Church & Dwight Co Inc

NYSE:CHD

Earnings Call Transcript 2018-Q4

[Matthew Farrell, President and Chief Executive Officer]

Thanks for coming. We have a lot of familiar faces here today and we have got a great program planned for you. I am going to start off with the Safe Harbor statement. I encourage everybody to when you have some time take a look at it and read it. And I have a very packed agenda. Many of these topics are familiar to you, who we are, why we are winning and take you through the ARM & HAMMER brand today, also all our exciting innovation in ‘19 and then our other couple businesses, international and animal productivity. I will also talk about how we run the company and Rick will come up and talk about the financials.

So, we just wrapped up another strong year. And we entered 2019 with a lot of confidence. So, our EPS is expected to increase 7% to 9% driven by operating income growth and that is top tier in the CPG space. Our 3.5% organic sales outlook is above our evergreen model. All three businesses are healthy. In the U.S. we are enjoying strong demand for our products, we are in the right categories and we have low exposure to private label. Our international business continues to be a juggernaut and we will hear more about that today from Steve Cugine who leads our international business.

Our Specialty Products business is also setup for a good year. We have an impressive lineup of innovative products across many categories that you are going to hear about today and our ability to rapidly innovate is differentiating among CPG companies. In 2019 we are going to return to gross margin expansion as we have price and productivity programs at our backs. Our price increases have been well executed for ARM & HAMMER cat litter, baking soda and carpet deodorizers and OXICLEAN pre-wash additives. Those price increases hit the shelves late in the quarter and will benefit 2019 gross margins and the good news is the competitors are raising price in those categories as we speak. And we have other levers to bolster 2019 gross margin expansion and those include pricing in personal care categories and also an opportunity to reduce promotions in the laundry category.

So, before we get into the formal program, I want to recap a few reasons why we are a standout in consumer products. We have an evergreen model which leads to two things, consistency and financial literacy. We delivered top line and bottom line growth year after year after year. The shareholders know the model very well and so do the Church & Dwight employees, all 4,700 of us. We all know what success looks like. With only 4,700 employees, we are a lean company and we adapt to change quickly. There is no better example of that than the growth of our online sales. We succeed, because our employees are committed to our success. We have brands consumers love and today you are going to hear from Britta Bomhard, our Chief Marketing Officer, you are going to hear about ARM & HAMMER and the More Power to You campaign. The More Power to You campaign is a shining example of our brand building skills. And finally, we made good choices when it comes to acquisitions. Those choices led us to dry shampoo, hair thinning, gummy vitamins and gum health. Our acquisition experience and skills will serve us well in the future. We believe there is no better place to invest in the CPG space than Church & Dwight.

Alright. I will get into the formal program. Who we are? Well, the evergreen model is 3% top line, 8% bottom line. It’s been like that for many years and will continue in the future. The way the 3% breaks out is we expect 2% from the U.S., 6% from international and 5% from Specialty Products. We have 11 power brands that are listed on the slide there and those 11 brands account for 80% of our revenues and profits. And we have a very balanced portfolio between household and personal care, household 45%, personal care 48% and Specialty Products bringing up the rear with 7%. And we also have a nice balance between premium and value, 65% premium, 35% value. And we are an acquisition platform. We have a fabulous integration track record. When we buy businesses, we grow revenue and we bring operational efficiencies and because we have a strong balance sheet, we have a lot of access to capital to do more in the future. And we have a long history of growth through acquisitions.

So what you see in that slide there is 15 years. So we went from $1.5 billion to $4.1 billion. So out of those 15 years, 12 out of the 15 years, we completed a transaction. And 10 of our 11 power brands were acquired since the year 2001. And when you have leading brands, it gives you the ability to take price. So, you read in our release that we are taking price on 30% of the portfolio and we are having discussions about other categories to add to that. And we have very clear acquisition criteria. Number one or number two brands, they need to be high growth, high margin. We are fans of asset-light businesses and we like businesses where we can leverage our existing supply chain. And finally, these brands need to have a sustainable competitive advantage. So, 11 brands today, 20 brands tomorrow. And we do operate in the land of giants. All of our competitors are far, far larger than we are. As I said earlier, we only have 4,700 employees. That gives us a huge advantage. We are a lot faster than they are. We can make decisions quicker and we adapt to change. You have heard us say before. Change is our friend. And we deliver phenomenal results to our shareholders over any period you want to pick, 1, 3, 5, or 10 years.

So, why are we winning? First is this scorecard. So here is 2018. So we have algorithm, we grow 3% top line we grew 4.3% top line 2018. The consumer business had a phenomenal year, United States 4.3%, international 7.8%. Combined that was a 5% growth rate for our consumer business in 2018. Specialty Products had a rugged year, but that’s going to turn around in ‘19. Okay, we are in the right categories. We know how to grow share. Low exposure to private label and we win in e-commerce, so some stats. So here is 2015, ‘16, ‘17 and ‘18. You can see in general our categories grow about 3%. That’s the underpinning for the growth in the U.S. And we know how to grow share. So this is our share scorecard. In 2018, 7 out of our 11 brands maintained or grew share. And we have low exposure to private label. So if you went and calculated what’s the weighted average private label share for our categories it’s around 12%. And out of those 15 categories you saw on that earlier slide, 5 of them have exposure to private label, but if you take a look at those five charts, you can see that the shares are relatively stable.

And we continue to win in e-commerce. So let’s look back at 2015. 2015 we were in the basement. We had 1% of our sales online. Today we are 7%, grew 40% in 2018. So, now we are top tier in CPG when it comes to online sales. We are expecting to hit 8% in 2019. And we have lots of number one brands online. Amazon generally is about 50% of online sales for most CPG companies. It’s very important class of trade. All of those products are rated there number one.

And now I want to bring up Britta to take you through the ARM & HAMMER campaign.

[Britta Bomhard]

Hello, everyone. As Matt just talked about, we are all about brands, consumers, love. And how we bring that to life, I want to share with you today. You have heard we have 11 power brands and I think about a year ago when I was here, I shared actually what we are doing on OXICLEAN. You might remember, it’s been a whole year I know that we talked about how we activate in digital and how we do targeted marketing and predictive analytics as one of the key tools. And as you know, we are all about transparency and results. So, Matt loves to talk about our report card. So I thought I would share today the results of the year of OXICLEAN. So what you can see behind me is OXICLEAN had the highest share ever at more than 53% and we have actually grown 4x the category. So that’s what great marketing can do for brands.

And today we are actually here to talk about our biggest and most exciting brand, ARM & HAMMER. And I know that I want to refresh briefly what you should know about ARM & HAMMER. It is one of the oldest brands in the United States. It was actually one of the first ones trademarked in 1905, which gives it more than 100 years. It is truly part of the American DNA. So one of my colleagues was actually in a museum in Utah and on the wagon displays of the wagons going west, there was a baking soda box, because the versatility of that product is so ingrained in American philosophy about making yourself a brighter future, but it’s not only a historical brand. Even today one in two households buy an ARM & HAMMER product every year and I hope all of you are part of that and you over index. So baking soda, just to put it into few fun facts and what it actually does in America.

