Good morning, ladies and gentlemen, and welcome to Church & Dwight conference call. Before we begin, I've been asked to remind you that on this call, the company's management may make forward-looking statements regarding, among other things, Church & Dwight's financial objectives and forecasts, and the impact of Zicam acquisition. As you know, risks and uncertainties involved in Church & Dwight's business, including those discussed in the risk factors section in our annual report on Form 10-K and other filings with the SEC, may affect the matters referred to in these forward-looking statements. As a result, the company's performance may materially differ from those expressed or indicated by such forward-looking statements. Church & Dwight will be utilizing both GAAP and non-GAAP financial measures in its discussion of Zicam. The company believes the presentation of Zicam's non-GAAP financial measures provides useful additional information to investors about the financial performance of Zicam.
These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be recorded as a replacement for corresponding GAAP measures. I would now like to introduce your host for today's call, Mr. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir.
Okay. Thank you. Hey, good morning, everyone. We have some exciting news today. This morning, we announced that we completed the acquisition of the Zicam brand from Matrixx Initiatives. I'll begin with my thoughts on the acquisition, and then I'll turn the call over to Rick Dierker, our CFO, and Rick will provide the financial details, and then we'll open up the call for Q&A. Zicam is the number one zinc supplement in the United States in the cough cold shortening category, and that's a subcategory of the $2.2 billion cold and flu category. Zicam shortens the duration of a cold using zinc as the core active ingredient. This acquisition meets the company's longstanding acquisition criteria. This one is down the middle for those of you who have been following Church & Dwight for many years. Specifically, Zicam is the number one brand in a niche category. It's asset-light.
It's a growing brand, and gross margin is accretive to the company's gross profit margin. We're excited about adding the company's 13th power brand. Acquisitions, as you know, have been a key driver of Church & Dwight's consistently strong shareholder returns, and we expect to fully integrate the business by the middle of 2021 while retaining the expertise of certain employees that are critical to the Zicam business. There's no doubt that consumers have made health and wellness a priority. The best evidence of that trend is the growth of the gummy vitamin category. Gummy consumption by consumers is generally intended to be preventative, and we expect the elevated demand for gummy vitamins to continue in 2021. On the other hand, consumption for cold shortening products is episodic and is influenced by the severity of the cold and flu season.
While 2020 consumption for Zicam was elevated due to the pandemic, we do not expect that to recur in 2021. Another note, more recently, we do see increased consumer interest in zinc as a preventative supplement. Zicam is the perfect tuck-in acquisition for our health and wellness business with a projected $90 million of net sales, high gross margins, and the ability to be a 3-4% top-line grower. Now I'll turn the mic over to Rick Dierker, our CFO.
Thank you, Matt, and good morning, everybody. I'm going to provide a few comments on the transaction, in particular valuation, synergies, and leverage. I'll start with valuation. The purchase price for this acquisition is about $530 million, as you read in the release. The acquisition was structured as a stock purchase that the company financed with a combination of cash and debt. Zicam's annual net sales are projected to be $90 million in 2021, and EBITDA is expected to be about $36 million. We are not assuming that the elevated demand from COVID will continue, and once Zicam is fully integrated, Church & Dwight expects to leverage its distribution network, operating discipline, and support functions to generate anticipated annual cost savings of approximately $5 million by 2022, made up of SG&A and supply chain savings, and that breaks out approximately two-thirds, one-third. This represents a synergized multiple of 12.9x .
Zicam is expected to be approximately 3% accretive to cash earnings in 2021, and the acquisition is expected to be neutral to Q4 2020 earnings per share and neutral to 2021 EPS. Starting with the $36 million EBITDA, less approximately $30 million due to intangible amortization and interest, as well as approximately $6 million in transition expenses, as well as higher marketing spend. That is how we get to flattish EPS in 2021. We expect to end the year with debt to EBITDA of 1.8x , and as we discussed during our last earnings call, we continue to have confidence in achieving our evergreen model in 2021. With that, we will open up the call to questions.
