Q3 2023 Church & Dwight Co Inc Earnings Call

Participants

Matthew Thomas Farrell; President, CEO & Chairman; Church & Dwight Co., Inc.

Richard A. Dierker; CFO, Executive VP & Head of Business Operations; Church & Dwight Co., Inc.

Andrea Faria Teixeira; MD; JPMorgan Chase & Co, Research Division

Anna Jeanne Lizzul; Research Analyst; BofA Securities, Research Division

Christopher Michael Carey; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Dara Warren Mohsenian; MD; Morgan Stanley, Research Division

Filippo Falorni; VP; Citigroup Inc., Research Division

Jason M. English; VP; Goldman Sachs Group, Inc., Research Division

Javier T. Escalante Manzo; Research Analyst; Evercore ISI Institutional Equities, Research Division

Jon Robert Andersen; Partner & Research Analyst; William Blair & Company L.L.C., Research Division

Lauren Rae Lieberman; MD & Senior Research Analyst; Barclays Bank PLC, Research Division

Olivia Tong Cheang; MD & Research Analyst; Raymond James & Associates, Inc., Research Division

Peter K. Grom; Director of Equity Research & Analyst; UBS Investment Bank, Research Division

Rupesh Dhinoj Parikh; MD & Senior Analyst; Oppenheimer & Co. Inc., Research Division

Stephen Robert R. Powers; Research Analyst; Deutsche Bank AG, Research Division

Sunil Harshad Modi; MD of Tobacco, Household Products and Beverages & Lead Consumer Staples Analyst; RBC Capital Markets, Research Division

William Bates Chappell; MD; Truist Securities, Inc., Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to Church & Dwight's Third Quarter 2023 Earnings Conference Call. Before we begin, I have been asked to remind you that on call this, 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 details in the company's SEC filings.
I would now like to introduce your host for today's call, Mr. Matt Farrell, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Matthew Thomas Farrell

Okay. Thank you, operator. Good morning, everybody, and thanks for joining us today. I'll begin with a review of Q3 results. And I'll turn the call over to Rick Dierker, our CFO. When Rick is wrapped up, we'll open the call up for questions.
So let's begin. Q3 is the fourth consecutive quarter of solid results beginning with Q4 2022. Reported revenue was up 10.5%, which exceeded our 8% outlook. Organic revenue grew 4.8%, also exceeding our 4% outlook. It's worthy of note that our global consumer business posted 5.8% organic growth, which exceeded our expectations. Going the other way, our SPD business accounted for 1 point of negative growth.
Gross margin expanded 270 basis points and marketing as a percentage of sales increased 80 basis points to 11.5% of sales. Adjusted EPS was $0.74, which is $0.08 higher than our $0.66 EPS outlook, and that result was driven by higher-than-expected sales growth and the gross margin expansion. It's important to call out the 2.7% positive volume growth in Q3. It's the first in 8 quarters, and our expectation is that positive volume growth will continue in Q4 to finish out the year.
But we continue to grow in the online class of trade. 17% of our global sales were purchased online in Q3 compared to 16% in the year-ago quarter. Just a few comments on the economy. Unemployment remains low in the U.S. and in most of our major international markets. Unemployment is a stat that we closely watch.
Regarding the health of the consumer household, balance sheets are more stretched as savings are lower and credit card debt is higher. Student loan repayments are restarting. Mortgages and auto loans are more costly. Why? Because of higher interest rates and higher oil may lead to higher gasoline prices. So a higher cost environment leads to trade down as consumers look for the best value, especially in our household categories, and we are well positioned for this trade down given that 40% of our portfolio is value products.
Now I'm going to comment on each business. First up is the U.S. The U.S. consumer business posted strong 5.5% organic sales growth of which 3.6% was volume-driven. 7 of our 14 power brands held or gained market share in the quarter. And for context, the brands that grew share represent 65% of our U.S. sales.
Private label is another stat that we closely watch. The good news here is the weighted average private label market share in our categories is stable. Now I want to look at a few of the more important categories in the U.S., starting with laundry. ARM & HAMMER liquid laundry continues to see consumption growth driven in part by the continued trade down to value brands and by media support behind our new Give it the Hammer advertising campaign which celebrates the great value that ARM & HAMMER offers in tough economic times.
ARM & HAMMER liquid laundry detergent held share in the quarter as the category grew 5%. We're now at 14.3% share, and XTRA our extreme value offering grew consumption 6.1% and increased market share to 3.8%. Regarding new products, we launched a new unit dose form of detergent, ARM & HAMMER power sheets laundry detergent as the first laundry detergent sheet from a major brand in the U.S.. Power sheets is a convenient new unit dose form of detergent that delivers an entirely new laundry experience. It is mess-free, it's lightweight and eliminates plastic bottle waste while delivering the trusted ARM & HAMMER a powerful cleaning performance that consumers have come to rely on and love.
We launched the product online in August. In September, Power Sheets was the #1 laundry detergent item during Amazon's September Prime Day event. So we're off to a great start with this innovation, which will roll out even more broadly in 2024. Now litter, ARM & HAMMER litter also continues to perform extremely well with 11% growth outpacing the category, which was up 8% and growing share to almost 25%. Now consumers continue to choose ARM & HAMMER litter offerings. We have steady demand for our premium litter offering, which is a black box. But our orange box, in particular, is driving the growth as it offers a great value for the cost-constrained cat owner.
Our new ARM & HAMMER hardball lightweight clumping litter is off to a solid start as distribution expands in the lightweight segment where we are underrepresented today.
Turning now to personal care. BATISTE grew consumption 14% in the quarter, as we continue to build dry shampoo awareness and drive household penetration. The dry shampoo category and BATISTE have room to run as we continue to invest to build awareness and drive trial especially through sampling.
HERO, which was acquired last October, captured the #1 market share position in the total acne treatment category. In the acne patch subcategory, MIGHTY PATCH is over 50% share. Retail distribution continues to grow, and we still have room to run as we expand across all classes of trade. The HERO team is doing a spectacular job growing this business. There continues to be a great deal of buzz here at Church & Dwight around the HERO brand and its future growth potential.
Similarly, THERABREATH, which was acquired in 2021, is performing extremely well and has been gaining share at a rapid pace. In Q3, THERABREATH took over the #1 share position in the non-alcohol segment with almost a 29% share. Distribution of THERABREATH has more than doubled since the acquisition date and we expect this brand to be a long-term grower for Church & Dwight.
Regarding a couple of businesses that depressed our results last year, WATERPIK continues to stabilize with Q3 coming in close to plan similar to Q2, WATERPIK all channel consumption actually was up slightly in Q3. Turning to gummy vitamins. While VITAFUSION was close to our expectations in the first half. Our consumption was down 11% in Q3 and partly due to distribution losses at many retailers due to our supply issues in 2022. And our job now is to win back retailer confidence and then regain lapsed consumers.
Next up is international. Our international team is doing a great job delivering organic sales growth of 7.3% in Q3, driven by broad-based growth in most of our subsidiaries and our Global Markets Group. Volume contributed 2.3% of the growth, and this was led by STERIMAR a nasal hygiene and OxiClean. Both STERIMAR and HERO are gaining distribution across our international markets, and we expect more to follow.
And finally, Specialty Products. Organic sales decreased 10%, but this is largely due to one product line called MEGALAC, which is being hurt by inexpensive imports. Excluding MEGALAC, the remainder of SPD delivered positive growth of 2%. I'm going to wrap up by saying we just closed out a strong October and we expect positive volume growth for a second consecutive quarter in Q4.
We raised our reported sales outlook to reflect the strength of consumer demand for our products, while maintaining our full year EPS outlook.
Now when we are performing well going into the fourth quarter, it's an opportunity to invest in the business. This is a long-standing practice of reinvestment at Church & Dwight and is well understood by our long-term shareholders. We take a long view with respect to the health of the business. Our business model is working. Our value offerings are performing well as our premium offerings. Innovative new products are contributing to our growth and we have one of our best new product lineups coming in 2024. Acquisitions are on track and significant cash generation positions us to continue to add TSR-accretive brands to our portfolio. And now I'm going to turn it over to Rick to give you some color on Q3 and the full year and the investments we'll be making in Q4.