So, one of the first things I want to talk, we all know the juice for cookies. If you used all the baking soda last year to make cookies, you would actually get up to 688 billion chocolate chip cookies, but it’s not only used for baking, you might be aware that it’s used for cleaning and refreshing. So it actually filled 31 billion gallons of swimming pool water. And the third exciting usage is it also has medicinal usage. So, 300,000 patients in the U.S. rely on ARM & HAMMER baking soda to purify their blood. It is such an essential product for this nation. And obviously, the one you should all be most familiar with is half of fridges in the U.S. are actually kept fresh with ARM & HAMMER baking soda. And in case you missed yours, there is a few baking soda to grab on the tables, remember to refresh every 30 days. It’s not only baking soda. In other categories, it is such a key brand in this country. So if we put all our laundry together and only wash white T-shirts, we would actually get 62.5 billion pounds of laundry. Now I know that’s a hard number to imagine, so I thought I would give you an easier one to imagine, how many elephants would that be? 6.5 million adult elephants. Now, I know you all imagine adult elephants everyday, so I thought maybe you just imagine the whole of Manhattan Island covered with elephants. That’s about how much laundry is done with ARM & HAMMER laundry every year.

So needless to say, it’s our $1 billion brand, our biggest and our crown jewel, so I think we are very excited to share how we keep this iconic brand going to work in the future. In the past, we have been very much communicating about the benefits and how it is better and the superiority of the product, but we are actually leaning in much more on connecting with our consumers in an emotional way, because we are all as I said about brands, consumers, love. So a new campaign which you hopefully at least saw coming in or experienced somewhere here is called More Power To You. And even if I call it a campaign, you really should think about a unifying creative idea, which is going to go and last us for years towards the future. So, what’s the base idea behind More Power To You? Well, no brand would exist today without the love of the consumers and what we are celebrating is actually the true power for ARM & HAMMER is the ingenuity of the people using it. So, we are elevating our consumers to the heart, because they are the ones, which make this brand great.

So, let me talk you through what that feels like and what’s the emotion around it. So if you can laugh over spilled milk, More Power To You. If you work a 60-hour week and still get the kids to school looking fresh, More Power To You. If things get gross and nasty, don’t panic, you have the tools to make it right, More Power To You. That’s why we created powerful products stacked with solutions to tackle everyday’s challenges with strength and a smile, More Power To You. Now I know this is probably not your usual what you see, but I think I want to show to you how our consumers took to this in a big event where we launched the campaign here in Bryant Park. And we asked our consumers what they were thinking about ARM & HAMMER. So, let’s go to the first video.

[Video Presentation]

So I think the video gives you a little bit of a flavor what this experience of experiencing ARM & HAMMER is like. But actually, I think when we say we celebrate the ingenuity of our consumers, they are our celebrities and where would you find celebrities, obviously, in People Magazine. So we highlighted our consumers as our celebrities in an edition in People Magazine in January to just show how important they are to us. So everybody you see here are real consumers as everybody you see on the wall here or as you see on the banner outside. But not only did we celebrate them, we invited them to share their experiences of baking soda, so they are telling the world about their unique experience or how they use it and we are amplifying that in our media.

And more than that, we make it even easier to connect with ARM & HAMMER. So if you want to connect today, we will have QR codes on our products, which lead you immediately to either the usages or participation in the campaign. And if you haven’t had yet the opportunity to test it, you will see on the right all these banners with QR codes, so an easier way for you to get that experience yourself. That will allow us to tell this rich ARM & HAMMER story in such a bigger way than just a couple of lines on the packaging. If you remember, there is more than 101 usages for baking soda. No box will ever be big enough to print all of them. So, these new medias are God sent for us to actually invite people into the ARM & HAMMER brand and educate even more.

So with that, somebody asked me earlier, we will have about 40% of our ARM & HAMMER spend on digital, because we find that it’s a fantastic tool to interact in a two-way communication with our consumers as well as make sure we target them the right way. But we also and I want to show you similar to what I showed in OXICLEAN a year ago, how this campaign ladders up for different target groups on the example of laundry. And hold your breath because nobody else has seen these campaigns yet, so you are the first one. So I want to show you the versatility of this creative idea with three very differently targeted executions for laundry. Let’s start with the first one.

[Video Presentation]

So if you have sensitive skin like me, you know this yucky feeling. I think this is a great visualization of what this looks like. So, this is clearly in the direction of elevating a benefit. But we also know that a lot of Americans are actually strapped for money and so we also know that we are one of the best value brands out there to doing your laundry. So we actually target those people with a different message, which I want to show to you now.

[Video Presentation]

So I think those two executions already show how versatile this campaign is. And we also have more emotional executions, particularly for those of you in the room who are parents you know what the strain of parenting can be. So I hope you enjoy the next campaign, which actually leads into that emotion of bringing up the family. Video?

[Video Presentation]

So I think you have experienced now the ability of this campaign all laddering up to More Power To You in targeting very different segments of laundry users. But as you know, ARM & HAMMER is much broader. It’s one of the brands with most different aisles in the U.S. So, we also have cat litter. So you might wonder how we bring this to life in cat litter and you are in for a treat.

[Video Presentation]

So it sounds like we have couple of pet parents in the room. So as you know, pets are often today are kind of treated as persons and children. So, I think by personifying the cat, that actually gave great emotional resonance, so we have excellent test results in that commercial. And as you can see here, it’s a unique way and we can own and breakthrough to a lot of boring cat litter communication. So I think it’s a very unique way for us to communicate and own a message in that category. So nothing works like experiencing a campaign. Instead of me telling you about it, I think what you want to do is be part of it. And as you haven’t yet, we have a box setup there to get your picture taken and know what it’s like to be part of the ARM & HAMMER community, because obviously, there is More Power To You. So thank you very much and join us on that campaign.

[Matthew Farrell, President and Chief Executive Officer]

Okay. Thank you, Britta. Now we have got some really exciting things to talk about. I mentioned earlier that we have quite a scale as an innovator in CPG and I think this little show here is going to give you a real pace of the breadth of the innovation that we have in 2019.

We will start off with Waterpik Sonic-Fusion. So we have the world’s first flossing toothbrush. Now you can brush and floss at the same time and only 16% of American adults floss daily. And this is clinically proven to be twice as effective as traditional brushing and flossing. So, this is a fabulous new product. And there is a lot of science behind this. So I am going to roll a couple of minutes here. So everybody can appreciate the design behind this product.

[Video Presentation]

Okay, gang. Everybody run out there and buy one today. Alright, next up is OXICLEAN. So we all know OXICLEAN for its whitening powers. But now we are launching OXICLEAN Dark Protect. So this is directed towards dark and black fabrics. So 42% of our wash loads are dark loads. So we are bringing anti-fade technology to OXICLEAN and it includes OXICLEAN Stain Fighters, it’s cold water soluble. This keeps dark and black fabrics looking newer. And we are also bringing that technology to value detergent. So, ARM & HAMMER plus OXICLEAN Fade Defense. This is for vibrant whites and bright colors. So, color fading is the number two laundry frustration. So this is a new benefit, Fade Defense that we are bringing to the value detergent category.

Litter, so we have ARM & HAMMER Cloud Control, so you can breathe easy. If you are a cat owner, you know there is a cloud of nasties when you are emptying the litter pad. Now you can breathe easy with no cloud of nasties when cleaning the litter box. So this is dust-free, it’s got dandruff control technology, and an allergy-free light scent and we still have our 7-day odor-control guarantee. In vitamins, we are coming out both for VITAFUSION and Li’l Critters with organic vitamins, USDA organic. So a couple of proof points here, 50% of Americans now consume organic products at least occasionally. And millennials, more than half of millennials prefer supplements derived from organic sources. So we are giving consumers more of what they want and less of what they don’t want. So we all know that facial masks are the rage. So, NAIR is coming out with a NAIR leg mask. This is the first mask for legs that not only beautifies skin, but also removes hair. So when you ask facial mask users, 86% are interested in purchasing or using a mask for legs. We think we have a great insight here. We are going to run an ad right now so you can get a better appreciation for this.

