Q3 2020 Church & Dwight Co Inc Earnings Call
Happy now to remind you that on this call. The company's management may make forward looking statements regarding among other things the company's financial objectives.
These statements are subject to risks and uncertainties and other factors are described in detail the companies you see.
I would now like to introduce your host for today's call Mr., Matt Farrell, Chief Executive Officer of Church <unk> Dwight. Please go ahead Sir.
Good morning, everyone. Thanks for joining us today I'll begin with a review of the Q3 results and I'll turn the call over to Rick.
CFO and Rick is done well open up the call for questions.
The pandemic has given us an opportunity to display our agility as a company we.
We increased our communications with retailers, we changed our marketing messages ship.
Shifting investments to categories that are most important to consumers.
We set new production records for my diffusion arm, <unk> hammer laundry and Harman Hammer baking soda and we lose people to focus on the online class of trade.
We've been proactive in seizing the opportunities presented by the crisis center, increasing manufacturing capacity in our plants and externally with new co Packers.
I want to thank all of our employees for their hard work their efforts are paying off.
The agility and resilience of the church and Dwight team is showing up in our results.
Our priorities continue to be employee safety meeting the needs of consumers and retailers scoping the communities, where we live and ensuring the strength of our brands are.
Our plant warehouse and laboratory employees have done an exceptional job keeping safe, which has contributed to our ability to operate our supply chain.
Our office employees continue to work remotely.
And are doing a super job running the company.
So now let's talk about the results Q3 was another exceptional quarter reported sales growth was 13.9% and adjusted EPS was 70 cents revenue earnings and operating cash flow were all significantly higher in Q3 than last year driven by the significant increase in demand for many of our products.
Organic sales grew 9.9% driven by higher consumption.
Regarding E Commerce, we were already strong pre covidien and well positioned online in.
In Q3 around lunch sales increased by 77% as all the retailer dotcoms have grown.
One example would be gummy vitamins.
In 2019, 8% of our full year sales were online. This year, we expect full year to be about 14% online.
Recall, we began the year targeting 9% online sales as a percentage of global consumer sales in Q1. It was 10% online Q2, 13% and cute Q3 also 13% so.
We expect the full year to be actually close to 13% as well.
We continue to conduct research on the purchasing habits of U.S. consumers, there's no surprises here actually the.
There was continued consumer concerned that stores will run out of stock the websites will face delivery issues.
Sumas 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.
We look at year to date shipment and consumption patterns, our brands remain generally in balance in the 15 categories in which we compete.
Well with respect to our brands, we had broad based consumption growth in Q3.
We saw a double digit consumption growth and by diffusion and little Critters Gummy vitamins Harman hammer baking soda oxi clean flawless Orajel nearer first response pregnancy kits and cleaners.
In household.
Our laundry business consumption was up 4% and arm <unk> Hammer cat litter was up 8% ward.
Waterflood Sears is another bright spot as consumption turned slightly positive in Q3, although.
Although our lunch and learn activity continues to be significantly curtailed we intend to continue to address this with incremental incremental advertising.
In addition to fight a fusion a little critters Waterford Waterfloods is another brand we expect to benefit from the heightened consumer focus on health and wellness.
The teased dry shampoo remains impacted by social distancing with consumption down, 10%, but improved sequentially compared to Q2 when consumption was down 22%.
Trojan consumption was down 6% Q3, but also improved sequentially when we were down 15% in Q2.
There's no doubt that consumers have made health and wellness a priority.
Hi, diffusion and little Critters Gummy vitamins saw the greatest consumption growth of any of our categories in Q3.
49%.
The category consumption was even higher our expectation is that consumer demand for gummy vitamins will remain high.
And we have new third party capacity coming online in late Q4 to take advantage of this trend.
Consumers are focusing on health and wellness, but also cleaning home cooking and new bromine routines.
At a recent Investor Conference you May have heard me say consumer research that suggests it takes 66 days to form a new habit.
Only time will tell if all of these new behaviors will translate into permanently higher levels of consumption.
But if they do indoor overtime, we believe we are well positioned.
Now a few words about private label as you know our exposure to private label is limited to five categories privately.
Private label shares have remained generally unchanged for the first second and third quarters of this year.
And now international.
Our international business came through with double digit organic growth in the quarter driven by strong growth in our GMT business, that's our global markets Group and Canada in October our GMT business is off to another strong start and we continue to see strong Pos recovery in Canada and Europe.