Richard A. Dierker

All right. Thank you, Matt, and good morning, everybody. We'll start with EPS. Third quarter adjusted EPS was at $0.74, down 2.6% on the prior year. As Matt mentioned, the $0.74 was better than our $0.56 outlook, primarily due to higher-than-expected sales growth and gross margin expansion.
Net sales were up 10.5% and organic sales were up 4.8%. Over half of our organic growth in the quarter was driven by volume. The total consumer business was up 5.8% organically. Our third quarter gross margin was 44.4%, a 270 basis point increase from a year ago, primarily due to improved pricing, volume, productivity and the impact of the HERO acquisition, net of the impact of higher manufacturing costs.
Let me walk you through the Q3 bridge. Gross margin was made up of the following: positive 140 basis points impact from price/volume mix, positive 120 basis points from acquisitions and a positive 160 basis point impact from productivity, partially offset by a drag of 150 basis points due to inflation.
Moving to marketing. Marketing was $27 million, up year-over-year. Marketing expense as a percentage of sales was 11.5% or 80 basis points higher than Q3 of last year. For SG&A, Q3 adjusted SG&A increased 310 basis points year-over-year primarily due to higher incentive comp from improved business performance, SG&A related to the HERO acquisition and investment spending.
Other expense all-in was $21.8 million, a $2.4 million increase due to higher average interest rates. For the full year, we now expect other expense of approximately $95 million. For income tax, our effective rate for the quarter was 24.1% compared to 20.2% in 2022. An increase of 390 basis points as the prior year rate included the benefit of a nonrecurring state tax reduction. We continue to expect the full year rate to be approximately 22%.
And now to cash. For the first 9 months of 2023, cash from operating activities was $795 million, an increase of $261 million due to higher cash earnings, including the positive impact from recent acquisitions and improvements in working capital.
Turning to the full year outlook. We now expect the full year 2023 reported sales growth to be approximately 9%, up from our previous outlook of 8%. We continue to expect organic sales growth to be approximately 5%. We now expect full year reported gross margin to expand 210 basis points, up from 200 basis points.
This is an encouraging trend as we continue to move closer to restoring gross margins to pre-COVID levels. We continue to expect a double-digit percentage increase in gross profit in full year 2023.
Looking at inflation, we continue to expect around $120 million of higher manufacturing costs in 2023. This is well below what we have experienced the last couple of years. While many commodity prices remain below prior year levels, resins and oil-based commodities are a bit higher. We continue to expect full year marketing as a percent of sales to be 11% and we continue to expect full year SG&A to be higher in both dollars and as a percent of sales compared to 2022.
SG&A is expected to be higher than our previous outlook driven by incremental R&D investments, higher incentive compensation given our strong performance a bad debt reserve related to 1 specific customer situation. As in past years, when we have strong business performance, we invest for the future, our investments will focus on driving future growth with higher marketing dollar investment R&D investment, including clinical studies and accelerating product registrations in international markets as well as driving efficiency, including investments in automation and technology.
We continue to expect full year adjusted EPS growth to be approximately 6%, and as a reminder, our EPS guidance includes the step up of marketing that we've been talking about and higher SG&A. We continue to expect full year cash flow from operations to be approximately $1 billion. Our full year CapEx plan is now expected to be approximately $230 million as we continue to make capacity investments, and we expect to return to historical levels of CapEx about 2% of sales by 2025.
Moving on to Q4. We have a strong outlook and expect reported sales growth of 5% and approximately 4% for organic, with volume contributing 1% or better. Organic growth rate in Q4 reflects positives from HERO, Litter and THERABREATH and negatives from not repeating some low-margin laundry promotions.
We expect gross margin expansion significant increase year-over-year in both marketing and SG&A and marketing is expected to be in excess of 14% in Q4. Adjusted EPS is expected to be $0.63 per share, a 2% increase from last year. So to summarize, a strong 9 months of the year behind us, we saw the inflection point of volume growth as expected, and we are spending on marketing and investments to build momentum for 2024 and beyond. And with that, Matt and I would be happy to take questions.