[Video Presentation]

Okay, next would be oral care. So we are coming out with ORAJEL toothache strips. So we have patent pending on this particular product. This is where you are going to get targeted long lasting pain from strips that you apply to your toothache. Our strips stay in place for targeted relief, they dissolve slowly for long lasting relief and a cool mint taste. So, this is really a revolution for oral analgesics.

BATISTE. BATISTE is a fast growing brand for us globally. We have two new variants coming out this year, one is a hydrating dry shampoo, the other one is volumizing. So a couple of proof points here. So, 80% of women don’t wash their hair everyday and only 24% are currently using dry shampoo. So, why is that? Well, it’s because some of them think it’s not for their hair type. So, we have a hydrating dry shampoo for dry hair with moisturizing avocado and volumizing dry shampoo for fine hair with plumping hair collagen. So, these are going to be two winners in 2019. It wouldn’t be an Analyst Day without TROJAN. So here is the TROJAN Edge, take pleasure to the limit. This is with lubricants to change sensations. Gen Z as we all know places a lot of value on experience, adventure and living boldly and to reach that crowd, we have a new TROJAN man.

[Video Presentation]

And no one in this room is in the target group, so you haven’t seen any of the digital ads, but I encourage you to look for them. Okay. Now, I am going to bring up Steven Cugine to take us through the international story.

[Steve Cugine]

Well, it certainly is a big sexy world. So I guess that’s why I am up next to talk about the international story. As Matt said, I think everybody is familiar with our evergreen target international at 6%, but I thought I would give a little color here on international. For the last several years, we have been focusing on building scale. As you can see in 2013, we were $430 million in sales and we exit 2018 with $710 million in sales. Not only have we increased scale to the point where we believe we can really have access to every major market around the world, we have doubled our organic growth on a much larger base from 3% to almost 8% and exiting 2018 at 7.8%. When we started this journey, we started really implementing our new strategies in 2014. We saw the fruits of that labor by Q4 and you could see from every year from 2015 to 2018, we have exceeded our 6% evergreen growth target exiting 2018 at 7.8%. Even better news is we had a very strong quarter finishing Q4 at 9%. So, we leave 2018 with a lot of momentum.

The net sales composition for international is really 8% Mexico and Australia; 23% Europe, which is made up of three subsidiaries, France, UK, Germany; Canada at 31%; and total export or our global markets at 28%. Breaking that down for 2018 even further, our subsidiaries delivered a solid 4.3% organic growth and export continues to deliver strong double-digit growth every year. As we look forward and we say where is the engine of growth coming from? And what is the fuel for that growth? In our subsidiary markets that now exceed $0.5 billion in sales we focus growth in three areas one, brand expansion, that’s expanding the offerings of the brands that we offer today like OXICLEAN Ultra Gel entry in Mexico, where we entered the liquid segment; VMS expansion and of course, BATISTE, Matt talked about the great new products, but we are also expanding in new subsidiary markets.

Last year, I talked about how excited I was about the acquisitions that we recently made and that I thought Waterpik represented a real engine of growth, not only for the company domestically, but for our international business. Now I am happy to say that international delivered 20% growth in the Waterpik business in 2018 versus year ago. Lastly, pricing, so in 2018, we have initiated pricing actions over a third of our products that we sell in our international markets and we will reap the benefits of that initiative in 2019. Another example for growth for the future is Asia. Last year when I was here I talked about a spotlight on Asia, both Southeast Asia and China and I am pleased to be here today to say that our sales exceeded $90 million in these markets in 2018. That is up from $25 million in 2013. This is enabled by a new relationship that we started in 2018 with DKSH, a partner of ours covering all of Southeast Asia. This year, we are implementing an initiative to really drive and expand our distribution in all of these markets through this partner.

Another exciting development is China. I personally spent almost 2 years in studying the China market and doing consumer research in every major city in China on our brands, identified those brands, took that research and identified partners that would really expand the China opportunity for Church & Dwight, but there are several characteristics that were very important. We needed a company that had certainly the traditional distribution access into retail, because it’s certainly a big part of the China market, but also had already developed a strong capability on e-commerce. This is something that even local Chinese companies are struggling with in terms of the dynamic change in this marketplace. So, we identified Shanghai Jahwa, which is a strong personal care, CPG company, $1 billion in size, publicly traded company, to be our partner in this market we spend a lot of time with them getting to know them and ultimately negotiating a very unique agreement, which gives us both transparency and access to the online and offline markets in China.

Beyond this, I’m excited about the capabilities that we’re building to drive long-term growth in our international markets. We have established local teams in Shanghai and in Taiwan. In Shanghai, our employees of Church & Dwight are actually embedded with and live and work with the Jahwa employees in their corporate offices. So, they’re really fully integrated into the Jahwa team to support sales, marketing, and operations and distribution in the China market. We doubled our staff in Singapore and Panama. So, we’re investing in the markets where we see the fastest growth. We built a DTC capability in Europe and Australia. As you know, we launched a new subsidiary in Germany last year, and that’s off to a fast start. We’re also committed to brand building, both in our developed subsidiary markets as well as in our export markets. And so, we have customized talent for each market and I just I’m going to share with you a brief snippet of some of our assets.

[Video Presentation]

Okay. So last slide, we are committed, certainly myself and the international team, to deliver at 6% or more for international organic growth, and I’m pleased to put this slide up in particular because it is the identical slide that I ended with last year because what was true then remains true today. Our existing brands still have a lot of runway and we look at Batiste and its growth in the international markets, ARM & HAMMER baking soda and ARM & HAMMER related products that were premiering today continue to deliver strong organic growth in our international markets.

Our acquired brands are building strength too. As I mentioned Waterpik growing 20% in 2018. Our export business has been and will continue to deliver double-digit growth. We’re making significant investments in Southeast Asia and China, and that will fuel growth for years to come. So, it is certainly a big sexy world out there, and I’m pleased to represent Church & Dwight’s international business. Matt, back to you.

[Matthew Farrell, President and Chief Executive Officer]

Okay. Animal Productivity, so we have a 5% algorithm here. Remember we said that the Company grows 3%, U.S. is 2%, international 6% as Steve just took you through, and Specialty Products 5%. So, you might think, hey, that’s kind of a big number considering that we went backwards in 2018 minus the 3.4%. Here’s how that 5% breaks out. So, we have a bulk chemical business. That’s essentially bulk sodium bicarbonate. It’s a real steady-Eddie business. Animal Productivity is the one that we expect to grow at 6%. Two-thirds of the businesses is Animal Productivity; one-third is bulk chemicals. Now the Animal Productivity part of the business is the one that’s been most volatile and the most cyclical over time. The reason we like being in that space is just because of this statistic is there’s 7.5 billion people on the planet today; going to 10 billion by 2015. So, animals have to be more productive.

If you went back to the 1970s, that’s when we first got into the dairy business. Essentially baking soda was Alka-Seltzer for cows. They could pretty much eat more and more grass. From there we moved into nutritional supplements, still in dairy. And then 3 years ago we decided we have a great brand in ARM & HAMMER. We can move into other species; that will be cattle, swine, and poultry. So first we bought into pre-biotics, then we bought into probiotics. So now today, 2018, 24% of the business is non-dairy and growing. This is good for us going forward. Second thing is that 13% of the business is now international. So, the population growth is outside the U.S. That’s where we need to be. So, we’ve made a lot of progress over the last three years and that’s what gives us confidence in the 5% top line long-term.

