Q2 2020 Church & Dwight Co Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Church and Dwight second quarter 2020 earnings Conference call.
But again I've been asked reminds you that on this call the company's management the company's management may make forward looking statements regarding among other things the companys financial objectives and forecast.
These statements are subject to risks and uncertainties and other factors that are described in detail and the company's FCC filings.
I'd now like to introduce your host for todays call Mr., Mike Farrell, Chief Executive Officer of Church and Dwight. Please go ahead Sir.
Good morning, everyone. Thanks for joining us today I'll begin with a discussion.
Impact of Coven 19, followed by a review of the Q2 results now I'll turn the call over to Rick darker CFO.
And when Rick is finished we'll open the call up for questions.
I'd like to give you a sense for how church and Dwight has reacted to the pandemic.
The virus disrupted just about everything.
Consumer behavior retailer operations, our supply chain and how we work.
We pivoted every aspect of our business to meet the new challenges.
Initially we had a daily hurdle at eight am seven days a week.
To address employee safety production levels co Packer operations and shipment patterns.
Today, we mean five days a week.
We increased our communications switch retailers and changed our marketing messages.
We moved people to focus on the online class of trade to create an uplift new content.
To speed up our reaction time, we created new data feeds the Pos data and retailer in stock levels.
We added more co packers to our supply chain network.
We we conduct weekly surveys of our consumers.
And all of our efforts are paying off the agility and resilience of the church and Dwight team shows up in our results.
Our priorities continue to be employee safety meeting the needs of consumers and retailers, helping the communities, where we live and ensuring the strength of our brands.
Our plant warehouse and laboratory employees have done an exceptional job and keeping safe, which has contributed to our ability to operate a supply chain.
The rest of our employees are working remotely and doing a super job running the company.
We have been supporting our communities through monetary and product donations, including the contribution of personal protective equipment.
In June we began producing hand sanitizer in our UK plant for both donations and employee usage.
With respect to consumers and retailers, we're taking steps to increase both short and long term manufacturing capacity and we continued to work closely with suppliers and retail partners to keep pace with increased demand.
A good example is our installation in Q2 of the new liquid laundry line in our York plant, which was quite a feat given the obstacles presented by Covance and as I mentioned before we've added more co packers to ensure a steady supplies for other categories now, let's talk about the results.
Q2 was an exceptional quarter reported sales growth was 10.6% gross margin expanded by 220 basis points and adjusted earnings per share was 77 cents.
Revenue gross margin earnings and operating cash flow, we're all significantly higher than Q2 last year, driven by the increase but a significant increase in demand for many of our products.
Organic sales grew 8.4% driven by higher consumption restocking, a retailer inventories and lower couponing.
Exceptional first half is a testament to the diverse set of categories that we compete in and the strength of our brands.
Regarding E commerce, even more consumers have moved online.
Our online sales increased by 75% in Q2 as all retailer Dotcoms have grown.
We began the year targeting 9% online sales in Q1, 10% of ourselves around line in Q2, it was 13% and we expect second half on life sales to be equally strong.
We continue to do Kentucky research on the purchasing habits of U.S. consumers are the category. So we are following.
There is continued consumer worry about the ability to leave the house and concerned that stores and websites will run out.
Consumers report that they are consolidating shopping trips and continue to stockpile to ensure that they have enough product for a couple of weeks at a time.
Similar to last quarter, I now want to talk about consumption and shipments.
Year to date shipment of consumption patterns are back in balance for our brands in the 15 category. So we compete.
We do have some additional opportunities in gummy vitamins and Harman hammer baking soda ash shipments are still well behind consumption.
In Q2, we saw double digit consumption growth in gummy vitamins women's hair removal cleaners, and baking soda on the other had restrictions on consumer mobility drove double digit consumption declines for water pick Trojan condoms and t. stretching too.
People are just not socializing due to government restrictions under mobility, which has a big effect on some personal care categories.
If you like consumption for the U.S. business is tracking to be over 10%.
Led by our gummy vitamin brands, Oxiclean additives and baking soda.
One third of our July consumption growth is attributed to our gummy business.
In July I think this is important only two of our 15 brands.
But to use and Trojan showed negative consumption. In contrast in the month of May eight of our 15 key product lines showed negative consumption. So consumption consumption is trending positively.
Now shipments July shipments for the U.S. business are tracking to be up high single digits.
Shipments of Gummy vitamins, Oxiclean additives baking soda and war to pick a roll up double digits in July.
Our gummy vitamins had been on fire consumption for May June and July has been averaging up over 40%.