After three consecutive quarters of growth our specialty products business contracted 3.4% in Q3, primarily due to the poultry segment.
Now turning to new products innovative new products will continue to attract consumers even in this economy and.
In 2020, we launched many new products, which are described in our press release.
Why did fusion gummy vitamins launched a number of new products and to capitalize on increased consumer interest in immunity, we launched the power zinc and elderberry gummies.
We've launched Armen hammer clean and simple, which has only six ingredients plus water compared to 15 to 30 ingredients for typical liquid detergents and in the second half, we launched Armand hammer absorb excess clumping cat litter, new letter, which is 55% lighter than a regular litter.
Now, let's turn to the outlook.
We're having an exceptional year.
We now expect full year, adjusted EPS growth of 13% to 14%, which is far above our evergreen target of 8% annual EPS growth.
Given our strong performance, we have raised our full year outlook for sales growth to be approximately 11% and organic sales growth to be approximately 9%.
As mentioned many times in the past, we take the long view in managing church and Dwight in order to sustain our evergreen model.
In the second half, we took the opportunity to increase our marketing spend behind our new products and we made incremental investments in the company.
As we wind up the year, we're putting together a 2021 plan.
It's safe to say that we have a high degree of confidence that we will meet our evergreen model in 21.
In February we will provide our detailed outlook for next year.
Now in conclusion, I would like to remind everyone of the many reasons to have confidence in church and Dwight degree.
The great thing about our company is we are positioned to do well in both good and bad economic times the categories in which we play are largely essential to consumers and we have a few categories that stand to benefit from the current environment.
We have a balance of value and premium products. Our power brands are number one or number two under categories and we have low exposure to private label.
We're coming off some of the best growth quarters, we've ever had.
With a strong balance sheet, we continue to be open to acquiring TSR accretive businesses we.
We believe our company is stronger and more agile than ever.
And finally, we have the resources the common sense, but ambition to ensure that our brands performed well in the future next up is Rick to give you details on the third quarter.
Thank you, Matt and good morning, everybody, we'll start with S. third quarter, adjusted EPS, which excludes an acquisition related earn out adjustment grew 6.1% to 70 cents compared to 66 cents in 2019.
As we discussed in previous calls the quarterly earn out adjustment will continue until the conclusion of the earn out period.
Longer than expected sales performance allowed the company to spend incrementally on marketing.
<unk> revenue was up 13.9%, reflecting a continued increase in consumer demand for our products.
Organic sales was up 9.9% driven by a volume increase of 10.2%.
Partially offset by 0.3% of unfavorable product mix and pricing, primarily driven by new product support.
Volume growth was driven by higher consumption.
Now, let's review the segments first consumer domestic organic sales increased by 10.7% largely due to higher volume overall growth was led by by diffusion and little Critters Gummy vitamins water Pik.
Oral care products arm, <unk> hammer liquid laundry detergent and Oxiclean stain fighters.
Commonly get asked to bridge the Nielsen report into our organic results. This quarter tracked consumption was 7.7% for our brands compared to an organic sales increase of 10.7.
In this environment, one might assume that is restocking retailer inventory that is not the case, we had 400 basis points of help from strong growth in untracked channels.
Similarly online and 100 basis point drag from couponing to support new products. The good news is as you heard from Matt consumption and shipments are in balance both low double digits.
Consumer international delivered 11.6% organic growth due to higher volume offset by lower price and price mix. This was a great recovery for our international business from a flat Q2.
Growth was primarily driven by the global markets group in Canada.
For SPD business organic sales decreased 3.4% due to lower volume offset by higher pricing.
Lower volume was primarily driven by the nondairy animal and food production sodium bicarbonate business.
Turning now to gross margin our third quarter gross margin was 45.5% 110 basis point decrease from a year ago.
Gross margin was impacted by 110 basis point drag from tariffs and a 90 basis point impact from acquisition accounting.
In addition to round out the Q3 gross margin bridge is a is a plus 100 basis points from price volume mix.
Plus 160 basis points from productivity programs offset by a drag of 80 basis points of higher manufacturing costs inflation and higher distribution costs as.
As well as the drag of 90 basis points for Cobi costs.
Moving now to marketing marketing was up 45.7 million year over year as we invested behind our brands.
Marketing expense as a percentage of net sales increased 230 basis points to 13.8%.