So just as Steve said, the same slide this year as last year. We have a great brand. All of these products are labeled ARM & HAMMER. The consumer trend is away from antibiotics. So, we make prebiotics, probiotics, and nutritional supplements. And we’re not wedded to dairy anymore. We’ve moved into other species, and the global growth and the growth of population is going to help us. So, this is going to be a winner for us, and this business has terrific financials.

Alright. Then how we run the company? First off, you heard from Britta today, we have number one brands we have brands that consumers love. We also are friend of the environment. We leverage people. We have highly productive people and we want Church & Dwight to be a place where people matter. And we leverage our assets heavily. And if you do all four of those well, you get really good returns. But because we are an acquisition platform, we deliver great shareholder returns. If you look at how we’re incented, it’s very simple; net revenue, gross margin, cash from operations, and EPS, 25% each and all 4,700 employees understand it. I want to particular gross margin is 25% of all employees’ annual bonus. If you look at our numbers for 2018, you know we’re pretty sad about that. So we’re going to turn that around in 2019.

These are the four ways we do it. So good to great cost optimization. That’s our continuous improvement program. We have supply chain optimization as well with our plants. New products we have accretive new products. All these products you saw today are premium priced and acquisition synergies. And with respect to being, a friend of the environment, in the early 1900s, we started to use recycled paperboard in our packages. In the 1970s we were the only sponsor of the first Earth Day. We were the company that took phosphates out of laundry detergent in the 1970s. And more recently, in 2018, a 100% of our electricity globally comes from renewable sources of wind and solar. And we planted 3 million trees through the Arbor Day Foundation last year. Why do you plant trees, because trees take CO2 out of the atmosphere.

So, we have three goals. One of them is we want to reduce the use of water by 25% by 2022 that’s water. Second is solid waste recycling. We want to move from 67% to 75%. And here is the big one. We intend to be carbon-neutral by 2025, and today we are 55% carbon-neutral. What does that mean? That means we take out of the atmosphere a little bit more half of what we put in the CO2. And we’ve been getting recognized for that; Barron’s, Forbes, FTSE, the EPA, Drucker Institute WSJ Management Top 250, all of them recognizing the efforts we’re putting into this. Alright. Now financials from Rick, come on up.

[Rick Dierker, Chief Financial Officer]

Okay. Alright. Thanks, Matt. I am going to go through three things, look at the 2018 results, quarter, full year, talking about the outlook, and will start with evergreen model like we always do.

So just as a reminder and we have been doing this for over 10 years, but organic net sales growth of 3% is kind of our algorithm, 25 basis points from gross margin, flat marketing, higher dollars of course, and then leverage SG&A by 25 basis points to get to the 50 basis points on operating margin, which translates into 8% EPS growth. I’m sure all of you guys can tell me the same thing.

And as Matt alluded to earlier, it breaks out by division, 2% domestic, 6% international, and 5% for SPD. So, Q4 highlights; 4.3% organic growth in the quarter, which is really strong top line performance. Our outlook was 3%, domestic was 4%, international was 9%, and SPD went backwards by around 4%, consumer organic also almost a 5% grower. Adjusted gross margin; now this is where we’ve had a lot of conversation. Our full-year outlook was down 120 basis points that implied down 160 basis points. In the quarter we finished down 250 basis points in the quarter. So, what happened? Three things; first of all, there was a mix impact of about 40 to 50 basis points. Our household business grew faster than we expected. Our personal care business, excluding Waterpik, grew a little bit slower than we expected. And so that was one. Number two was tariffs, so the timing of tariffs, right. As our Waterpik business grew faster, we thought that tariff impact was going to really hit ‘19. It got pulled forward into 2018 and then the third thing was on gross margin. We really blew the doors off of cash from an incentive comp perspective. We missed on margin, but we really blew the doors off the cash flow, free cash flow conversion. We’ll get to that in a minute and so gross margin has an impact. Incentive comp has an impact on gross margin.

Marketing was up 10 basis points. So, we invested $5 million or $6 million year-over-year in marketing really to start the year with momentum, which is actually happening, right. I think Nielsen information came out today, plus 6% on consumption growth, so really starting off the year strong and EPS was up 10%. So for the quarter 3.8%, 4.4%, 4.7% and 4.3%, so just really strong broad-based growth across the year, on a stacked basis, the second half of the year was around 8%, alright, so just growth on top of growth.

This is probably the most important slide or one of them in the deck. This is our progression on price/mix. Remember organic has two components. One is volume growth and one is price/mix growth. And for a long time, we were bumping along in the negative price/mix growth, for about a 1.5 year. In Q3 we inflected, right. And lower promotional spending, especially in laundry, and positive price/mix happened in Q3, happened again in Q4. Now remember in Q4 list price changes that we’ve gone to retail with aren’t even in these numbers yet, right, because it takes it typically protects a month or two months or even three months sometimes retail pricing, and so really that benefits on the come in Q1 and for 2019.

I already walked through the details of Q4, but I’ll just recap gross margin for the full year. So plus 20 basis points on volume, price/mix, down 170 basis points for commodities and transportation, and we’ve talked many times about the headwinds on commodities, whether it’s resin, oil, diesel, surfactants, the headwinds in the industry on transportation, and we’ll talk little bit more about that in 2019 outlook area. And then other manufacturing costs, whether it’s tariffs or incentive comp or labor increases. Productivity program was plus 80 basis points and then FX and acquisitions was, really immaterial, so that’s down 140 basis points for the year. For the full year 4.3% growth, down 140 basis points for gross margin. We just spoke about that. Marketing was strong, 11.7%. SG&A was a good baseline of 13.6%. EPS was 17%. And I think too many times we look past our EPS growth. So, 17% EPS growth, and yes, we had some tax reform benefit in there. Our peer average was about 5.5% apples-to-apples. So, we’re just we feel like we’re top tier performance here. Cash from operations was $763 million and free cash flow conversion was 124%. You’ll see in our slides later on cash, the peer average is 91% on free cash flow conversion. So, just doing a great job of converting those sales and earnings into cash.

Okay. Moving to the outlook, so 3.5% organic sales. This is the highest organic sales outlook we’ve given since 2014. Gross margin is expanding 10 basis points. Excluding tariffs, it’s up 35 basis points. And I’ll walk you through that detail in a minute. Marketing is down 10 basis points, but that’s really just math. Our SPD growth is around 9% for next year. We, don’t advertise to the dairy industry that much or to cows. So, it doesn’t have much marketing. So, it’s just math. Our marketing dollars are up year-over-year. SG&A is down 30 basis points as we leverage pretty much in line with the operating model and 50 basis points expansion for operating margin, 21% effective tax rate. So, 2018 we were at 21%. In 2019 we’re at 21%. That’s two things; one is stock option exercises and the other one is favorable tax matter internationally. But the good news is its flat year-over-year and so that means what does that mean? It means our EPS growth is all operating in 2019.

Cash from operations is around $800 million is our outlook. So again, really just strong free cash flow conversion. And it’s not on the page, but the assumption for buyback is about $300 million, $100 million of which we’ve already done. And, of course, if we do an acquisition, we would probably dial that back and just focus on using that money for M&A. Here’s the detail for the organic sales outlook, 2.5% domestic, international was 6%, SPD was 9%, that’s how we get to 3.5% as a baseline.