There was an increased consumer focused on wellness and it is likely that we will reach a permanently higher level of consumption.
We're looking to third parties to supplement our existing capacity right now.
You may recall that we announced our exit from private label early in Q1 and that turned out to be a timely decision because it helps free up capacity for our brands.
Regarding our laundry and later businesses consumption is recovering you will recall that there was massive pantry loading in laundry inlet or in the month of March laundry pantry loading appears to be absorbed as our consumption improved from being down low single digits in the quarter two up approximately 10%.
In July year over year.
Similarly, Harman hammer litter improved from negative consumption in Q2, two up approximately 5% in July so our two big <unk> categories of recovering nicely.
In the Waterfloods for category water pick is starting to recover from the steep decline in April when consumption was down 55%.
Q2 consumption was down significantly due to retailer closures de prioritization of waterfall says by some retailers and closure of dental offices remember that down professionals are an important source of waterflood <unk> recommendations, which influences first time buyers.
The most recent surveys indicate that 95% of dental offices are now open although most are at a reduced capacity.
The good news is mostly consumption award to pay for Waterfloods uses now positive.
Although our lunch and learn activity continues to be significantly curtailed we intend to address this with incremental advertising in the second half.
The flawless brand has had strong consumption growth in May June and July due to reduced consumer access to salons. The launch of our new full body device, new razor was perfectly timed.
Well. This is one of our brands that could benefit from the at home grooming trend and we tend to strongly support flawless with advertising in the second half.
Now private label Forever little shares or something we track closely.
As you know our exposure to private label is limited to five categories in the private label shares were generally unchanged in Q2 and it was also true in Q1.
Because of the virus consumer trends are emerging which affect our business, including a focus on cleaning personal wellness and new grooming routines.
These consumer trends may indoor over the long term and if they do we believe we are well positioned.
International our international business came through with slightly positive organic growth in the quarter driven by strong growth in our GMT business that stands for global markets group in particular, China and Asia Pacific turned in a remarkably strong performance in the second quarter and in July our GMT business is off to a strong.
Start.
And we're seeing strong Pos recovery in Canada, and Europe, as well is starting to recover.
Specialty products businesses had three straight quarters of organic growth and we expect continued organic growth for specialty products in the second half now turning to new products.
Innovative new products will continue to attract consumers even in this economy in Q2, we launched a new armen hammered laundry detergent call clean and simple, which has only six ingredients plus water and this compares to 15 to 30 ingredients for the typical liquid detergent. It has a cleaning power comparable to our best selling couldn't consumer.
Her favorite which is Harman hammer with Oxiclean.
However.
Because of retailer stocking issues in the second quarter, we eliminated advertising trade and couponing support that we had planned and we've pushed it for the second half.
We're excited to report today than we have another big product launch this year.
The second launches in the clumping litter category. This month, we began shipping absorb X, which is a revolutionary new Harman hammer lightweight litter made from desert dry materials. It absorbs wetness in seconds to trap and seal odors fast.
Absorb X is 15% lighter than our existing lightweight and its 55% lighter than our regular clumping better.
We have a significant amount of advertising tree and couponing plan for the second half to get behind this exciting new launch.
And by the way Here's a fun fact, or forensic clorox just posted to the web site, a new litter varian called ultra absorb and we'll take that as a complement imitation is the greatest form of flattery.
Now, let's turn to the outlook, we had an exceptional first half and we were running well ahead of our original full year EPS outlook, we reinstated our EPS outlook with 13% growth, which is far above our evergreen target of 8% annual EPS growth.
As in prior years, when we find ourselves in this position we use the opportunity to invest in our future, which we intend to do in the second half you may recall that just last year. We had this this exact same opportunity to invest and our E. P. S was down 4% in Q4 2019 as a result.
This year, we just got to with similar point much earlier.
Rick will provide some details on those investments when I turn the call over to Rick.
It's important to note, we continue to take the Longview and running church and Dwight.
Now my conclusion, there are lots of reasons have confidence in church and Dwight the great thing about our company is we are positioned to do well in both good and bad economic times the category categories in which we play are largely essential to consumers, we have a balance of value and premium products. Our power brands are number one or number two.
And your categories, and we have low exposure to private label.
We're coming off one of the best first half so you've ever had and are entering this downturn in a position of strength and with a strong balance sheet.
And with a strong balance sheet, we continued to be opened to acquiring TR TSR accretive businesses and finally, we have the resources the common sense and the ambition to ensure that our brands performed well in the future and next up is Rick to give you details second quarter.
Thank you Matt Good morning, everybody, we'll start with S. second quarter, adjusted EPS, which excludes an acquisition related earn out adjustment grew 35% 77 cents compared to 57 cents in 2019.