Question and Answer Session

Operator

(Operator Instructions)
Your first question comes from Rupesh Parikh from Oppenheimer.

Rupesh Dhinoj Parikh

So just starting with the Specialty Products segment, how are you thinking about the business in the coming quarters. So this quarter, obviously, a larger decline. Just wanted to get a sense if we see weakness for a few more quarters until you lap the issue that you cited.

Matthew Thomas Farrell

Yes, it's going to be -- Rupesh, it's going to be a draggy in Q4. So when we call a 4% number for organic for Q4, that's net of SPD, which kind of reduces the contribution from the consumer business. But -- so yes, at least 1 more quarter where we're going to be down maybe in Q1 as well.

Richard A. Dierker

Yes. I think the nuance, Rupesh, also is when you look at like a 4% growth rate in Q4. When we talk about investing, many times, we're talked about SG&A or marketing. Sometimes we're doing really well, we also look at customer profitability. We take -- we get ahead of it and call unprofitable or low profit promotions in some of our businesses like laundry.

Rupesh Dhinoj Parikh

Great. That's a good segue to my next question. So organic sales growth was maintained for the full year. So it sounds like those lower-margin laundry promotions is what may have limited organic sales growth increase for your -- for the full year. Is that correct? Or is there anything else weighing on the lack of organic detail?

Matthew Thomas Farrell

That's true. Last year in the fourth quarter, we had -- looking back now, we had a lot of promotions that we thought were not profitable. So we called them. And so they're not going to be in place for this fourth quarter, which obviously results in a lower volume.

Rupesh Dhinoj Parikh

Great. And maybe just a follow-up, just related to -- is there a way to quantify the impact of those? The lack of running those promotions?

Matthew Thomas Farrell

Easier to do that when the quarter is over and do right now. Now it's more conjecture, but it is a direct.

Operator

The next question comes from Bill Chappell from Truist Securities.

William Bates Chappell

Can you talk a little bit about kind of where we are for both HERO and THERABREATH in terms of as we're moving into next year, trying to understand the distribution, is it where you expect to be? Or do we have tougher comps for both of those businesses in terms of growth in year 2?

Matthew Thomas Farrell

Remember, in year 1, let's say, is 2023, when we were gaining distribution was throughout the year. So we'll have full year benefit of all the distribution gains in 2024 versus '23. So that's a positive. So naturally, the comps are more difficult once you've got in place. But the demand for the product is surprising us. In fact, the demand has been -- exceptional wherever we've launched it. The second thing is we'll be launching Hero in dozens of countries next year through our Global Markets group. And that will happen throughout the year.
So that's not a Jan 1 thing, but we see a lot of opportunity there as well. Now THERABREATH, THERABREATH was acquired in December of 2021. And they had far more distribution already than HERO did when we acquired THERABREATH. We did expand that in 2022, but I'd say 2023 versus 2022 is less benefit from distribution gains in comparison to HERO. What's happening is because the demand for THERABREATH and the consumer is voting in favor of their breath, what's happening is retailers are willing to give us more shelf space and we fully expect to get more shelf space when the resets happen in 2024.

Richard A. Dierker

Yes, Bill, that's the big difference for 2024. In 2023, we got TDPs. We got new retailers, new stores. Now it's all about shelf space and expanding that footprint and that's what's happening.

Matthew Thomas Farrell

Yes.

William Bates Chappell

Got it. And then second, just trying to understand the spend or the accelerated spend in 4Q to kind of keep your EPS guidance in check. Is that more SG&A? Because it does sound like you'll have some your benefit on gross margin by just pulling back on some of the promotions? Or is there a -- is it -- will SG&A and gross profit in terms of kind of how you're trying to reinvest in the business to keep things going in '24?

Richard A. Dierker

Yes, Bill, it's mostly SG&A. Some of it is higher incentive comp, but many of it is the investments we've talked about these last few quarters and just more of that. I think HERO is a good example. As we fast forward product registrations, we're going to be in now 40, 50 new countries pretty rapidly because we're able to do that. So we think all these investments are great, and they're going to help us in 2024 and beyond.

Operator

The next question comes from Chris Carey at Wells Fargo Securities.

Christopher Michael Carey

One quick follow-up on laundry and then a broader question. The promotions that you're talking about, has that been occurring over the course of the year? Or was that something new that you did because you're responding to the environment or you saw an opportunity because you're tracking ahead? I'm trying to understand if we're just lapping something or this is a new decision. So apologies if I missed that.