Okay. I want to spend a minute on this slide. This is gross margin expansion in 2019. This is the key part of our story in ‘19. Really two things to call your attention to, in 2018 we are only plus 20 basis points for price, volume, mix. In 2019 the net benefit of price, volume, mix is 125 basis points, so this is plus 100 basis points largely because of the retail price increases. The other thing I will call your attention to is inflation. So it was a 250 basis point headwind in 2018. It’s another headwind in 2019, although not as much, 190 basis points. I think there is a false narrative out there about commodities and how quickly they came down and the – maybe favorability that they are throwing off.

As an example, in Q3 to Q4 oil was down about 30%. A couple of key commodities that we had diesel, resin, surfactants, they were down 4%, 7% and 13%. And so it takes a while and you have heard this from many of our peer set. It takes three months, six months, nine months for oil to be down for the rest of the inputs to really fall at the same rate. The good news though is what Matt alluded to is we have certain pricing actions, those four that Matt already talked about embedded in our outlook, but there are other pricing actions for personal care items that we are working on and that would be in addition to our outlook. Productivity programs is plus 100, we are making great traction on our good to great program and then the tariff impact is minus 25 basis points. So remember, we have talked about this briefly, but we price to protect profit dollars and not margin. So that’s largely the Waterpik tariff impact. And while we are protected from a profit dollar perspective, it still has an impact on margin. And so net-net we had a 10 basis point increase from a – on a reported basis and then if you add back the tariffs, we are at plus 35 basis points. So we feel really good about margin expansion for 2019. And here is some color on some of the key P&L items. So organic growth, we have had a great track record of organic growth and we are ahead of our evergreen model in ‘19 at 3.5%. Gross margin, I just went through that in detail. This is a hallmark of the company and Matt told you how much it’s important to the entire company, 25% of our incentive comp is tied to gross margin. Nobody else in the industry really does that.

Marketing spend, we are still in the top 20 advertiser in the U.S. and dollars were up. And it’s essentially flat year-over-year. SG&A management, this is a great baseline for us we are leveraging back down to 13.3% in 2019. Now if you exclude amortization, a few years it looked like we are building SG&A. That was really tied to some of those smaller deals we are doing and all the amortization that we are throwing off. So if you take a step back, you can see the trends pretty flat over time. We have had great adjusted EPS growth over the last few years and we expect ‘19 to be no different. So 7% to 9% EPS growth in 2019, which is top tier in the industry again. I think the peer group when we did a list of about nine or ten peers, on average it was around 1% or 2%, okay. Strong margin expansion over time, gross margin matters for this company. Gross margin drives EBITDA margin. EBITDA margin drives cash flow, we believe that drives valuation. So just a great progress on and we expect more to come.

Free cash flow conversion, this is my favorite slide, 124% for Church & Dwight, peer average is 91%, lot of companies target 100%. And we do that a few different ways, but one of them is working capital management. We have gone from 52 day cash conversion cycle all the way down to 20 days. And we have a very strong balance sheet. We ended the year about 2.2x levered, we will be sub-2x in 2019. And what does that mean, well, especially when we are under-levered, capital allocation is very important. But number one far and away is M&A. Number two is debt reduction because it enables number one. Number three is new product development. Number four is CapEx. Number five is return cash to shareholders. So we have a lot of firepower, $2.5 billion is our math and we can maintain our investment grade rating. And we are not a capital intensive company. We are about 2x or sub-2x typically on CapEx. We have announced a 5% dividend increase in 2019. This is strong track record of dividend increases and we have been paying one for 118 years. And I think Bill Chappell had to leave, but this slide was specifically for Bill because he came in late a couple of years ago. Our TSR is 20% over 10 years. It’s about 18% over the 3-year and 5-year horizon and it was 33% in 2018.

And with that, I think we have a public service announcement before we start our Q&A.

[Video Presentation]

Alright, so I am going to invite up the rest of management team and we will go through our Q&A.

[Matthew Farrell, President and Chief Executive Officer]

Okay. We have got the whole squad coming up here, every function is represented. There would be chance to pepper us with questions, so we got a microphone for the crowd.

[Rick Dierker, Chief Financial Officer]

Yes.

[Matthew Farrell, President and Chief Executive Officer]

Okay. Joe Altobello.

[Joe Altobello, Raymond James]

Thanks. Couple of questions on gross margin, I guess first for Rick, can you walk us through why the cash flow over-delivery was a drag to gross margin in the fourth quarter?

[Rick Dierker, Chief Financial Officer]

Yes, sure. The question is why is cash flow over-delivery from an incentive comp perspective a drag to gross margin rate, right. Well, we have 4,700 employees, two-thirds of whom are at the manufacturing facilities all over the world. And so when you do incentive comp or salaries, that goes through direct labor or overheads at the plants. And so increases in compensation flow through the gross margin line as part of COGS, so that’s why.

[Joe Altobello, Raymond James]

Got it. And secondly in terms of the ‘19 outlook for gross margin, what level of promotion activity you are expecting, is it going to get better than it was this year or worse than it was this year or pretty much equal?

[Matthew Farrell, President and Chief Executive Officer]

Yes. One of the things I have said upfront is that we see an opportunity to reduce promotional spending in the laundry category. If you looked at two big household categories right now, so if you looked at laundry detergent and litter and you looked at the last six quarters, you see that the fourth quarter was the lowest quarter in 1.5 year. Unilaterally we think because the strength of our brands and the strength of the consumer that we can go further.

[Joe Altobello, Raymond James]

Okay. Thank you.

[Matthew Farrell, President and Chief Executive Officer]

Kevin?

[Kevin Grundy]

Thanks. My question is on the international business, how big can the China opportunity be, what’s potentially the role of M&A with respect to that growth strategy. And then lastly, touching on that with the guidance that was the one segment where you are guiding in line with the evergreen target, but it seems like this would be a year with the – with your alliance Jahwa coming on where maybe we would see above sort of evergreen target growth, but that’s not at least initially anticipated in the outlook, so maybe you could touch on that as well? Thank you.

[Matthew Farrell, President and Chief Executive Officer]

It’s never enough, Kevin is it. We have got a 6% algorithm. We said we are going to hit the 6%, but…

[Kevin Grundy]

[Question Inaudible]

[Matthew Farrell, President and Chief Executive Officer]

Yes, okay, alright. Well, I am very curious to hear what Steve has to say about how big the international business can be particularly in China.

[Steve Cugine]

Okay. So put it in perspective, right. So outside the U.S. for Procter, China is the number two largest country. For us, it represents about 1% of total sales. So it’s a very significant opportunity for us. So we believe that we are putting in the foundation for what I think is a decade, maybe two decades worth of growth, right. To maintain a 6% plus algorithm, you are going to need to have some large markets contributing for a long period of time. So how big can it be, I think it can be pretty big, but I won’t put a number on it today. We are just starting with Jahwa as of Q1 in ‘19, so we would like to get a little momentum under our belt. Your second question was on why only 6% growth and I would say there is two reasons for that. First is that we are investing both in Southeast Asia and in China, right, particularly in terms of expanding distribution. That is a net negative against organic sales. If we looked at a unit basis, we think there would be faster growth, but we are really ceding that for 2020 and beyond, that’s number one. And number two we are being just a little cautious as it relates to Brexit. So we have a large manufacturing plant in the Southern UK that supports a lot of our international personal care brands.

[Matthew Farrell, President and Chief Executive Officer]

Okay. Jason.

[Jason English]

Thank you for the question. Two quick questions, first on cadence to gross margins, obviously we finished on a slightly softer note, can you give us any directional indication of what the shape of it may look like throughout next year? And then second question, I will just plow them both in now. Can you update us on your M&A ambitions? I know a lot of observers of Church & Dwight had a sense that there maybe acquisitions coming sort of late last year. Clearly, we are into the next year and nothing has happened. Is there reason to have a heightened sense of anticipation that there is something happening sometime in the near-term?