EPS increase was largely driven by higher sales due to continued high consumer demand for our products and higher gross margins.
As we discussed in previous calls the quarterly earn out adjustment will continue into the conclusion of the earn out period.
Reported revenue was up 10.6%, reflecting a significant increase in consumer demand for our products due to carbon.
Organic sales were up 8.4% driven by volume increase of 4.9%.
Positive product mix and pricing that 3.5%.
Organic sales growth was driven by higher consumption, lower couponing and recovery of retailer in stock levels.
Now, let's review the segments.
First consumer domestic organic sales increased by 10.7% due to higher volume and positive price mix.
We typically try to break down their organic growth were 6% as consumption growth, reflecting strong tracked and on track from E Commerce growth.
1% from lower couponing.
And then approximately 3.5% from improving retail in stock levels.
Overall growth was led by Harman hammer liquid laundry detergent Carefusion little Critters, Gummy vitamins, Harman Hammer clumping cat litter and pay Concetta and Oxiclean stain fighters.
Consumer international delivered 0.6% organic growth due to positive price and product mix offset by lower volume.
Growth was driven by the T. stress shampoo, femfresh feminine hygiene portfolio, and Armen hammer liquid laundry detergent and the global markets group business, partially offset by Europe in Mexico.
Mastic market declines of note Asia Pacific had strong performance in the quarter.
For SPD business organic sales increased 3% due to higher volume offset by lower pricing and demand for our products continues to grow in the poultry industry.
Turning now to gross margin, our second quarter gross margin was 46.8%.
220 basis point increase from year ago, due to a reduction in trade couponing and improved productivity.
In terms of our gross margin bridge first year ago positive price and volume and mix contributed 220 basis points.
Productivity added 140 basis points offset by higher manufacturing costs of 110 basis points.
It was driven by 110 basis points related to covert supply chain costs.
And then improved commodity costs were offset by higher manufacturing costs.
Finally, a drag a 20 basis points from the prior year flawless accounting impact and a 10 basis point drag from FX is how we get to 220 up for the quarter.
Moving now to marketing marketing was down 6.8 million year over year marketing expense as a percentage of net sales decreased to 180 basis points to 10.2%.
Due to retailer out of stocks marketing spend was significantly reduced and shifted the back half to support new products.
For SGN, a Q2 adjusted EPS DNA increased 30 basis points year over year, primarily due to higher incentive comp intangible costs related to acquisitions and investments in R&D and I take.
And for net operating profit the adjusted operating margin for the quarter was 21.5%.
Other expense all win was 14.7 million a slight decline due to lower interest expense, resulting lower interest rates.
And for income tax our effective rate for the quarter was 19.6% compared to 18.7% in 2019, an increase of 90 basis points, primarily driven by lower stock option exercises.
Now turning to cash for the first six months of 2020 cash from operating activities increased 70% to 599 million due to higher cash earnings and a decrease in working capital. This includes deferring and 81 million dollar income tax payment in line with a cares Act.
Within the quarter, we fully repaid the revolving credit line that was access in Q1 during the early days of cobot.
As of June Thirtyth cash on hand was 452 million.
Our full year Capex plan has gone from 80 million to 100 million as we begin to expand manufacturing and distribution capacity, primarily focused on laundry lettered vitamins.
Now turning to the outlook companies now reinstating the 2020 outlook, given we have half the year behind us and strong sales growth in July.
We are due to quarterly volatility in retailer orders and consumer consumption.
We will only provide a full year outlook.
Now expect approximately 9% to 10% full year 2020 sales growth and approximately 78% organic sales growth.
Adjusted EPS growth is expected to be 13% above the high end of our original some the 9% outlook.
It implies a front end loaded year and flat EPS in the second half.
As the company has shifted promotional and advertising dollars from the first half to the second half in support of new products.
Turning to gross margin the first half gross margin expanded 150 basis points, we expect that second half will contract by a similar amount.
Most of it is simply the year over year impact of acquisition accounting.
The balance reflects incremental cobot costs as well as waterpark terrorists, new product support that Matt mentioned incremental manufacturing and distribution capacity investments.
That that means will be slightly below our original full year margin outlook.
As you heard from Matt, we intend to make incremental investments in the back half to 2020. Some examples here include a new third party logistics provider outside storage to handle surge inventories preliminary engineering on capacity is decisions.
Ns outsourcing costs as well as other investments around automation consumer research and analytics.