Matthew Thomas Farrell

These are promotions that happened in Q4 '22, that didn't happen in Q3 or Q2 '22, so it was isolated to Q4 last year, and the decision to pull back on those is because we can. And besides as I said earlier, they weren't the best payback. So we said that's a good time not to repeat them.

Christopher Michael Carey

Okay. That make sense. I know we'll get guidance on 2024 next quarter, but you have given kind of high-level thoughts. As I think about this, volumes positive. You still have gross margin momentum behind productivity inflation is easing. I think you've kind of taken a view on that and you rebased investment spending this year. Is there anything that we should be just thinking about perhaps less obvious going into next year? And just maybe any kind of like high-level thoughts about how you feel about the business and your momentum going into 2024.

Matthew Thomas Farrell

Well, Chris, we feel great about the business. You see the kind of numbers we just posted in Q3. And the gigantic number, a 5.8% organic growth for the consumer business. And then when thinking about Q4, we got another 4% organic growth, and that's got a drag from SPD as well. And we expect the second consecutive quarter of volume growth. So we hope to start stringing these together. We're going to have volume growth quarter -- each quarter for the next 4 or 5 quarters. Gross margin, you're right, as Rick said, well, if we hit the number that's in the box right now, we'll be 150 basis points short of our high watermark for gross margin, which was 45.5%, back in 2019.
So we would expect to get more of that back next year, not all of it, of course, but we expect gross margin expansion. And one of the good things about this year is we came all the way back with marketing as a percentage of sales. Last year, we're 10%. We started the year saying, "hey, let's try to get to 10.5%, and then we're all the way to 11%. So that's behind us now. So another thing I said was we have one of our best new product pipelines coming in 2024, and it's pretty broad-based. So we got -- there's a lot of things we feel real great about. And so we're very confident in the strength of the business.

Operator

The next question comes from Steve Powers from Deutsche Bank.

Stephen Robert R. Powers

Great. A question -- first just on the fourth quarter guidance -- I guess, two questions actually. The first one, maybe my numbers are (inaudible), but it feels like you kind of need to do $0.64, even $0.65 in the fourth quarter to be up to $3.15 based on what you've done in the first 9 months. Just wanted to see if I'm missing something in that math? And then as we talk about that, Rick, just the gross margin, it implies about a couple of hundred basis points of gross margin expansion. I don't know if you're able to kind of preview how you think the bridge between price volume and productivity and inflation were kind of balance out in that 20 basis points.

Richard A. Dierker

Yes. No problem on the first one, Steve, but if you could repeat the second one, it would be helpful, you're breaking up.

Stephen Robert R. Powers

Sorry. I think it's about 200 basis points of gross margin expansion implied in fourth quarter. Just how you think that's going to kind of shake out between the benefits of price and volume versus productivity offset by the lingering inflation.

Richard A. Dierker

Yes. Got it. Okay. Well, the first one is on EPS, I know we've -- if you take a big step back, we've looked at -- we typically repurchased shares on a annual basis to offset share creep. We didn't do that this year. We may get ahead of that in 2023 for 2024. So that and rounding will probably get you most of the way to the difference on your EPS for Q4. The second thing on your gross margin bridge questions, I would say, of course, the price component of the price volume mix component, the gross margin bridge comes down a little bit more in Q4, the price piece. But the volume and mix piece are going to go up because we used to have acquisition by itself, which was HERO and that gets blended into kind of the mix of the portfolio. So I would probably say in Q4, a big tailwind from price/volume mix, a little bit lower productivity just because it's timing and those projects are choppy. And then, of course, we go backwards a little bit on manufacturing costs and inflation year-over-year. So those are kind of the 3 pieces to -- the main 3 pieces for gross margin bridge.

Stephen Robert R. Powers

Okay. That's perfect. And if I could just -- I guess this is more -- this is not a '24 question, it's more a philosophical question. So if we go back to 2021. And coming into '22, the original expectation was that evergreen was on the table. It didn't play out that way, obviously. But as you think about that, if we had grown evergreen in '22 and '23, we'd be looking at $3.50 thereabouts of earnings in '22 not $3.15. So I guess the question is, as we look forward, are you guys approaching the future trying to claw back that $0.35 over time? Or have we sort of written off '22 and we're kind of philosophically running Evergreen from here?

Matthew Thomas Farrell

Well, Steve, I mean everybody -- any public company is -- with a question like that, is going to say, hey, 2022 was -- and it was the last year of a 3-year COVID event. In 2023, there were 3 things that hit us. It was WATERPIK and vitamins post COVID and then FLAWLESS. So the business then gets to rebaseline. WATERPIK, vitamins and FLAWLESS in 2023, and then we kind of grow from there. So I think that's the simplest way to think about it. Where 3 isolated incidents that affected us in 2022, we've got our eyes open about that. Those businesses Vitamin has certainly stabilized. Pardon me, WATERPIK has stabilized. Vitamins is still declining, but we have a path back to stabilize that business next year.

Operator

The next question comes from Dara Mohsenian from Morgan Stanley.

Dara Warren Mohsenian

So can you give us a little bit more of an update on the VITAFUSION business. You obviously mentioned the weak retail sales. We can see in the scanner data with the distribution losses. Do you have visibility that can snap back going forward in 2024 that you can, in fact, regain shelf space based on your plans and perhaps that business can return to growth at some point? And maybe just in general, help us understand your plans on that business for 2024.