[Matthew Farrell, President and Chief Executive Officer]

I am going to let our attorney answer that second question. So I will take the second question first. So you know that there is no property that is sold in the United States without us being aware of it. So any book that’s floating around, we have it. So we look at everything that comes to market, but we never tip our hand with respect to what we are going to hunt for or if something is imminent. But rest assured, we are very busy looking at opportunities, so that’s as far as we can go. Patrick, are you good with that? Alright.

[Rick Dierker, Chief Financial Officer]

And then your second question on gross margin just the curve, largely because of commodities it’s, I’d say, first half, second half. So the first half will have to be down on gross margin, the second half will be up on gross margin, because of the timing on commodities.

[Matthew Farrell, President and Chief Executive Officer]

Okay.

[Unidentified Analyst]

Okay, thank you. So, following up on a question on guidance and a question on international for Steve, on the guidance 2.5% consumer domestic growth, your commentary was very bullish on pricing and optimistic on lower promotion, some of that 2.5% price mix versus volume, should we expect that to be skewed significantly more towards price mix? If so, how do we square that and the flat A&P against the backdrop where just a couple of your competitors, Henkel and Colgate are reinvesting pretty significantly? Maybe not all the funds in the U.S. market in your categories, but they are investing. P&G is not relenting. So is your spending outlook enough and the price mix optimism, how do you square that with the investment backdrop competitively? Secondly...

[Matthew Farrell, President and Chief Executive Officer]

Do you want to pause there and let us answer that?

[Unidentified Analyst]

Sure.

[Matthew Farrell, President and Chief Executive Officer]

So one of your questions is we have some competitors talking in high-pitched voices about they are going to be investing more money, whether it’s P&G or Colgate or Henkel. We don’t view this as something new. These guys have been spending lots of money the last few years. So I don’t look at this as a sea change. So Henkel, for example, yes, they bought a business a few years ago and they got bigger in the U.S. Obviously, they want to make a big splash into premium laundry and they have with Persil. They have less than a 3% share today. They do have other brands in the mid-tier and in value, but we have been winning in value for the last 2 years and it’s not from them lack of trying. Our share of laundry today is 15%. 2 years ago, it was 14.1%. So we have had huge growth in the last 2 years and it’s defined everyday. So we don’t really view this as something we got to sweat. If you go back to Henkel and mid-tier, one of their brands is all. Two-thirds of all is a sensitive skin consumer. That’s not the lion’s share of our brands. So obviously, it’s something we are going to watch. I would imagine OXICLEAN liquid laundry will get knocked around a little bit up in the premium tier, because of average for Persil, but that’s not something that we think is going to influence our 2019 results.

[Rick Dierker, Chief Financial Officer]

And I would just add to your question on volume versus price mix, probably two-thirds price mix and one-third volume is a good kind of general direction. And then in terms of why you are growing faster is kind of the crux of the outlook on revenue. And 3.5%, we think is a great number relative not just to our history, but also relative to the peer set. We are not going to go lead with a 4% growth when the rest of peers are growing 2%. So is there conservatism, maybe but 3.5% feels right at this point in time.

[Unidentified Analyst]

Great. This one will be quicker. Just on the international horizon, thinking long-term, at what point you are leading with a lot of export-led, distributor-led growth, at what point, as you realize that, do you foresee organically you need to step up like cash investment in those markets to really build your own infrastructure versus going on the back of distributors? Is that something that’s within a 5-year time horizon or is it going to be just more even keel as you go forward?

[Steve Cugine]

Yes. Today, I would say Church & Dwight is 82% sales in the United States, right. We have a big world and that’s why I was joking. I don’t know who put the TROJAN spot in before me, but I really do believe passionately that we have a lot of runway for growth before we really need to put in kind of big assets. And the big assets are usually around SG&A frankly if you’re going to go direct, and we have a model that we prescribe in terms of the size of the business and the percent of SG&A required to make that math work. It works in Germany, but – and that’s really just because there are a few large customers. So, the SG&A as a percentage of sales makes the math work. In other countries like China, we said we’re never going to be able to get to the scale that would be required that say P&G has been able to do over decades of time. So, we’re taking that partner route and we’re going to do that in most of our markets. But what we’re doing is we’re attacking that market through a brand building partnership approach for large markets. And in that case, we see that playing out for years to come. So even in the 5-year timeframe, I think we have a lot of runway in the current model that we have structured so far.

[Rick Dierker, Chief Financial Officer]

I would just add to that, it’s also a pay-as-you-go model. I mean, these guys are doing a great job. We’re not calling out of our EPS or investment like we’re spending millions of dollars in China, that we spent millions of dollars going direct in Germany. That’s embedded in our outlook of 7% to 9%.

[Matthew Farrell, President and Chief Executive Officer]

Let’s stay with the same table.

[Olivia Tong]

Thanks, Matt. Appreciate it. Wanted to talk about pricing. The 30% of the business that you’re planning to price on, are those price plans already in market? If not, when are they coming? And then also are your peers, have they announced their pricing plans? And just on gross margin, mix, tariff, these are kinds of things I think that they’ll continue. So, why does it get better from here?

[Matthew Farrell, President and Chief Executive Officer]

Yes. So, with respect to pricing, when we say 30% of the portfolio is price that’s across all three businesses. It’s U.S., International, and also Specialty Products. Within Specialty Products, it’s the bulk sodium bicarbonate driven by rises in soda ash. As far as announcements go, yes, they have been announced. The 30% has been announced globally, and one of your questions was have competitors moved in the U.S., the 30% they all moved. So, it’s still early days. This is just a measure of price elasticity, but we’ll be watching out over the next 3 months to 6 months.

[Rick Dierker, Chief Financial Officer]

Maybe you want to – Paul, do you want to comment on just the volume elasticities in just early days?

[Paul Wood, Executive Vice President, U.S. Sales]

Everything – generically speaking it’s always tough to take price anywhere, but those are progressing as expected and similar to Matt’s. The price elasticity, the volume, mix that we put on has been positive. As expected, we’re making progress. So, we’re going into this – these are always tough conversations, but I think no surprises and going exactly as we expected and planned.

[Rick Dierker, Chief Financial Officer]

Yes, great. And then, Olivia, your second question was on gross margin and mix continues and tariffs continue. I already talked about tariffs, right. Tariffs are implicitly in there, but we’ve already priced those. Those prices are effective already. And so from a profit dollar perspective, we’re protected, right. If those roll back then great. From a mix perspective, this was a year that we just missed gross margin in a big way, right. I was here a year ago and I told we were going to be flat and then commodities came in a big way, transportation came in a big way, and mix came in a way. So, we planned 2019 a little more conservatively from a mix perspective. So, I feel pretty good up here in February talking about it.

[Olivia Tong]

Got it. And then if I could just pivot over to SG&A, obviously that’s a big bucket of your operating margin delivery for 2019. And SG&A has actually been going up as a percentage of sales the last couple of years. Obviously, last year you got the tax benefit that you put back into the business, but what’s going to drive that SG&A improvement for 2019?

[Rick Dierker, Chief Financial Officer]

Good question. Three things, one, and this is just consistent with our evergreen model. I’ve said it many times. If we can grow our SG&A dollars at half the rate, we can – we grow our top-line. That’s worth about 15 basis points, okay? We’ve done the math there many times. We get about 15 basis points again just from incentive comp, right. Again, we really blew the doors off the cash, and so that is going to be a benefit year-over-year in 2019. And then the third thing, we’re really – working really hard on systems and automation, whether it’s the quality system, whether it’s our PLM system for R&D, our SAP system or whatnot. All these systems that we put in place so that we don’t have to add people that we get more effective and efficient that way. So those are the three reasons.