Lastly, consistent with how we've been managing throughout the crisis. Our outlook may continue to adapt and we may continue to deferred trade couponing and advertising even into next year, depending on consumption a resurgence of covered 19 more supply constraints.
And with that men I'd be happy to take any questions.
Thank you to ask a question press. The Star then one key on your Touchtone telephone to withdraw your question from the Q press the pound.
Our first question comes from Bill Chappelle with Suntrust. Your line is open.
Thanks, Good morning congratulations.
Hey, thanks.
I guess first just on those last kind of commentary a Rick.
The way you accrue for advertising and marketing means that even though you've kind of postponed from first half second half a dozen really didn't really affect the quarterly accrual is that correct and then I guess, if you make the decision to push it to next year with that.
With that that create a reversal or something as we look to model for the back half.
Now, let me try to simplify bill the advertising matches, when we spend the money right matches when the when you're trying to launch the product so spend in the Q1 in Q2.
For the for new product launches was actually deferred so we didn't spend that we said we.
Consumption was so strong.
So in Q3 Q4 that spending.
For for the litter laundry innovations that met went through will be spent and so it's just the extra dollars go out in Q3 in Q4.
Got it.
And then just from a I understand you're not seeing much pressure from trading on the private label do you think you're seeing.
A whole lot of benefit from consumers trading down to your do your value part of your portfolio or is it really just.
Things are are hitting so well with the premium sides hitting so well, it's it's not really affect it's tough to tell at this point.
Yes, Hey, Bill it's a it's Matt.
It's hard to tell right now because as you know the beauty those $600 weekly checks have been helping quite quite a bit so.
As far as disposable income goes so that's been propping up.
Consumers.
It could be more likely that to happen in the second half, but when you talked about shares I mean arm <unk> hammer liquid laundry was up 80, bips in the quarter to 13.9%.
But I think it's too early to to make a lot of judgments about.
Share movements, particularly looking at the second quarter, because you had a few months there where you had the shelves wiped out and certainly not dependent on whether or not that you had product on shelf dictate when the consumer picked up your product so.
This is say I think the important thing to think about is that.
Retailer in stock levels.
Have normalized and so so now that you have normalized in stock levels.
You can expect promotional activity.
To start normalizing as well because that was all eliminated from the second quarter.
Got it so you are seeing promotional level kind of normalize in July.
Im San we expected to happen in the second half.
Okay, great. Thanks, so much.
Thank you. Our next question comes from Rupesh Parker with Oppenheimer. Your line is open.
Good morning, and thanks for taking my question also congrats great quarter.
Thanks for purchase I guess, I guess startup or first on flawless on at least Archrocks. We'd hope you saw out of stocks on flow that some some the retailers. So just curious where you are from an out of stock perspective, and then if you look at flawless. Obviously has now been a few quarters. Since you bought the asset would you say is now back on track to have you guys are originally envisioned when you when you maybe the ACA.
Vision.
Yeah, well, if you measure back on track by how would the sales look in Q2 year over year, we were actually up.
So in spite of the fact that you had told Lisa store closures the.
People buying product online has helped us a significantly and rupesh as Rick and just give you context remember follows was was down about 20% and Q1, it's up that's a positive in Q2, which is which is great out of stocks are exactly right.
When you have strong consumption like we've seen a above and beyond what we affected than we have out of stocks and we're in the high.
Hi, Eightys mid to high Eightys at retail when you do the blended average and we expect that to improve by the end of August.
Okay, Great and then I guess I guess one more question. So if you look at some of the trends that you're seeing related to coated obviously cleaning strong vitamins are strong like are there new opportunities you guys cheaper church and write down the road just related to some of the trends you're seeing right now in your business and and from a consumer perspective.
Well gummies is an obvious one six cents.
Product launches in Gummies, I think we'll be well received not only this year, but but next year I think cleaners is probably an area we have opportunities to expand we're going to expand capacity there.
We can improve our claims so antibacterial claims, which we haven't had a lot of those on our products. So we can now introduce it takes a bit of time.
To do that because you have to get registered with the appropriate government agencies.
But that's that's one that that could help us and that would be for oxy clean as well as could boom cleaners and few others.
Okay, great. Thank you.
Okay.
Thank you. Our next question comes from Nik Modi with RBC. Your line is open.
Yes, good morning, everyone.
I was hey, I was hoping you can just a pine on direct to consumer not necessarily going to third party, but obviously the shift online is going to be permanent why don't you consumers coming online some of the older demographic. How do you think about philosophically third party E commerce versus direct.
Consumer and I know, it's a very expensive proposition, but it seems like.