Ladies and gentlemen, if you have a question at this time, please press the star and the number one key on your telephone. Once again, that's star one to ask a question. Our first question comes from Rupesh Parikh with Oppenheimer. Your line is open.
Good morning. Thanks for taking my question and congrats on the acquisition.
Thank you, Rupesh.
I guess I want to just ask about the growth rate. Any color you can share on what the growth rates were for this business pre-pandemic? As you're looking forward, what are some of the growth opportunities you see for the business, whether distribution gains, international growth, etc.?
Yeah, that's a good question, Rupesh. If you look at consumption for the business year to date, it is up 16%, and that's driven by the big spike in COVID, so we don't expect that to recur. If you want to get some context for the $90 million steady state 2021 number, 2018 net sales were $80 million. If you want to kind of trend that forward at a 3%-4% rate, you kind of get to that $90 million. As far as the opportunities go, the product is pretty well distributed today, but we do see additional opportunities at selected retailers due to consumer interest in wellness. The other class of trade that's underdeveloped is the online class of trade. Somebody may have a question about international, so I might as well answer that one now.
Internationally, it's heavily regulated, so we can sell the product, but the regulations limit the claims that we can make on PACs. I think near-term, the opportunities are more in the U.S. than anywhere else, Rupesh.
Okay, great. Maybe just one follow-up question. Do you see any synergies with vitafusion or L'il Critters? Just curious if there's any synergies between the two businesses.
There is always synergies with respect to the expertise that we have with supplements, either in R&D, for example. Certainly, we have all the leverage on the sales and marketing side, but there is definitely expertise at the Zicam business that we are looking forward to retaining.
Great. Thank you. I'll pass it along.
Thank you. Our next question comes from the line of Kaumil Gajrawala with Credit Suisse. Your line is open.
Thank you. Congratulations, guys, on another deal. Can you just maybe talk a little bit about, you mentioned number one market share in their subsegment. Can you talk about what that share is? Is it a fragmented category generally where the share opportunity is still substantial even though you're number one, or is it one where you're by far and large just the share leader and it's going to be much more about category growth?
Yeah. No, that's a good question. I mean, it is clearly far and away the number one brand with a market share of 73%. The number two in the category is a brand called Cold-EEZE, and that's around 16%. The rest is private label, which is 11%. That 11% has been pretty steady for the last three years, the private label share. That probably is what you're looking for.
Yep, that's exactly. If I could layer on kind of another question in some ways related to that, do you feel that this is a brand that can expand beyond its core in that maybe you get more into prevention, more into the supplements kind of side of it versus what the bulk of its business currently is?
Yeah. We've had that experience with other brands that we've purchased in the past by going into other forms. For example, Zicam doesn't have a gummy, and obviously we make gummies. Yeah, there's definitely opportunities given our size and breadth and our past experience in taking a brand and moving into other forms. Yeah, that would be part of the plan longer term.
Got it. Thank you.
Okay.
Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is open.
Hey, good morning, guys. Congratulations on the deal and happy holidays.
Yeah.
First one for Rick. Asset-like deal, presumably the business is currently using co-packers. Is there an opportunity to bring manufacturing in-house? If so, what could that potentially mean for margins of the business?
Yeah. No. Hey, Kevin. There are three or four co-packers. They are all in the U.S. We like the asset-light business. As Matt said, hey, they do not have a gummy today. Potentially, we could always do that. No issue. Margins in the business are in the 70% already. Very, very strong gross margin business. No plans at this time to bring anything in-house, but we will see about maybe the future with gummy.
Got it. Thanks, Rick. Two more quick ones for me. I apologize if I missed this in Rupesh's question. Did you guys provide the channel mix specifically? I was kind of getting to online, but even just sort of broad brush strokes, how much of this is in track channels versus how much is online versus how much may be in non-track outside of online?
Yeah. What I told Rupesh was that the online is underdeveloped, and that's one of the opportunities for the business. So less than 10%.
