Church & Dwight Co Inc (CHD) 2022 Chairman, President and CEO Matthew T. Farrell's Shareholder Letter: Navigating Through Volatility

Dear Shareholders,

2022 was another volatile year dominated by significant inflation which resulted in unplanned material, labor and transportation costs that put significant pressure on gross margins. Prior to 2022, we had already raised prices on 80% of our portfolio to offset the inflationary pressures of the pandemic. In 2022, a second round of pricing was taken in several categories including laundry and cat litter. Our organic sales growth was 1.4% reflecting consumer pullback on discretionary purchases of WATERPIK flossers and FLAWLESS hair removal devices as consumers were squeezed by inflation. In late 2022, we wrote off our investment in FLAWLESS, a device business acquired in 2019. In the future, we will stick to acquiring fast-moving consumables. There was also a pullback in VITAFUSION gummy vitamins as many consumers exited the category post COVID, which had artificially inflated demand. WATERPIK, FLAWLESS, and VITAFUSION, which account for approximately 20% of our global sales, were a significant drag on our organic revenue growth. The good news is the remaining 80% of our business grew approximately 4% in 2022. ARM & HAMMER liquid laundry detergent and ARM & HAMMER litter achieved all time high market shares. THERABREATH, ZICAM, and HERO experienced double-digit consumption growth and market share gains. We believe we are set up for success in 2023.

Here are the 2022 results:

• Reported net sales were $5,376 million, a 3.6% increase.
• Organic sales increased 1.4% driven by 0.9% growth in our Consumer Domestic business, 2.8% growth in our Consumer International business, and a 3.7% increase in our Specialty Products business.
• Gross margin decreased 170 basis points to 41.9%, primarily due to higher manufacturing costs. These higher costs were partially offset by our productivity improvements and higher pricing.
• Adjusted EPS was $2.97 per share, a 2% decrease.
• We generated $885 million of cash from operating activities and invested $179 million in capital expenditures resulting in free cash flow of $706 million.
• Total Shareholder Return (TSR) represents the combination of stock price appreciation and dividends. We manage Church & Dwight with the perennial goal of delivering strong TSR to you, our stockholders. Over the past decade, we delivered an annual TSR of approximately 13.3%, which was better than the 10.4% TSR of the S&P 500 stock index during the same period. In the 15 years prior to 2022, we delivered positive TSR each year, often double-digit returns. In 2022, we went backwards and posted negative 20% TSR. This is a disappointment to management, our employees, and our shareholders. Our goal is to start another 15-year positive TSR streak in 2023.

Evergreen Model

Our long-term mission is to maintain our track record of delivering outstanding TSR. Our long-term plan for delivering superior returns is based on what we call our “Evergreen business model” — 3% annual organic revenue growth and 8% annual increase in earnings per share. The 3% annual organic growth is driven by U.S. 2%, International 6% and Specialty Products 5%. The 8% earnings per share growth is primarily driven by 3% organic growth and 50 basis points of operating margin improvement. Our operating margin improvement is dependent on 25 basis points of gross margin expansion and a 25-basis points reduction of overhead costs. Achievement of the Evergreen model influences both our short-term and long-term decision making and promotes financial literacy inside our Company. It is an important part of our success. The mid-point of our 2023 Outlook calls for 3% organic revenue growth and 2% EPS growth. 2023 EPS is burdened by a deliberate incremental investment in marketing, normalized incentive compensation, and higher interest expense. We expect to return to our evergreen algorithm in 2024 and beyond.

Key Drivers of TSR

The following are the key drivers of our success:

1. A Diversified Product Portfolio
2. Focus on Power Brands
3. High International Growth
4. Animal Nutrition Growth Opportunity
5. Winning Online
6. Focus on Gross Margin
7. Growth through Acquisitions
8. “BEST IN CLASS” Free Cash Flow Conversion
9. Superior Overhead Management
10. Simple Incentive Compensation

Sustainability

Sustainable business practices are especially important to our Company, our employees, our retailers, and our consumers. Church & Dwight has been a friend of the environment since the early 20th century. In 1907, we began using recycled paperboard in our packaging. In the 1970’s, Church & Dwight was the only corporate sponsor of the first Earth Day and the first to remove phosphates from laundry detergent. We have planted millions of trees in the Mississippi Valley through our partnership with the Arbor Day Foundation. Today, 100% of our global electricity is derived from renewable resources. We are committed to doing our part for the environment and are committed to the Science-Based Targets Initiative (SBTi). SBTi is focused on reducing Greenhouse Gas Emissions to help keep global climate change safely below the 2-degree threshold, aligned with the Paris Agreement goals. Our continued improvement with regards to Sustainability and Environmental, Social, and Governance (ESG) is being recognized by the outside world as well. Our MSCI rating, a 3rd party measurement of a company’s management of financially relevant ESG risks and opportunities, has improved over the last three years, climbing to a AA rating.

Culture

Our “secret sauce” is the Church & Dwight culture. We describe ourselves as roll-up-your-sleeves company with a high aptitude and an underdog mentality. Church & Dwighters exhibit an absence of ego and ‘wear many hats’ because our responsibilities often extend beyond our job descriptions. We make decisions based on “What is best for Church & Dwight”, putting personal goals second.

We emphasize speed in doing our work because speed of execution determines the winners and the losers in the consumer products industry. By obsessively focusing on the consumer experience, our employees discover insights that lead to new products and brands that consumers love. Our employees’ willingness to pitch in and help one another makes teamwork a hallmark of Church & Dwight’s culture. Church & Dwighters have experience, good instincts, and a zeal to “get the facts” to make data driven decisions. Our employees are the backbone of our great Company. At Church & Dwight, we strive to create a culture of belonging. We strive for our workplace to be a place where people matter and to reflect the diverse consumer base that we serve. Through our Diversity & Inclusion Advisory Council, our Company has made clear our support for racial equality and the importance of diversity both inside and outside our walls. The Church & Dwight Philanthropic Foundation (the “Foundation”) focuses on helping to create equitable and inclusive opportunities and advancing environmental preservation, two causes that are important to our Company. At Church & Dwight, we are focused on creating an inclusive, stronger, more resilient company while contributing to a better, more sustainable world.

2023 Outlook

We expect reported sales growth to be 5-7% and organic sales growth to be 2-4%. We expect gross margin expansion of 100 to 120 basis points, and an incremental increase in marketing dollars with a target of 10.5% of revenues. We expect cash from operations to be approximately $925 million. We continue to invest in the future. With regards to capital expenditures, in 2022 we began a capacity expansion for laundry, litter, and vitamins. We expect our CapEx spending to peak at $250 million in 2023 and $180 million in 2024. In 2025 we plan to return to historical levels of 2% of revenues.

I would like to thank all employees of Church & Dwight for the personal sacrifices that they made to deliver our business results in 2022.

Matthew T. Farrell
Chairman, President and Chief Executive Officer

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