This is something that might need to be done broadly across consumer space. So just wanted to get your thoughts around that and how you think about that from a kind of build in house or potentially do it through M&A. Thanks.
Yeah, Hi.
Direct to consumer is a difficult.
It's a difficult path for any one particular brand tend to follow generally to be successful. There I think you really have to have a great deal uniqueness and oftentimes the hiring in order to to afford a direct to consumer website.
So consequently, it would appear that the the larger.
The dedicated retailer dot coms, whether it's a amazon or or Walmart, Walmart dot com Cosco dot com.
That seems to be.
The destination for most brands unless there's some uniqueness that can justify direct to consumer.
Got it.
Then just from innovation standpoint, obviously, you're talking about some some new product to the Michelle how are we looking I mean is this are you going to.
Our your biggest retailers actually going to reset on time and it's in the fall or is that something that's going to be a little bit offline.
Yes. It was some resets were delayed.
There was lot of disruption in the in this in the second quarter, just because the rather than reset the shelves as you know the retailers directed the store personnel, just just to get product on the shelves.
So you saw some of that particularly in the laundry category, but I do think it's all going to catch up by the end of the third quarter.
Great I'll pass it on thanks, a lot guys.
Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is open.
Great. Thanks, Good morning, guys congrats.
Results and I hope that Oh people doing well.
Hey, Matt I'd like to pick up on the prior question just on some of the some of the big trends, we're seeing but hopefully sort of tied in to your longer term thinking and implications for the company's topline growth relative to the 3% that you've targeted for very long time. So yes, the focus on cleaning in health and wellness and retailer folks.
Suncor SK use so the fabric care baking soda vitamins, all should see structurally higher demand. It seems like this whole this will have a longer tail to it things probably go from bad to worsen half for Trojan, but it seems like church you'd be a net beneficiary when when you go through the through the portfolio in total you should see higher demand. So how are you thinking about category.
Longer term as the organization is making decisions with respect to capacity and investment and potential implications relative to your longer term outlook on 3% topline growth in that I've a follow up.
[laughter], what we won't be quote any numbers today, Kevin, but you've heard us say that we're looking to expand capacity for laundry and litter and we're trying to do battle de bottleneck our plants for.
Baking soda and though we've stood up some a whole bunch of co Packers to help us on on the cleaning side. So you're right. When you look at this year do you see categories that are they are down double digits like dry shampoo.
Water Picco waterflood, Susan and condoms, but at some point those are going to come back right and but we see vitamins is going to be.
Expected to be a permanently higher plateau.
I think the longer behavior goes on new behavior goes onto more likely.
It gets embedded in the consumer.
So would suggest that vitamins would be higher going forward.
The cleaners, who would be higher going forward, that's just not as big a business for us but.
Its place we're going to invest now because we can see the opportunity with the anti back any bad claims baking soda baking soda since people have been home have that's been rediscovered affect them were up double digits in baking soda month after month.
We got a de bottleneck our plants.
That could also be a permanently higher.
Assumption level. So it's a kind of a rollercoaster your depend on what category looking out, but you know the the.
The best case would be all these categories a normalized and then we got a handful of categories that are ever permanently higher consumption level, which bodes well for the long term outlook for the company.
Got it makes sense, if I could just squeeze in one one follow up but I wanted to ask you about the market share opportunity in in the laundry category.
I've been a bit puzzled by one of your key competitors strategy not referring to the one in Cincinnati and their willingness to seed market share almost across the portfolio seemingly with the exception of its most premium brand. So while I Wouldnt expect you to comment on any competitor strategy laundry or otherwise, perhaps talk about the market share opportunity.
Both in the value went in mid tier.
Laundry category and then your expectations year do we see any sort of change in posture. What do you guys have in your guidance with respect to any any significant ramp and trade spending in that category.
Apps in the back half the year.
And what we launched our biggest category and we have we've got great brands and we like our prospects going forward. So we have Harman hammer, we have extra we've actually clean you know we're exiting oxiclean. So we we announced that earlier.
This year.
Extra.
Extra is overtime slowly been taking share from a one of those other competitors that you mentioned and.
Although share is down for extra expected it to be down because we exited drug early this year you may recall, we announced that but going forward. We think it we're in a great place. We think we have with stronger brand.
And we are the opening price point, we're deep value detergents. So we think going into this recession, we feel like we're well positioned and Harman hammer.
I said this before we have a an unfair competitive advantage Harman hammer is a over billion dollar brand.
So it's an advertised value detergent and that is not true for the for the other variants are there other brands in the value tier.
So over time, we continue to win and we also innovate.
So we see so whether new innovation this year with.
Harman Hammer clean simple tsum tsum simply six.