Less than 10%. Okay. And then just the last one, Matt, you alluded to this. This kind of gets back to more sort of the core product categories that Church has looked at over the years relative to some of the appliances, I guess, in the past couple of deals. Talk about, I guess, if you wouldn't mind, Matt, how you see vitamins, minerals, and supplements longer term for this company. It does tend to be it's large and it's fragmented. Does this seem like a likely destination for free cash flow going forward with respect to M&A?
Yeah. We're opportunistic when it comes to acquisitions, and we saw this one, which obviously is a supplement, and it's zinc, which is a well-known ingredient. It was just kind of a perfect tuck-in for us. If there were others like that that also met our criteria, would we be interested? Absolutely. I do think that internationally, I think vitamins have a long way to go. Yeah, we're the number one gummy vitamin in the U.S., but we see just so much opportunity outside the U.S., not just in North America, but especially in Asia. I think you can be looking for more of that in the future from us.
Got it. Okay. I'll pass it on. Thanks, guys.
Okay.
Thank you. Our next question comes from Jason English wi th Goldman Sachs. Your line is open.
Hey, good morning, folks, and congratulations on the acquisition. Just a couple of housekeeping questions. You mentioned it's going to be funded with a split of debt and cash. Can you give us that split?
Yeah. I'll give it to you directionally, Jason. We were saying that we would probably finish the year closer to 1.2x debt to EBITDA. Now we're saying closer to 1.7 or so, 1.8. About $400 million or so is going to be through commercial paper or other short-term debt instruments, and then the balance will be cash.
Got it. That's helpful. To bridge from your cash accretion to your sort of neutral number with interest expense and amortization, I've got to tuck in like around $30 million of incremental D&A. Is that close to the pin? It seems like a large number.
Yeah, it's close. It's around $25 million, and then interest is around $4 million-$5 million. We've been pretty consistent as we do these smaller deals that we go ahead and amortize them. We think it's just a conservative route to play, and we're going to continue to do that.
Sure. Sure. Last question. You mentioned no gummies. What are these fruit drop products they have? Because it looks like they do have gummies. I ask just to try to size the prize because it seems like a great opportunity if, in fact, they're not really or only nascent in that category.
Yeah. That's very small. The way it breaks down is two-thirds of the product is what are called rapid melts. So sort of a very thin tablet that kind of melts in your mouth. And another 20%-25% is nasal. That's the lion's share of the business between those two. That's about almost 85%-90%. Then the rest is small stuff. Yeah, that is an opportunity for us down the road, Jason, gummies.
Got it. Makes sense. Thanks a lot, guys. I'll pass it on. Be well.
All right.
Thank you. Our next question comes from Joe Altobello with Raymond James. Your line is open.
Thanks. Hey, guys. Good morning. Congratulations. Looking at the purchase price, you're paying almost 15x projected EBITDA next year for Zicam. I think it's almost, as you mentioned, 13x a fully synergized number. That is toward the upper end of the range for some of your more recent acquisitions. I guess, what attracted you most to the business that justified paying that type of multiple, particularly given that it's sort of a 3%-4% grower, as you guys point out?
Yeah. Hey, Joe. It's all context, right? If you look at what market has been for some properties, it's far higher than that. We would say that $12.9 million fully synergized is a good number. This is a long-standing brand that's been around for a while, and we think this is a rock-solid grower. We thought, "Hey, this is okay. We're willing to step up to this thing." The other wildcard is longer term. Does zinc become even a greater interest of consumers as a preventative? I wouldn't say that that's true today, but we launched a Power Zinc product this year in July, and it's doing extremely well. We believe we'll be able to expand distribution of that product in the future. We do think it's just a steady eddy, and it's got a potential tailwind.
That's helpful, Matt. Thanks. Just a second one. You mentioned you are limited in your ability to make efficacy claims in some international markets. Are there similar concerns in the U.S., or are you comfortable that the FDA is comfortable with your packaging?