[noise] for SDMA Q3, adjusted SG nine decreased 30 basis points year over year, primarily due to leverage from strong sales growth are.
Other expense. All then was 12.3 million 3.9 million decline due to lower interest expense from lower interest rates.
And for income tax our effective rate for the quarter, a 17.3% compared to 21.6% in 2019.
The decrease of 430 basis points, primarily driven by higher tax benefits related to stock option exercises.
And now turning to cash for the first nine months of 2020 cash from operating activities increased 29% to 798 million due to significantly higher cash earnings and an improvement in working capital as of September Thirtyth cash on hand was 549 million.
Our full year Capex plan continues to be approximately hundred million as we began to expand manufacturing and distribution capacity, primarily focused on laundry litter and vitamins.
As I mentioned back at the Barclays Conference in September we do expect the step up in Capex over the next couple of years to approximately 3.5% of sales for these capacity related investments.
In addition, as you read in the release due to the strong cash position the company may resume stock repurchases in the future.
For Q4, we expect reported sales growth of approximately 9%.
Organic sales growth of approximately 8% and as Matt mentioned, we have strong consumption across many of our categories.
And then also last quarter you heard me walk through investments, we're making in the second half of 2020. Examples here included a new third party logistics provider outside storage to handle surge inventories preliminary engineering on capacity.
Vms outsourcing costs as well as other investments around automation consumer research and analytics. So what changed now we're calling down 190 basis points for the back half are down 20 basis points for the year and that implies down 250 basis points for the quarter.
We have some supply chain nonrecurring costs here are a few examples.
First.
Because of our outsize growth I mentioned last quarter, we are adding a new threepl distribution center well in the quarter, we again had stronger sales and as such had duplicative outside storage locations and the new Threepl distribution center that Wasnt operational.
So for a period of time, we had duplicative costs.
We're also in the process of going through make versus buy decisions and that will trigger a couple asset write offs likely in Q4.
We have lean training across the plants and finally due to the great results this year higher incentive comp cost that flow through Cogs.
So our full year tax rate expectations, or 19% and we also raised our adjusted EPS growth to 13% to 14% now.
Now that we're through the outlook I also want to spend a minute on flawless as.
As you saw in the release, we had an earnout benefit of approximately 50 million in the quarter and reported earnings we exclude any of the earnout movements and adjusted EPS. Some color on that swing as a backdrop, we bought that business for $475 million upfront and a 425 million earnout tied to year end 2021 sales.
Net sales target represented in excess of 15% CAGR for three years off of the baseline of $180 million or trailing sales.
That revised three year CAGR for this business is closer to 8% and as such the earn out liability comes down and earnings go up we're still positive on this business and the strong consumption growth. These past six months is a great indicator for the future.
As you heard from Matt The company is well positioned as we enter 2021 and with that Matt and I would be happy to take any questions.
Okay. Thank you and that sorry, lying down ladies and gentlemen to ask a question you will need to press star one on your telephone to withdraw your question yesterday at bound our high school.
Our first question comes from Olivia Tong with Bank of America. Please go ahead.
Hi, Olivia presenters.
Hi can you hear me yes.
Yes, I hear you now.
Okay great.
Good morning, first I want to talk a little bit about.
Some of the expenditures first on marketing can you just talk a little bit about the key buckets of spending and whether is it more about frequency depth of brands being advertised more mediums.
And the E commerce investments that you're making as well thanks.
You alluded about 70% of our advertising right now is digital disease, and Thats been moving up year after year and it was accelerated more this year because of consumers moving online as far as where to invest and we have a couple of big launches right. Now you have Harman hammer clean and simple. So I just described and the opening comments and also in the script.
New platform for Us, it's got six ingredients plus water compared to many ingredients for the typical launcher detergent and we think thats going to be a platform. We can build on in the future. So we've been spending behind it.
And the second is almond.
Harman Hammer clump <unk> seal absorb exits in the new cat litter, we haven't had a strong cat litter in the category. There's been a lot of growth there over the years. So we came up with a brand new cat litter that has a different substrate, hence 55% lighter than our existing cat litter. So we're getting behind that in the second half of the third.
Would be flawless.
Losses, obviously, a new brand that we acquired last year.