So.
The Harman Hammer and just some take a page at a at a British book.
Over the past year, the number households that are buying Armen hammer has increased about 3%.
And so the brand gets stronger all the time, it's our biggest brand. So I think Harman hammer detergent is in great shape in I think extra is well positioned as the opening price point deep value.
Particularly going into this recession.
We think we're well positioned long term.
Excellent. Thanks, Matt Good luck guys. Okay. Thanks Kim.
Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is open.
Great. Thanks, good morning.
I was hoping I guess.
Hey.
Do you think one with just a follow up on discretionary what's happening.
Promotional environment.
I guess without talking about.
I'm just curious why like why do we think that promotional environment tick back up there.
Big brand Jordan retailer driven.
So just curious on go wide back you know the right assumption looking ahead.
Then the second thing was just the I got a little bit confuse honestly when you were talking in the beginning about.
Shipments versus.
Consumption and that year to date I think you think we're now in balance, but then said for baking soda and vitamin D., we're still running behind so just to clarify does that mean, there's other categories that are running ahead and that's the total company comes that even if that's the case which of those categories. Thanks.
No. It wasn't really in aggregate, we said category by category. If you look at shipments and consumption who seem to be tracking each other we just said it's for a couple of them, there's still more demand than we can fill netsol. So we can we can sell ever every case of gummies. So we can make and it's the same is true for for baking.
So that's sort of what I meant.
Oh, no right now Mr emotional.
First of all you as far as per promotion environment. If you just have the what happened in Q2 is like.
Everybody just just a eliminated there.
Promotions and coupons the laundry category.
Last year was it was around 36% and.
Sold on deal and then in Q2 this year, it's a 19% and similarly, if you looked at litter.
She was 20%.
And.
This you said core was 12%.
Just this huge decline team out.
Sold on deal.
Because you didnt have too right.
The oldest.
Pantry loading that was going on a difficulty in re stocking shelves. So it just made no sense and it wasn't it wasn't just the.
The brands so the retailers so that as well.
So now you as you kind of look ahead would.
So it's sort of reverse is true. So you have those categories are in stocks are back up into the high Ninetys. If you looked in the in Q2 they were in the eighties.
So once you get to high Ninetys. Your Senaki things are back in stock and then used to say, okay or people going to start competing on the same basis, if they did pre covet.
And.
I think a simple way to think about it is you got 11% unemployment and who knows what's going to happen with this is going to be another wave of.
Stimulus will be 600 Bucks for handbooks 200 Bucks when will that hit and said I think the second half dynamics will be different than the first half. So we have to wait and see and see if.
If things do return to normal levels, but it would seem that.
The fundamentals that would you'd need to have in place.
I would be there.
Hi, unemployment.
You don't have a stimulus package.
You don't panic buying you know you've in stocks are back so that's why I'm, saying, hey, you could be an expectation for the second half.
Okay. That's great. Thanks, Dan that's okay.
Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is open.
Thanks.
Sort of I guess sort of on that same promotional topic just on the balance of back half investment. It just feels like a lot is going above the line into couponing and trade as you've been talking about.
And then some of the other capabilities investments that you mentioned Rick upfront.
I think that implies higher as today also maybe you could just tease that out for me and I guess that if that is that how much is left for for puree NP investment and do you expect BNP line to finishing that 11 have 12% kind of sweet spot range are we going to slipped below that this year in favour of the other investments.
Yeah, Hi, Steve It's Rick.
I'll take the investment question largely.
It's it's a broad base investments and it's hitting a couple of different lines and the PML, but.
Mats comment was right we're back to our assumptions normal trade and couponing levels you know the shift in the first half is really just around new products. So the trade couponing to support new products. Those two launches that we talked about.
Now, we'll have incremental investments around capacity, we I walk through those examples that heads largely margin as an example.
We did we did mentioned in my comments that we have some tariffs for what effect that got reinstated that'll hit margin. Some of the investments will hit us today like the R&D investments analytics.
So if I'm thinking about marketing for the full year than you had the 11 have said.
12 range is still a sweet spot for us, but wouldn't really go in any more detail than that.
Yeah, just to add to that.
Steve.
We have for marketing remember, we have is too big launches.
Clean and simple and support move to the second half no. We've got the absorb axa.
It really cool new cat litter, and then remember lunch and learns where we can't really do those at the dental offices. So we're going to be amping up the advertising for water pick.
And flawless as a young brand as well so we're building equity her to say that we react were up year over year in Q2. So.
When put some money behind flawless as well so we got good destinations for for the Doe and the second half.