Matthew Thomas Farrell

Yes. Well, it's kind of a simple problem. We weren't able to supply in 2022. So we got punished by retailers in 2023, losing shelf space, a little interest in taking new product launches, et cetera. And so consequently, you lose shelf space, you're going to lose consumers. And so now the whole game is win in the resets in 2024, which now do we have a lot of visibility to that. We have some right now. We'll have more when we talk to everybody in January. But the fight is really to win back more shelf space in 2024. Some good news with respect to vitamins. We are the #1 gummy vitamin on Amazon, and we have been doing extremely well there this past year. So that's going to be a bigger focus for us going forward as well. But we do think it's just execution on blocking and tackling, Steve, to get that business on firm footing.

Richard A. Dierker

And meanwhile, we're investing in a big way on marketing to drive awareness to new packaging to pop at shelf and displays, all those tactical things that you can do as the momentum will build back.

Dara Warren Mohsenian

Okay. Great. And then you touched on that you think you're well positioned for consumer trade down. Are you actually seeing that? And then maybe also, can you just give us a sense of the promotional environment you're seeing? Obviously, you touched on the laundry issue specifically, but just in general, the promotional environment.

Matthew Thomas Farrell

Yes. Look, the trade down, as I mentioned in my opening remarks, in the litter class of trade or a litter category. We have a black box and an orange box and black box is premium, the orange box is value. And so consumers are staying within the franchise trading that from black box to Orange box, and it shows in our shares. So our shares are almost like 25% in litter. Your other question was more broadly with respect -- let me comment on laundry as well. I mean, laundry has -- we've been doing trade down since the beginning -- I guess, the middle of 2022 quarter after quarter. And this past quarter, liquid laundry grew with the category, but extra you see has started to grow. And that, again, is a sign of the times. It's a deep value laundry detergent. So once again, think our portfolio was well positioned for a difficult economic environment.
Of course, as long as unemployment stays low, people have jobs. We think that it's going to -- people are going to be discerning when they go shopping, but they have money in their pockets to shop. So I think the best value is going to win. When it comes to the promotional environment, liquid laundry, just to give you some numbers, round numbers, if you look at liquidity sold on deal in Q1, it was around 32%. And in Q2 it's like 33.5% and Q3 was 35%. So liquid laundry has been creeping up during 2023, so it's around where we expect it to be pre-COVID. So it's kind of kind of all the way back. Same is true for unit dose. If you look at unit dose sequentially Q2, Q3, 31% sold on deal in Q2, 36% in Q3.
Now Litter is a different story. I think it's largely because of the difficulties that one of the competitors has had and has consequently pulled back promotion. So the trend for litter Q1, Q2, Q3 is like a 15% in Q1, 14.5% in Q2 and 14.2% in Q3. So that kind of gives you a sense for the trend. I'd say in vitamins, it sequentially is up 200 basis points from Q2 to Q3. There are some competitors that are spending 55% sold on deal. I can't make a lot of money that way, but it definitely does go to grab volume. But I think those 4 categories liquid laundry, unit dose, litter, vitamins give you a sense for what's going on in the promotional environment, Steve.

Operator

The next question comes from Lauren Lieberman from Barclays.

Lauren Rae Lieberman

I have a question about HERO. Hey, so in the past, I think you've talked about being focused on sort of acne-related categories with HERO. But we've seen some impressive talks about you expanding into retinol and eye cream and [bombs] and stuff. So just curious kind of where you stand on Beauty overall. And just perspective there and start there.

Matthew Thomas Farrell

Yes. Well, look, our #1 objective is to win in acne and it's on acne patches and also related products to acne and that's pretty broad. This is a really, really big category. The opportunity is not just on launching in dozens of countries in 2024 with HERO. So we think there's still so much runway. And there still needs to be greater awareness of the patch form which is another reason why we want to make sure we don't get too much of our focus outside the patch category. Now HERO is a fabulous brand. It resonates with consumers of all ages. We definitely do have the right and the permission to go to categories that are adjacent to acne. And yes, that could be in our future. But in the near term, the focus is on patches.

Lauren Rae Lieberman

Okay. Great. And then just sticking with HERO, and maybe my math is wrong, but just with it moving into organic, I guess, in mid-October, it looks like it should add 2 to3 points to organic sales growth in the fourth quarter. So I just wanted to make sure that was sort of roughly the right order of magnitude for thinking about this. And then just ask about sort of what that implies for everything else kind of decelerating sequentially? Frankly, is it conservatism? Or is there something you're seeing that would support that modeling that deceleration?

Richard A. Dierker

Lauren, it's Rick. I would say our math does not lead to 2 to 3 points of organic contribution from HERO. I remember there was a sell-in to new retail distribution in Q4 last year for HERO. So from a comp perspective, it just doesn't give you that by much that you're calculating. I think overall, we think consumption is still really strong in Q4. And October was off to a great start. I think Matt mentioned it was one of our highest shipment months ever in the history of the company. So we feel really good about our momentum right now. And we've made some choices to discontinue some promotions, and I think that's what kind of the nuance is for folks that they weren't expecting.

Matthew Thomas Farrell

Yes. And Lauren, it all depends on your perspective. People depends on the narrative. Do you want to look at sequential Q3 to Q4. Do you want to be just a year-over-year and look at comps and said, what was in last year versus this year. But we have total confidence in where we sit right now with respect to the demand for the products as evidenced by such a strong October. So yes, we think we've got a good number for Q4. And sometimes people accuse us of being conservative, but one thing is for sure about Church & Dwight is we take the long view. We don't have short-term thinking. And I think that anybody listens to the call, and certainly our long-term shareholders understand that we're always palms up and try to make sure create understanding for not to suit analysts, but for our shareholders. And we're really confident not only in Q4 but in our future.

Operator

The next question comes from Anna Lizzul from Bank of America.

