a COVID impact or when retailers are closed.

And so we're waiting for - as time goes by, you get a little bit more prudence on what's actually happening from a consumer trend. And while consumption is positive, it was just going to have to start at a lower baseline because of some of the retailers being closed and some of the consumption and demand trends.

So, I guess, my answer would be, we look at it every quarter. We didn't make a big adjustment last quarter because we didn't have the visibility into the baseline like we do now..

Yes. As far as the category itself, we've made a lot of investments in categories we thought there could be a tailwind. And so if you go back and we say we bought gummy vitamins in 2012 because we thought there would be a transition from capsules to gummies over time.

And that's proved to be true, and we obviously benefited from what's happened this past year. And we bought WATERPIK. It was obviously a device, but we believed that gum health was going to become more important to consumers over time. And I think that's proven to be true. So we think there's a lot of opportunity there going forward.

When it comes to FLAWLESS, FLAWLESS is hair removal using a device. And there's historically been a stigma attached with using devices - women using devices to remove facial hair, both face and brows. We thought that was going to pass over time.

And we think that the COVID has - because spas and salons being closed, has helped the business because people have discovered the at-home solution. So as far as how that's going to work out, that's going to work well for both the seller and the buyer, Church & Dwight, as far as the multiple ultimately that we will have paid for it.

But our criteria hasn't changed, and all of those investments meet the same criteria and be the number one brand, you've got to be able to grow, got to be a high gross margin, asset-light and either have a competitive advantage..

Thank you..

Okay..

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Mr. Farrell for his final remarks..

Yes. Hey, thanks, everybody, for joining us today, and we're looking forward to February, when we tell you about our 2021 plans. So thank you..

Thank you, ladies and gentlemen, for participating in today's conference. You may now disconnect. Have a wonderful day..