Okay, Alright, great and then if I could on on on International I think I think.
That segment had a pretty wild up and down quarter.
So could you just I guess, where we are now July forward, just give us a little bit more on the latest outlook there and how.
You know how much of the volatility you think's behind you and our mortgage steady state or are you still poised still braced for more volatility.
As we go into the but the balance of the or.
Yeah, no you're right. The a second quarter was wicked for international now at the GMT business, which is our business, where we ship product so over 80 countries.
Did extremely well.
But our country's really suffered.
But we do think that Q2 is likely the bottom of cycle.
We should start to see improvement in the global markets as the Lockdowns start to ease up.
Asia should stay salad and that was.
Surprisingly strong in the second quarter, and we expect Europe, which had steep double digit declines in Q2 is skewed Scott Creamed, Oh, we expect that to be.
To be more low single digit declines in Q2, and and our July performance by the ways in line with you know what I what I just said so we ended the 0.6% organic growth for international for Q2. So we would expect that that the organic will improve sequentially.
Lee from here in Q3, and then in Q4.
Okay perfect. Thank you.
Okay.
Thank you. Our next question comes from Olivia Tong with Bank of America. Your line is open.
Thank you.
Just want to talk a little bit more about your expectations in the second.
Given that July stream, that's pretty impressive so.
Okay, just talk a little bit about once you thinking.
Restocking persons continued demand a little bit you gave some numbers there.
On your on second half with what's your base case assumption because you're actually seeing just in terms should think consumptions.
Potentially accelerate from here, if you, mostly kind of demand and you're going to the quarter pretty clean from that perspective, and I was going to just compared to other competitors to people who have leasing for your guide.
Youre just organic sales.
Really hasn't isn't looking for much deceleration.
Could you first half versus peers. Thanks.
Well, we saw a consent to July consumption as I said for the us business was.
Over 10% and if you should think to what was the organic growth.
In the second quarter for for the Us.
10%, plus so say, okay. That's a somewhat consistent with that we saw in the in the second quarter.
But remember the elements of that 10% in the second quarter were largely.
Well three pieces, one was to restocking, but in some was consumption and some was that the lower couponing.
You are making the assumption that included in that 10% is restocking.
There is there's less of that in July than there was in the second quarter just to add that add to that Livia. It's Rick is Oh, you said in the second quarter, 6% was consumption. One was couponing three and a half was with shipments Matt said in his comments shipments and consumption or are pretty imbalance here today, so that would imply.
Fly that.
Very little.
Incremental shipments for retailers.
Beyond with our in stock levels are is happening from a July go forward basis Thats all consumption.
Right and maybe I can clarify that a little bit. So you guys think domestic because you're looking for a bigger number at entry.
Well you think domestic consumption quick fix rate and then just sorry, Lilly organic 70, so im just trying to understand.
Relative to the consumption that you saw in July organic sales this for a little bit better than that so I'm just kind of been trying to understand what's your underlying thought is in terms of well our our employees back half if you take the midpoint implied back half organic is around 6%. So we feel like Thats really strong.
We're not going to get into the quarters per site, because we said all the volatility their ability is difficult to parse out quarters. We're just trying to give you a sense.
More so than most people do for the early trends in the quarter for Q3 and this will result in July.
Going to get into.
The cadence or sequence of each quarter on organic growth or what we think but in general the back half is still strong.
Because consumption still yeah, Olivia we had a better handle on that we probably would have called the Q3, but if we don't.
Not really a this is still lot lot lot of moving parts, but we thought.
Seven months into the year, we thought we had we could you could comfortably call. When we think the full year is going to be.
Thanks, that's helpful and then just.
Commerce.
Talking about your penetration commerce, and obviously a lot in the last few months how is that how that's influencing your growth strategy on income from here.
Well you know people live that Didnt buy online are now discovering online so.
We've had a big pickup and we think we've benefited from all the work we've done over the past a couple of years to put ourselves online web pages the creative content.
The storytelling et cetera.
Weve flawless certainly benefited from online salons, we're closing people move there and discovered flawless water pick also benefited as well, although waterproof picked up crushed because of.
On bricks and mortar.
People, who are buying one of losses were not going to bricks and mortar and returning to online.
But I thought I think longer term because this has been such a focus for the company.
We're when we benefited greatly we think that the second half will be at least 13%.
Online sales percentage of our total sales or higher.
So I just I think its credit to our marketing and sales organization to for US, where we are and where we're positioned to as as people move to this class of trade.
I don't expect too.
Lose any sales in fact, we may pick up more.
Thanks very much.
Thank you our next question goes from.