[Matthew Farrell, President and Chief Executive Officer]

So, here’s a fun fact. So, we have just about the same number of employees on December 31, 2018 as December 31, 2017. And we expect to be the same way December 31, 2019. So, we’re a really lean shop. And one of the beauties of that is it forces the Company to prioritize. We can’t do everything. So, we just focus on high-value activities. Who’s next? Let’s come forward here.

[Andrea Teixeira, JPMorgan]

Thank you. Andrea Teixeira from JPMorgan. So, I wanted to follow up a little bit on the Nielsen data. For the first time actually the fourth quarter kind of tracked the Nielsen data and usually you would be – we are aspired to see you’re growing faster than that. So, I was wondering, if there is an indication of like the gains that you had in distribution in off-track channel kind of like easing off? And kind of related to that also, Amazon, you mentioned that 50% of your e-commerce now is through Amazon, which does make sense in terms of like share. But like there’s a lot of sampling talks about Amazon asking for more support from the manufacturers. So, I wonder if embedded in your guidance there is also some investment within e-commerce?

[Rick Dierker, Chief Financial Officer]

Yes, I’ll take the first one. So, the question is organic versus what Nielsen would say. So, I think organic for us is 4% for consumer domestic, Nielsen was 3.9%. And you’re right, typically we’ve had around, I don’t know, 100 basis points of a tailwind from untracked channels, whether that’s online or club. It was 150 basis points this quarter, so that 4% – 3.9% plus 150, right, becomes 5.40% 15 [ph] and then we had incremental couponing that was already in place 6 months ago for Q4 around one of our laundry brands. And so that part brings it back down because coupons are not in Nielsen. So that brings it back down as well as some SRAs, sales returns and allowances back down to 4%. So that’s how you get there. It looks like it’s the same, but there’s really two moving pieces.

[Matthew Farrell, President and Chief Executive Officer]

Britta, you want to take a swing at the Amazon?

[Britta Bomhard]

Sure. I can talk about investment in Amazon. So, I think with all our marketing investment we actually evaluate efficiency. So, Amazon’s part of the mix, and from that we read rather how effective it is. We don’t do it like specific by any retailer ads. It’s much more about what can we achieve in total results.

[Andrea Teixeira, JPMorgan]

[indiscernible].

[Britta Bomhard]

Of course, at Amazon, I would say what you will see is that effectiveness in their advertising, if you go on their sites, the search engine has been improving. So, with that, yes, we are investing with Amazon in line with the results we’re getting.

[Matthew Farrell, President and Chief Executive Officer]

Okay. Nik?

[Nik Modi, RBC Capital Markets]

Yes. I have one question with 11 parts. Just on the business, I’m just looking at slide number 25 with some of the businesses, the power brands have been struggling. Matt, maybe you can just give us some context on what the challenges are, so we can kind of think about 2019 and some of the drivers?

[Matthew Farrell, President and Chief Executive Officer]

Yes, which – you’re looking at this slide with the 7 out of 11?

[Nik Modi, RBC Capital Markets]

Yes. So vitamins, XTRA, SPINBRUSH, ORAJEL?

[Matthew Farrell, President and Chief Executive Officer]

Yes, okay. Yes, generally, investors are only interested in things that are red or that can hurt you. So, we would generally say 7 out of 11 is a win, that’s a high five year.

[Nik Modi, RBC Capital Markets]

High five. Got it.

[Matthew Farrell, President and Chief Executive Officer]

Okay. So, let’s just bound through them. So, vitamins, for example. So the vitamin category you know when we bought the business, it had 6 competitors, now it has 30. So, it’s very cluttered right now. We continue to grow our consumption year-over-year, but we’re just not growing as fast as the category. What’s happened is that a lot of the pill brands are now moving to gummies. Net they’re about standing still, but gummies is growing faster, right, than the pill category. So, consequently, it looks like we’re losing share. But we’ve been happy about our growth. We grew at 6% consumption in 2018. So, we feel good about that. What’s the next one?

[Nik Modi, RBC Capital Markets]

XTRA?

[Matthew Farrell, President and Chief Executive Officer]

Okay, so XTRA, XTRA has been in decline for a number of years up until this year. So, this year we’re just slightly – a slight decline in 2018. So, we – actually that is a good story for us. That one almost turned green. We almost got to 8%. So that’s terrific and one of the reasons that has done better it’s because of our Odor Blasters campaign. We brought Odor Blasters into the XTRA story.

[Nik Modi, RBC Capital Markets]

Okay. And then just on ORAJEL and SPINBRUSH?

[Matthew Farrell, President and Chief Executive Officer]

Yes. SPINBRUSH has been a tough one for a number of years, again a cluttered category. That’s where we shipped 40% of our units in the fourth quarter. There’s a lot of competition from Colgate, Crest, others. There isn’t a really great story. It’s not that big a business, but we’re still the number one battery-operated toothbrush, but it’s very competitive. What’s your last one?

[Nik Modi, RBC Capital Markets]

And ORAJEL?

[Matthew Farrell, President and Chief Executive Officer]

ORAJEL. You want to take ORAJEL?

[Britta Bomhard]

Sure. So first of all, I have to extend more love to XTRA than actually Matt has done. I think if you look at the laundry category in total in the different price segments, XTRA competes in a very value-priced tier. We’ve actually done significantly better than anybody else in that segment. And as I said, we were so close to being flat. It was minus 10 bps in market share in the end of the year. So, I think that’s a tremendous improvement and if you look at total laundry, an absolutely success. So sorry if I think there is a little bit more passion behind XTRA and we love this brand.

Secondly, I would say on ORAJEL. You might have seen it. We had an FDA change of mind regarding benzocaine and teething products and that has had an impact. We are the number one in teething and in young kids, and as we had to withdraw from that segment that’s why you’ve seen a decline. But all our other ORAJEL businesses, so we have canker sore, you’ve seen the new strips, and the kids toothpaste are doing very well. So, that’s actually, as you know, sometimes regulation can be surprising.

[Matthew Farrell, President and Chief Executive Officer]

Nik, I didn’t hear you thank us for providing that scorecard so that you could ask that question. Okay. Anybody else? Here Caroline.

[Caroline Levy, Macquarie]

Sorry for the repetition, but can we go back to gross margins, because I think going into the fourth quarter, we saw great sales trends, and we were definitely surprised as it sounds as if you were by the margins. My understanding then is more people in the Company are incentivized by cash flows and by gross margin. Is that what affected the pay?

[Rick Dierker, Chief Financial Officer]

Yes, no, what I’m saying is and Matt said, we have a simple incentive comp program, 25% each, but when cash flow maxes out because of great working capital management, the P&L expense for that is split between SG&A and cost of goods sold. And so it’s only 10 basis points or 20 basis points really. I mean, we’re going through to – maybe 20 basis points on the gross margin impact from higher incentive comp.

[Caroline Levy, Macquarie]

Okay. And then on the pricing, you took your pricing up, but the retail price hasn’t gone up, but your income statements affected by what you get from the stores? So, can you just explain on that?

[Rick Dierker, Chief Financial Officer]

Right. So we – but typically in industry if you protect, you price protect for the retailers for a period of time, right, because they have their own pricing policies of, yes, you can do your announcement, but you’re going to protect me for 30 days or 60 days or 90 days, right. And so what we’re saying is there was a price protection program even to our pricing to retailers, but that’s all labs and so in Q1 and going forward, it’s a new retail price.