Yeah. We're comfortable with the packaging. It's just outside the U.S. is where it's heavily regulated, and there's very little you can say.
Okay. Great. Thanks, guys.
Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is open.
Yeah. Hey, guys. Thanks. Just two quick cleanups from me as well. First one, Rick, the $6 million of marketing and transition costs that you mentioned, I'm assuming that's not anticipated in the $36 million of EBITDA number that you threw out there, but just wanted to clarify that.
Yeah. Let me just try to do a walk-through. $36 million of EBITDA is what we're expecting for 2021. The way we get to essentially flat, instead of flat, would be $30 million of interest and amortization, and then $2 million or 2 million or 3 million of a transition cost, and about $3 million more of marketing. We're going to take the marketing up a couple of percentage points from where it was at, maybe 12%-13% to the mid-teens.
Okay. Cool. Not to split hairs, so then we use a base of 33 going forward. When you add back, when you realize the $5 million of synergies, is it to get to 38, or is it 36 too?
No. 36-41 in theory in 2022, and then less the $3 million uptick in marketing, which is permanent.
Okay. That's what. Okay. Perfect. The only other question I had was just on seasonality. We see the seasonality of the business as it flows through retail. Is there anything to call out in terms of the shipment timing? It's a good thing about the cadence of the business over the course of the year.
Yeah. It's a good question. I would just tell you from a seasonality perspective, of course, typically Q4 and January are the biggest months of the year.
Okay. Perfect. Thank you very much.
Thank you. Our next question comes from Bill Chappell with Truist Securities. Your line's open.
Thanks. Good morning.
Hey, Bill.
Hey. First couple of quick housekeeping. You may have said this. Is the $90 million in revenue for next year expected, that would be down from the expected 2020 number?
Yeah, Bill. This is Rick. It's going to be down. We've completely stripped out the COVID impact, which was very, very significant in 2020. We are saying, "Hey, let's do the roll forward from our baseline of $80 million in 2018. If you grow that at 4% or 5% for 2019 and 2020 and 2021, that's how you get to the $90 million." Yeah, it's down from 2020. I don't think it's going to repeat.
Okay. I just want to make sure. And then, Rick, stay with me. Usually, companies on an asset-like deal, there's some sizable cash tax benefits that nine out of 10 companies put into the valuation and say they even paid even less for it. Am I missing something? Usually, I mean, I would think there's like $1,050. I mean, so there's some kind of tax asset that comes with this since it's an asset-like deal. Is that not correct?
Not in this case, Bill. You're right. When we do an asset deal, right, it's either going to be an asset deal or a stock deal. This happens to be a stock deal. We buy the entities. When there's a stock deal, you do not get a write-off of the goodwill on your tax return. There is no tax shield.
Okay. Thanks. Then, bigger, can you talk about any R&D, anything embedded? I mean, I understand that, Matt, you've said that private label hasn't really creeped up over the years, but it seems like there's a fairly broad distribution of brand equivalent at least the drug trade of Zicam. Just trying to understand, are you doing anything to distance the products versus private label, or is it just the brand is so well-known that consumers kind of flock to it versus private label anyways?
Yeah. It's more of the latter, Bill. What the company has from a kind of a defense standpoint is has clinicals, which leads to a claim structure, and they do have know-how. I'd say those are the things that they have to combat private label. It does have a new product pipeline, largely related to flavor, but also form can be a way to differentiate from private label as well in the future. It's probably more the latter than the former of your example.
Okay. Last one. Was this an auction or just someone you had monitored for years?
Yeah. Hey, Bill. It's Rick. Similar to the Waterpik deal, actually, we had looked at this business and done diligence on this business a couple of times over the years. It just happened to make more sense now than it did in the past.
Great. Thanks so much, and happy holidays.
Okay. You too.
Thank you. Our next question comes from the line of Andrea Teixeira with JPMorgan. Your line is open.
Thank you. Good morning. I have holidays. My question is on distribution. You said that it's one of the positives that you can expand. According to our math, the ACV in use is about 70%. Correct me if I'm wrong. What is your aspiration, and what is embedded in your $90 million for next year?