It's an at home solution lot of people are turning to devices instead of going to salons and spas that are generally closing of lower volume soup and putting my money behind flawless as well and and again the other money would be gone just brand building, which we've typically done in the past when we have the ability to spend yes, I would just add a little.
To that right. The brand building comment is maybe a quarter ago. We did have some out of stocks as such but five of five of our brands.
We're growing share as of last quarter seven this quarter and we think it's going to be even stronger that as we exit the year.
Can I just follow up too on.
Turning to inorganic sales, obviously very strong but.
Surprising how little leverage you seem to be getting off of that and yes. She may because it does seem that.
Here's our growing maybe 10%, but close to it on the topline and they're seeing a lot more.
A lot better margin flow through so can you just talk a little bit about the machining. Thank you.
Yes sure no you are right, we are getting phenomenal growth.
On the topline.
SG Nate we're not getting the leverage maybe you might think because we're also making investments when we talked about investments last quarter.
That transpired across the PML. So we're talking about marketing investments step up we're talking about supply chain investments, we're talking about SJ investments and so as we look at it.
Analytics, or we look at IP or cyber security or things that we can do to just bullet proof the company for many years to come SG ne is one factor, Yes, Hey, Olivia you now we run church and.
Dwight very lean shop.
So.
Theres no shortage of good things to and which we can invest across the company. So you know as Rick said.
Got automation projects, not just inside the plants, but office environment.
New product initiatives, where we do lot tests and learns IP projects R&D now these are all SNA items.
Olivia solar.
Does that answer your question. Thank you.
Okay.
Our next question.
From Kevin Grundy with Jefferies. Please go ahead.
Great. Thanks, Good morning, guys and congrats on the strong quarter.
My question for you just on on longer term guidance. I mean, this is clearly an exceptional year for the company, we would probably the strongest in the company's history from a topline perspective, and you're planning on 9% organic growth. This year clearly investing in capacity. So there. There is recognition here that demand is going to be sustainably higher.
Some of your key categories expanding relationships with co manufacturers et cetera. So I don't expect you to guide for next year. At this point you do then in February but should investors expect the company to revisit the longer term algorithm as well I mean, clearly it would seem like 3% is not the appropriate number nor do I think thats was discounted stock or in sales side numbers. So maybe you could just comment.
On that and then I have a follow up for Rick on margins.
Well in my comment was it safe to say.
We'll hit our number for next year, but we typically don't give the details or the numbers right now as you know.
But there is a we have a lot of tailwinds going into next year.
The biggest being and wellness health and wellness, but also cleaning that home grooming and and at home cooking. All of those things are are tailwinds for us and it will do also expect an improvement in consumer mobility next year and that that's going to help the PC brands have been up here for those brands that are down this year I want to make sure you heard that Kevin.
We have 12 pages of material that we read through during during the call that did say that we have a high degree of confidence in our on hitting our evergreen model next year.
Got it very clear Rick quick one for you and then I'll and then I'll pass along a couple of areas that are getting increasing attention from from investors would be the normalization or return of of trade spending as well as higher freight costs with respect to promotion, we're starting to see that a little bit in the Nielsen data you guys appear to be spending behind laundry and litter.
In households can you just talk a little bit about your intentions, what you're seeing competitively and then Rick with respect to freight cost as well maybe talk a little bit about that and maybe even broadly expectations from a from a planning perspective I'll pass it on thank you.
Yes, when you win in thinking about the promotional environment you have to go to household and household is laundry and litter. So if you go back to Q2, Kevin and you look at it.
Sold on deal for laundry and litter fuel year over year.
Q2, 2020 in Q2 2019.
Litter was down 800 basis points.
Sold on deal and launch it was down 1700 basis points of the numbers were.
In Q2 launch you was sold on deal, 19% and litter at 12%.
You go to Q3, and you look at laundry and litter sold on deal you're going to see.
Litter at 15% and laundry at 30% so.
Well, if they've stepped up a bit in laundry and litter, but we still look at year over year to see still a huge gap. So it really is 2019 Q3 sold.
Sold on deal for launch was 38%, it's 30% in Q3, so its still an 800 point gap and then if you look at litter it's.
It's also similar.
Last year Q3, 23% sold on deal this year.
15% sold on deal in the <unk>. So an 800 point go.
GAAP, both in laundry and litter so.
As the in stock levels have improved profit.