Anna Jeanne Lizzul

I wanted to ask on the higher marketing and investment spend. I think some of us were expecting you could potentially see a benefit in market share in certain categories like litter from a competitor's disruption and maybe that would provide some leverage on the investment side. So I was wondering if you could talk more about where you are investing in terms of marketing spend and where you think you need the most support among your categories?

Matthew Thomas Farrell

Yes. You may be referring to -- so litter, we do some help from litter sales line in Q3 and some of that will continue in Q4. But there's lots of opportunities to invest when it comes to marketing. It is not just the advertising. Remember, we had some new products we just launched like the laundry sheets. But sampling is another avenue for us. We've had remarkable conversion rates sampling of THERABREATH. We think that also can be true for laundry sheets is nonworking media as well that we can get after in Q4 to prepare for 2024. Over in R&D, there's clinical trials that we can start earlier than expected for 1 product in particular that we're looking at. There's just a whole list of things that we can go after. But generally, we're going to -- we're always going to be supporting the businesses that need to help, so that would be vitamins, for example. But then you want to feed the strong as well. And we've got a lot of businesses that are on fire right now. So we'll just pour it on in Q4.

Operator

The next question comes from Andrea Teixeira from JPMorgan.

Andrea Faria Teixeira

I wanted to go back to the 4% organic guide for the fourth quarter. We'll take another swing on that one. You said the 50-50 volume rig would be even higher now in the fourth quarter. So it does imply a really much bigger step-down in pricing. And I understand that with the discontinuing of some of the nonprofitable promo that you had, that would imply that obviously, you had pricing realization higher. So I was trying to see what is implied in your guide? And then related to that also in terms of pricing? And then related to that, also, how long do you think it's going to take? Because it seems as if you're starting to lap those promos and reducing those promos at the trade. How long do you think this is going to linger for another 3 quarters into 2024?

Richard A. Dierker

Okay. Andrea. So I guess, first of all, in my prepared comments, I said we thought Q4 would be 1% or better on volume. So not half. In Q3, it was better than half. But in Q4, we think it's 1% or better. And part of that is because of some of the promotional pullback and discontinuing promotions like I talked about. We don't think that continues at all into 2024. Those are some discrete promotions we chose to not repeat in Q4. That's the simple story.

Andrea Faria Teixeira

And then any other -- one of the things if we step back then strategically, if you have always told us, right, you have 40% of your portfolio in value which implies, obviously, the other [6] somewhere between midyear to above. And of course, the consumer is moving down. Is that like what we've been seeing now is that probably now we're starting to feel it, right? It's like it's a risk to the bottom in the sense that we'd rather not have consumers trade down in general to you as well because it's like at the end of the day, you want to create growth and you want to work with your retailers to create growth in the category for innovation.
So I was wondering if you can kind of like go back to both laundry and litter because you have on those categories go across, and it's great. But in some ways, you also want to stop that movement in the sense that otherwise it's going to lower the total value of the category. So can you comment a little bit more on those 2 specific as well as the other one, which is the vitamin situation that I thought that at this point, you would have lapped a lot of that impact and that retailers would give you back some shelf resets. And if you can comment on that for shelf resets into spring for vitamins next year.

Richard A. Dierker

Okay. So I would take that in 2 parts. And I'll start with the second one. On vitamins, we kind of just talked about that recently over the last quarter or 2. It's going to take a full 12 months to get back into the shelf position that we want to. And all those tactics we would talk through is what's going to enable us to do it. So I know it feels like it's been a long time, but we've only been talking about that relatively for a short period of time.
Your second question on trade down. I think Matt and I have been really clear over a long period of time, the company does really well. Our brand portfolio does really well in good times and in bad times. And the value brands, of course, do better. But even our what you would call our mid-tier premium. It depends what category you're in. And most of our premium brands like THERABREATH or HERO are doing astonishingly, just fantastic. Yes, we do have some rise of private label in a couple of categories, but in general, consumption is strong for the quarter and for October. That's what I would tell you.

Matthew Thomas Farrell

And Andrea, feel great about having this sort of portfolio that gives consumers a choice and can trade down. The thing you have to keep in mind, too, is if you look at back at that ARM & HAMMER liquid laundry, it has grown share just about every year that I've been here, in good times and in bad times. So it's not simply -- yes, it gets accelerated when you have an economic downturn. But what happens is people trade down, they discover the brand and they stick with it. That's true for ARM & HAMMER laundry. Now if you go over to litter, trade down between black box and orange box great keeping consumer in the category. And certainly, when the economy recovers, people will trade back up to the black box.

Richard A. Dierker

And just one comment for everybody as we move forward because we're starting to get a little tight on time. Let's just try to keep it to one question and maybe one follow-up question.

Operator

The next question comes from Olivia Tong from Raymond James.

Olivia Tong Cheang

Great. Firstly, Matthew, can you just talk about what is incremental in Q4 versus your prior expectations? What's driving the 14%, particularly if there's a big change in certain categories and then your flexibility around that? Because if I remember correctly, (technical difficulty) Q3 and Q4.

Matthew Thomas Farrell

We always thought it was going to be weighted more towards Q4. We did have some marketing shift out of Q3 into Q4, largely because of MPD support, like -- even our laundry sheets, we sold out so fast, that we wanted to make sure the marketing was turned on when we had the supply. So we shifted some of that into Q4.

Olivia Tong Cheang

Got it. And then just laundry, can you talk about the shape of your laundry portfolio? Because you're first to market with the sheet, which is obviously a premium price product, but then we're cutting back on some promo, but it also sounds like you're benefiting from trade down. So how are you thinking about the positioning of your laundry portfolio premium versus mid-tier versus sort of the opening price point with XTRA? How do you think about that longer term? And then also just in the midterm as you embark on this next new category?