Yeah. Hey, Andrea. It's Rick. What Matt said was that it actually was pretty well distributed at a 70% ACV. That's why we're calling it as a 3% or 4% grower. Do we think we're going to have tailwinds in the future because of gummies and whatnot? Sure, but we never justify any deals on revenue synergies. That's implicitly in the $90 million.
Right. Andrea, what I said was well distributed, but we do think that at certain retailers, there's still opportunities to spread out due to consumer interest and wellness.
No, that makes sense. Just to follow up, just a clarification on, I think, Steve's question. You said, obviously, the math to do the 12.9x EBITDA goes from $36 million to $41 million in EBITDA in 2022. You said the $3 million in marketing, that is embedded in the $41 million, correct? That's the permanent uptick in marketing.
Yeah. Now, what I said was the $36 million run rate goes to $41 million with synergies, and then the $41 million minus the new permanent marketing would be $41 million minus $3 million would be kind of $38 million.
Okay. Now I get it. Okay. So fully with the it's somewhere in between the 12.9, fully synergized 12.9 to the 15x , that is the line number.
Yeah. Probably around 13x is the answer.
Yeah. Okay. Perfect. All righty. Thank you. I'll pass it on.
Thank you. Our next question comes from Olivia Tong with Bank of America. Your line is open.
I wanted to talk a little bit more about the cross-pollination opportunities with your existing gummy business. Obviously, you talked about gummies' potential for Zicam, but wanted to see if there are other opportunities as you look at the new innovation pipeline for Zicam, whether they're sort of like a multi-multivitamin with a cold component to it, or there are other areas. Just sort of the health of the innovation pipeline would be great. Thank you.
Yeah. I think you have a future in marketing and new product development. I think we do see opportunities for other forms in the future, but we're very focused on growing the base business, which is the rapid melts and the nasal products. Obviously, because we have expertise in gummies, it's a logical place to go. We have also seen that the Power Zinc gummy that we launched earlier this year has been turning extremely well. There is definitely something there in the zinc category. We would not tip our hand today as far as what the new product pipeline's got for the next couple of years.
Great. Thanks. In terms of the opportunities going forward, one of the areas is obviously this asset-like. Is the goal eventually to bring production in-house once you add the additional capacity that you talked about in vitamins? Or is the plan for now just to stay outsourced even after you have that incremental capacity in vitamins?
Yeah. Hey, Olivia. It's Rick. What I had said to Kevin was they have three or four co-packers all across the U.S. They have great capabilities. We're going to continue to do that. Over time, as we maybe develop and we have a gummy capability, that piece of it might come in. For now, great gross margin, great investment model, and we like it.
Got it. Thanks. Lastly, is this just a straight sale, or are there any earnout provisions or anything that we need to be mindful of?
Nope. No earnouts. No complications. It's pretty clean.
Fantastic. Thanks and happy holidays.
Thank you. Our last question comes from the line of Shirley Serrao with Barclays. Your line is open.
Hi. Good morning. Just had a question on the distribution opportunity with regards to online. I know you said it's less than 10% of sales at the moment. Where does online typically track in terms of penetration for this category as a whole, or maybe some of the competitors that you mentioned?
Yeah. Remember, it's a small category. And because Zicam has a 73% market share, it largely does drive the category. To the extent that it's underdeveloped for Zicam, it's completely underdeveloped for the entire category. We see it, when I say under 10%, it's more like mid-single digits. It's pretty low.
Yeah. The only thing I would add to that is the good news is on our vitamin business, for example, over the last, whatever, nine months or so, our vitamin business percent online has effectively doubled. We do have a great capability, and we think that's going to help on the Zicam side.
Thank you.
Thank you. There are no further questions at this time. I would like to turn the call back to Matt Farrell for any further remarks.
Okay. Hey, thanks for joining us today, everybody. Talk to you again in Q1.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a great day.