[Caroline Levy, Macquarie]

Was there forward buying in the fourth quarter, so the volumes –

[Rick Dierker, Chief Financial Officer]

We don’t let – I mean you limit the amount that can ever happen, it’s an immaterial amount. We limit the amount our retailers can order when you have a pre-buy for pricing.

[Caroline Levy, Macquarie]

Okay. And then if I might, on the WATERPIK. Is WATERPIK lower than average margin to the Company at the gross level?

[Rick Dierker, Chief Financial Officer]

No, it’s not. Gross margins are on par with the company. Now with tariffs, it’s a few 100 basis points lower than the company margin, right, but normal operating – normal gross margins are on par with the company.

[Caroline Levy, Macquarie]

So to the extent – and this is my last one, but to the extent that household continues to grow faster plus WATERPIK grows faster, that’s just a negative mix shift that –

[Rick Dierker, Chief Financial Officer]

Well the household business, WATERPIK rolls up in the personal care business, but when the household business grows faster and if the WATERPIK business grows faster with tariffs, then that’s a negative drag on mix. But we were conservative when we planned 2019 was my earlier comment.

[Caroline Levy, Macquarie]

Got it. Thank you.

[Matthew Farrell, President and Chief Executive Officer]

Okay. Lauren, you’re next.

[Lauren Lieberman, Barclays]

Thank you. So first, I just wanted to continue on WATERPIK. I was curious if it’s possible to shift sourcing for WATERPIK to outside of China, so you can just get around the whole tariff issue to begin with? And on top of that, I just want to be clear because I think last quarter when you talked about pricing plans on WATERPIK, I just would have expected it to hurt so much this quarter because the plans were in place and it was discussed. So, is it that your retail partners or your distributors kind of was a longer period of price protection, there was maybe some buying ahead of that pricing going into place that really kind of threw the balance off, because it feels like a lot of the gross margin shortfall in the quarter was related to the dynamic of tariffs and also WATERPIK?

[Rick Dierker, Chief Financial Officer]

Yes, let me answer the second one first. And really Steve Cugine’s Group is doing a great job with WATERPIK, right. They had explosive growth internationally. We’re not changing the price of WATERPIK internationally. But when you have explosive growth internationally and sales are higher than you expected, then all of a sudden, the tariffs which you thought were going to be in inventory are now flowing to the P&L. That’s what happened.

[Lauren Lieberman, Barclays]

Okay.

[Matthew Farrell, President and Chief Executive Officer]

And your other question is with respect to sourcing, so, I’ll let Rick take a swing at that. The short story is, this is a fairly sophisticated product. So, it’s not something that’s easily moved nor do we have plans to move it. So right now, we’re planning on riding things out, but maybe see Rick can give you a little more color on what’s involved at the plan?

[Rick Dierker, Chief Financial Officer]

Yes. So we have a great network of contract manufacturers making the WATERPIK products and we’ve been working with them for a number of years. We are exploring other alternatives outside of China, but as Matt said, it’s a complicated product and we don’t want to jump the gun on that given that the tariff situation is pretty dynamic right now, but we’re doing our homework, so that if they’re here to stay, we will have some options hopefully.

[Lauren Lieberman, Barclays]

And then I just had one more on gross margins. The long-term algorithm, everyone else had like seven questions. So, the long-term algorithm though for gross margin, I just want to talk about kind of some of the contributors because in terms of what’s growing fastest in your portfolio, International, SPD, right, temporary hopefully the tariff situation, retail environment arguably only getting tougher and tougher in the U.S., all these components. Like why is 25 basis points kind of the right algorithm going forward? And also in terms of the closer in promotional environment, you definitely cited the continued more rational environment in laundry as being contributing to your outlook for ‘19. But at the same time, we know you’ve got Henkel with very, very clear objectives. I know you talked about nothing’s changed. These guys never step back. But the numbers are big what they’re throwing around. And again, if we’re talking about promotion being lower and a positive contributor in the near-term, why isn’t that something we should be worried about changing course as we go through ‘19?

[Matthew Farrell, President and Chief Executive Officer]

Look, whenever you build a plan, you build some flexibility, so you have some bullets to fire if something different happens. So, of course, if there’s something unforeseen that happens, we’ll react to that. But I don’t have anything to add to what I said earlier about what our expectations are. We actually think we can pull back further on promotions in laundry in 2019.

[Rick Dierker, Chief Financial Officer]

And the other thing that’s kind of under the radar, but we put a slide up about it was how much progress we’re making with our productivity program. It was plus 80 basis points in 2018, plus 100 basis points is the outlook in 2019. We’re in the early days of reinvigorating our productivity program with incremental dedicated resources in R&D and supply chain. So, we’re doing things that give us the flexibility, the degrees of freedom so we can confidently say 25 basis points is the evergreen model.

[Matthew Farrell, President and Chief Executive Officer]

So while we have a robust continuous improvement program, it’s just that in ‘17 and ‘18, all the cost increases from – ‘18 I should say, outran whatever we could do with continuous improvement. And there was another step up this year with costs, but not as much. It was 250 basis points in ‘18, I’d say 190 basis points negative in ‘19. But as Rick said, we’ve got a lot more juice in continuous improvement, but not enough to overcome that next year. So, pricing is what gets us over the hurdle. But we still see plenty of runway in future to become far more efficient as a company.

[Rick Dierker, Chief Financial Officer]

Okay. Alright, last one.

[Lauren Lieberman, Barclays]

I just had a quick follow-on on the pricing what you just mentioned. If I understand it correctly, you have pricing in the market on about 30% of your portfolio and then you’re considering doing more pricing. Is that a decision you’re going to be making in the next few weeks or months or is that more of a second half decision when we can expect to see more pricing going in the market?

[Rick Dierker, Chief Financial Officer]

Yes. We’ve said – we’ve said in the release, we’re already talking to retailers about categories beyond the initial 30%. As far as when that would hit, we wouldn’t be able to disclose that. But those conversations are happening right now and particularly in the personal care categories.

[Lauren Lieberman, Barclays]

Would it be then more than half of your portfolio in terms of the discussions you’re having right now in terms of price increases?

[Matthew Farrell, President and Chief Executive Officer]

Yes, we’re not prepared to say. We will update everybody in May. Okay. One more question. Okay. You’re the absolute last. Okay Michael, what have we got?

[Michael Steib, Credit Suisse]

Thank you, Matt. It’s a marketing question. It’s about the millennials. Could you share your thoughts about that particular group of the population and specifically what behavior are you observing that are helping you, hurting you, or what are the bigger trends that will affect us over the next 3 years to 5 years?

[Britta Bomhard]

Well, that’s a very philosophical question. So first of all, question is how many of you have millennials in your household already? So first of all, I would say what do we see. I mean, we’ve all heard about it. Maybe a little bit more sheltered lives early on later moving out and forming their own households, a little bit more, how would I say, media consumption very different. I think we’re showing how we’re responding to that in all our different avenues. Overall, I see nothing, but opportunity for us. I think millennials are great, because it gives you opportunity to have a dialog with consumers going forward. And as I would say, we are very fast, agile at adapting, that works in our favor.

[Matthew Farrell, President and Chief Executive Officer]

Okay. We’re going to pull the plug right now. Thanks for coming today, gang. We’re very enthusiastic about 2019. We’ve got a lot of confidence in delivering our plan. Thank you all for coming today.