Matthew Thomas Farrell

Well, if you look at the value detergent, there's value and there's extreme value. So you're right, XTRA is the extreme value. And ARM & HAMMER is the high end of value, maybe even at the low end of mid-tier. And that has been a strategy for a long time. Pods is an area where we're underrepresented and we only have a 4% share of pods when, in fact, in liquid laundry, we have a 15% share. Now pods is unit dose, but since so is sheets and sheets has an advantage in that it's more sustainable. No more plastic jugs. So we do think that, that's going to help us gain even greater share in unit dose. Yes, it could cannibalize some ARM & HAMMER pods. But we do think it's going to be attractive to anybody who's using pods today because we don't have the plastic pouches. This comes in a carton. And people who don't want to be carrying the big jugs anymore, we'll migrate to sheets as well. So we think there's a lot of positives by adding sheets to the portfolio.

Operator

The next question comes from Peter Grom at UBS.

Peter K. Grom

So I wanted to ask specifically about gross margins. You made a lot of progress this year and that you kind of mentioned that you saw this opportunity to kind of get back to this 45.5% target. But you also said I think in your response to Chris' question, that you wouldn't get it all back next year. So can you maybe help us unpack the reasons why that might be the case just given the momentum you're exiting the year with? And then just maybe building on that, Rick, last year, you kind of mentioned that you were less hedged heading into the year than previously. Can you maybe just give us a comment or so on your outlook for inflation and whether or not you're kind of deploying a similar hedging strategy looking ahead?

Richard A. Dierker

Yes. This is a lot to do with our forward-looking guidance for 2024. So I would just tell you, we'll get into all those details in January, February. We do think we're going to have gross margin expansion. We think there's tailwinds on gross margin because for the first time in a long time, productivity can outpace inflation. Inflation, we think still higher than normal next year, but not anywhere near what it's been like these past few years. So that's kind of what I would tell you in a heartbeat. The other nuance is, really, when we look ahead, our pre-COVID margin should be higher because we have some better, faster growing personal care products like HERO and THERABREATH. So we fully recognize that as well. But it's going to be, like I said, in the Deutsche Bank Conference and Barclays conference as well, it's going to be 2 to 3 years to get there. And so we're going to take a good step each and every year.

Operator

Next question comes from Nik Modi from RBC Capital Markets.

Sunil Harshad Modi

Matt, can you just talk about what you're seeing in the M&A environment as kind of the situation continues to evolve. Are you seeing any potential assets out there, brands that might look interesting? And then I have just a follow-up question on the promotional situation.

Matthew Thomas Farrell

Okay. Yes. Nick, we're always on the hunt. We -- if you look at the HERO was acquired last October '22. And we've looked at 3 other potential acquisitions since then, all of which we passed on. But we're always on a hot. We got quite a strong balance sheet right now, a lot of cash building up, so we've got a bit of a war chest. I would say that the interest rates will obviously affect the bidding process in any one of these acquisitions or auction processes. And obviously, we're affected by that as well. But you do want to buy brands that long term are going to be able to grow. And interest rates, yes, they may be high for a few years, but they do moderate it seems. So you got to take a long view when you're looking at assets. But there's always something to buy, and we've been pretty active at looking at what's available. You had a second question, Nick, on promo?

Sunil Harshad Modi

Yes. I mean, usually, when you see these kind of unprofitable promos get called, it's usually part of a revenue growth management initiative, a more focused revenue growth management initiative. Over the years, I haven't heard you guys talk too much about revenue growth management. So I'm just curious, is there just a more concerted effort to really focus on that -- in that area, and that's what's really what's driving some of these choices for the fourth quarter? Any perspective around that would be helpful.

Matthew Thomas Farrell

Yes. No, that's a timely question, Nick. Our international business was really first out of the gate on revenue growth management. And so we have 6 subsidiaries, and we have all those 6 subsidiaries have all been linked up regularly discussed the tactics in improving revenue. And now it's all the levers between gross and net. And more recently, our U.S. business reorganized so that we can adopt more of those practices that our international businesses on, but also link the U.S. into those 6 international subsidiaries. So yes, the whole concept of revenue growth management is taking hold in the company, and that contributes to making decisions about unprofitable promotions.

Operator

The next question comes from Jason English from Goldman Sachs.

Jason M. English

So a couple of quick questions. In response to Mr. Grom's question, I was surprising was surprised to hear you say that you expect inflation next year to be above average. So I guess 2 questions related to that. First, what's driving it? And second, in context of that, what sort of pricing environment do you expect next year? Would you expect to see positive price growth in your key categories and from you in the domestic market?

Richard A. Dierker

Yes. Thanks, Jason. It's Rick. I would say Grom got me to comment on 2024 a little bit more than we normally would. But what's normal for us in COGS inflation is around 2% of COGS inflation. That's been true for many years, 2013 through 2019, and then it went to 8% during those COVID years '20 to 2022. And then in 2023, it was 4%. My belief is it will be lower than what it is this year, for sure, but a little bit higher than what we've had in the past. And what's driving that is some of the oil-based and resin-based commodities. And that's probably the extent I'll go into right now. The good news is that our productivity -- it's not going to be as apparent because productivity for the first time in a long time, can actually offset some of these headwinds. And that wasn't the case during the last few years with COVID.
In that type of environment, I don't think that pricing will play a major role when manufacturers can cover a lot of their cost headwinds. And in other categories and other companies, there's other commodities that are going the other way. And so that's why there's deflation in some commodity categories. So that's kind of the short answer from our perspective. We have one price increase that we just rolled out. You heard us talk last quarter about soda ash and baking soda and those cost inputs being up 40% to 50%. We did roll out a price increase on baking soda in October, and that's going to be out in retail. And we don't have further plans to take price really.