Hi, Joe Altobello with Raymond James Your line is open.
Hey, guys good morning.
Just go back to your answer to Steves question regarding this look internationally relative.
Matt.
I've alluded to the difference.
The.
Consumable mobility Lockdown international markets, but if I'm curious.
Or is there some difference in the nature of the categories.
Your distribution channels and some of these markets as well.
What caused that.
Yes, you got to look at what what the products, we're talking about that that international is selling.
So the international doesn't have.
The gummy vitamin business that we've got it doesn't have the baking.
So the business that we have Sophie if you if you look at the the categories, where we had big big consumption in in the second quarter.
You won't find them in international So I think that's one of the big differences between us and the international results right now.
Okay, and then secondly curious on the M&A environment.
Very much in the market for acquisitions.
Hello.
Good.
Yes.
The number of sellers the willingness of sellers the a multiple of you're seeing out there.
Yes, it's it's good question.
I've been with this company since 2006, and the you know there's been a good times in bad times over that period.
Joe there's always something for sale.
So.
The immediate even now.
So I don't expect that there will be there will be much of the.
I have a slowdown in the number of opportunities and just remind everybody were pretty fussy about well what we buy.
Yes.
We directed by as you know this number one or number two brands but.
Yeah, I couldn't really comment on on multiples at this point I think people always have.
A big multiples on their heads when they when they are selling because yes. The good news Joe as.
As our balance sheet issues.
Testing and right, we're going to be less than 1.5 times.
Levered debt to EBITDA into the year and if you look at a net debt will just generating so much cash would be closer to 1.1 times net debt to EBITDA. That's good point.
Got it okay. Thank you guys appreciate it okay Joe.
Thank you our last question comes from Andrea Teixeira with Jpmorgan. Your line is open.
Thank you and good morning.
Hoping just so you can impact the topline drivers I think.
You gave.
During this last commentary on obviously the vitamin.
And then Rick if you can talk about the price mix benefit for the balance of the year.
And I know the Braves anything like that so 120 basis points, but.
The vitamins I think you said consumption up 40% and you are now shifting to consumption some thinking.
Why is that 10% that included it's probably in the U.S., It's probably about 200, some 400 basis points driven by vitamins and then I understand from your commentary about.
Condoms like getting back about becoming less negative is that how the way we should be thinking and as you lap next year.
I know it will probably agree that's going to continue elevated but that tailwind is going to go away by the way, we should be thinking like five or 6%. It included before for the balance of the year and on the price mix benefits of 220 basis points. So for the balance of the year that bridge for the gross margin that's going to.
The reverse to negative is that that guide.
Sorry.
One question.
Yes, I think there were half a dozen in there.
Andrew.
Thank you first one with respect to.
Growth, Yes, I did mention earlier that we had over 10% growth in the us in Q2.
And we're seeing them shipments similar in the month in July and I did say that that you know about a third of that.
Is.
[noise] is vitamin business and it would seem that that we continue for the remainder of here.
This is of the 10, I think Rick called out.
Bruce would you would you repeat that again Rick.
Yeah for it was 6% for consumption it was 1% for lower couponing and it was three and a half or so for retailer in stock retailer inventories going back up and just to take a big step back. We also bridge typically from.
Nielsen Nielsen would have said our Consumptions 2.9, so you can imply that.
We had on tracked channel growth of around 3%, that's how we get 6%.
On track in E Commerce. So Thats again, just a reminder on that on that bridge.
Yes, so I did mention that with respect to consumption that only two of our.
Over 15 categories have negative content consumption in the month to July.
And those would be dry shampoo.
And condoms that doesn't mean everything else is is flying either.
I had mentioned the waterfall us or shipments were double digit in the month of July.
The consumption is only only slightly positive for four flavors and then in terms of gross margin I think thats. What your question is on price volume mix in the quarter we had.
Positive 220 basis points, so for the first half.
Largely had positive 180.
Basis points for price volume mix and the second half as you would expect because we're getting to normal promotional levels and we're supporting new products.
With coupon and trade that number will decelerate it'll still be a positive contributor, but just not as much.
So hopefully that gives a little bit account.
I appreciate that thank you.
And there are no further questions in the queue I'd like to turn the call back to Mr. about Faro for any closing remarks.
Okay, well, hey, thanks, everybody for joining us this morning, we had a.
Terrific first half great second quarter, and we do try to provide as much details we can.
To do you intend to investors so they can get down to date.
View of where we are in this way we provide the the July.
Shipment and consumption data as well so the consumption data for the quarter and we'll do the same when we get to.
Talk to you at the end of Q3 so.
Ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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