Jason M. English

Okay. That's helpful. And speaking of commodities, I'm on the website for this MEGALAC product. It looks like a pretty commoditized product. And it sounds like you have a new competitive threat coming in, undercutting you. First on talking about it. So I'm assuming it's new, I'm assuming it's still early innings. So can you give us some context to assess the risk? Obviously, if everything else was up 2% and this drove it down 10%, it's big. How big is it? Like how big was it before this? How big is it this quarter? And how do you plan to deal with that headwind going forward?

Richard A. Dierker

Yes. So MEGALAC has faced low-priced imports for years, even pre-COVID. We were a little protected from that because of how difficult it was to get shipping containers. And so the U.S. market was a little bit more protected, and so MEGALAC did really well during those few years. So once shipping constraints were lifted, competitors came back in, low-priced competitors were there, and we've lost share. This is a very low profit business, this one product line. And so we are looking hard at how to restructure that business. And so not a lot to talk about today, but I would just tell you, yes, revenue is down were volatile, but the impact on profit is minimal.

Operator

The next question comes from Jon Andersen from William Blair.

Jon Robert Andersen

Just one. It's a shot. It may be too early for you to comment in detail. But you mentioned a couple of times that you have one of the better or best...

Richard A. Dierker

Jon, if you can hear us, you broke up.

Jon Robert Andersen

Given kind of the current macro, the innovation for '24 will be tilted more towards value than premium. And if you can just kind of characterize it a little bit given Matt's comments that it's one of the best or better new product lineups that you've had?

Matthew Thomas Farrell

Yes. Well, look, I'm -- it's a logical question, but it is the first week of November and we're going to unveil all those new products in the January 1st week of February when we give our outlook for next year. So it's best to just stay tuned on that one, Jon.

Jon Robert Andersen

Great. Can I squeeze one more in?

Matthew Thomas Farrell

Yes, sure. We didn't really -- you whiffed on the first one. So yes, go with a second one.

Jon Robert Andersen

Yes, we'll try again. Just WATERPIK, could you give us a little bit more detail around where that business is versus your plan year-to-date? And really more importantly, what your expectations are going forward as you look to 2024 things.

Matthew Thomas Farrell

Well, look, this was a reset year for WATERPIK. The whole idea was to get close to plan, try to have a level year when it comes to sales the business has been struggling because during COVID pretty flush, people staying at home, a lot of water flossers got sold in 2021 and some in '22. So that's where the struggle is in '23. And then there's always knockoffs that we have to deal with that we see more and more of those as well as some private label, which is -- which we -- is not a new thing, but it's been more significant in 2023. But that business has been around for decades. It is the Cadillac when it comes to flossers. And we have innovation coming as well for WATERPIK, which we'll talk about in -- at the end of January, first week of February. But innovation and the maintaining the brand equity that the WATERPIK is the premier water flosser is our strategy going forward.

Operator

The next question comes from Javier Escalante from Evercore ISI.

Javier T. Escalante Manzo

My question has to do with volumes. If you can comment what was in the comp versus your growth of around 3% and is there something that is going to anniversary in Q4? And also, if you can give us a sense of underlying category growth in terms of volumes on an all-channel basis and how do you stand vis-a-vis that?

Richard A. Dierker

Yes. The first one is similar to what I said with Warren. There's 2 things that are kind of impacting the comp in Q4. One is even for HERO is we did have some big -- so that was a higher comp. The second thing was the laundry promotions. We had some discrete laundry promotions and revenue growth management activities that kind of Matt alluded to is what got pared down in Q4 this year. So those are the 2 things.

Matthew Thomas Farrell

Yes. And as far as -- I can't really help you with the volumes for our 17 categories. But what I can tell you is that if you look at October and that we had consumption growth in 12 of our 17 categories that continues to sustain what we saw in Q3 -- and remember, Q3 was -- half of our growth was driven by volume. We see that to be 1% or better in Q4. But the good news is that the -- in 12 of our 17 categories, we're seeing growth in October. So it's -- the beat goes on.

Javier T. Escalante Manzo

But you don't have a sense of whether given the amount of pricing, there has been a pullback in actual usage or purchase frequency.

Matthew Thomas Farrell

No. When you have volume growth, that would suggest that you are seeing consumers migrate to your product year-over-year, we have higher -- we're shipping more cases and more units. And like I said, we expect that to continue in Q4.

Operator

The last question comes from Filippo Falorni from Citi.

Filippo Falorni

Keep a quick back. So just a quick question on the marketing expense as a percent of sales. You clearly returned to 11%. Should we consider this a new normal for you guys? Or in the past, you've also done closer to 12%. So just wondering if there's a new normal level of investment.

Matthew Thomas Farrell

We've said that 11% is where we wanted to get back to, and we thought it was going to be a stair step that would go from 10% in '22 to 10.5% in '23 and then 11% in '24 and we're already now at 11%. And we think that's a good level of spend to sustain and grow our brands.

Operator

There are no further questions. I will turn the call back over to Mr. Farrell for closing comments.

Matthew Thomas Farrell

Okay. Hurray. Thanks for joining us today. We had a great Q3, a lot of momentum going into Q4 and in 2024 and really looking forward to talking to you guys at the end of January or early February with our outlook for '24. So thanks for joining us today.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.