Promotional activity is slowly returned to normal, but it's still well below below normal yeah, and I would just add to what the gross margin impact of that is right. The first half of the year. If you look at price volume mix. Because this is where that would show up price volume mix for US was on average for the first half a good guy of 180 basis points 170.
Just a point or so.
And remember we pulled back a ton on on trade and couponing, because we just didn't want to exacerbate out of stocks and the second half of the year that number is closer to a positive 80 basis points.
As promotional levels have started to return to normal and we're supporting our new product. So while still positive just a deceleration.
As a contributor maybe on margin your second question was distribution.
Absolutely right distribution market is extremely tight.
I shared with our board yesterday as an example of that.
Before these last few months of only about 5% of all spot loads were wouldn't be picked up or rejected a said another way and now that's up to about 25% of all spot loads in the industry are being rejected.
For us the good thing is we do have a big large significant part that is.
Dedicated lanes right, we have some customers that are that pickup.
And so it's more on their supply our distribution network, but I would just tell you. It's tight costs are increasing brokerage costs are increasing.
But.
And then in the day and we've done a good job managing that and.
And it's not as impactful for us because of our dedicated lanes.
Thanks for the color guys. Good luck.
Okay. Thanks, Kevin.
Thank you.
Our next question is from and Andrea Teixeira with JP Morgan.
Hi, Yes, hi, good morning. Thank you just just following up on the commentary.
On the gross margin that you just gave now.
Is it fair to assume that given the tariffs that were.
I believe it's not anymore.
And.
In the back half of the year rider that you had been hit by.
Some of the tariffs on Chinese garrison flow in especially in the water water philosophy.
Is that is that fair to assume that you're going to have lingering gross margin pressure at least at.
The first half of the year, especially as you mention now.
The puts and takes or we should be seeing some mitigating or pricing as you go into as you're going to turn it to anyone.
Yeah, no. It's a it's a fair question Andrea of of course, if the tariffs are coming in the back half then there will be more pressure in the first half of next year, but I'll just point you back to Matts comment is we kind of tried to give.
In a kind of an outlook and said that in 2021, we believe that we're going to hit the evergreen model.
So that does mean margin expansion as an example, because we have to it's our job to mitigate things like that whether it's where we where we manufacture from how we can increase productivity in our supply chain is that a fantastic job. We hit an all time high this year in terms of productivity.
Our good to great program and that trend. We think is going to continue yeah. The other thing Andrew to keep in mind as you know it's always we always tend to focus on what can hurt you, but you see it is going to be some some.
Some pressure on because of tariffs initially, but you got to remember coated is also going the other way so that won't be as high those those co wood costs and 21 versus 20. So you know there's always offsets yeah, and let me give you. An example, because you might say well what happens if covered.
Spikes back up in 2021, well a big part.
Part of incremental profit cost for us early on it was just trying to ship as much product as we could to customers and so we are shipping out.
Less than full trucks right now that we have built inventory now that we're building capacity, we have more flexibility to make sure that we don't run into that same issue again.
And then on the distribution centers, which obviously you youre. It's everything to do you are trying to get in third parties and all of that.
And you are also investing a lot of money on your own capacity when would you think on that and you're going to be having the capacity coming through from production standpoint, and also the distribution brand you think you're going to hit those targets and obviously those pressures that you said you called out the non recurring.
Yeah, well the great news is that we just had our first shipments from the new Threepl. This this past week and so we believe we'll be up and running.
On this full bore in Q1 of next year, which is fantastic. So thats distribution and that's a meaningful difference in terms of our shipping capacity overall for the network for manufacturing right. If you do something in house. It always takes about 18 months, but the good news as we said for vitamins specifically as an example that we're going to go outside and that's going to be outside.
For.
For some small quantities already in Q4, and then ramped up really quickly in the beginning of 2021.
Okay, great. Thank you so much.
Thank you.
Our next question is from will perish Parikh with Oppenheimer.
Your line is open.
Good morning, Thanks for taking my question also congrats on a nice quarter.
Hey, guys wanted to start.
So I guess start just starting out the M&A curious what you're seeing right now on the M&A front and does anything change in terms of in terms of what you guys are looking at from an M&A perspective, just given the pandemic and some of them maybe some new opportunities you see going forward.
We will have the same criteria.
For many years as you know repair so I don't expect that to change at one point, we thought that there may be a.
More more properties come to market in the back half of the year.
I see a election was looming.
It's I guess, it's still possible between.
And next week and the end of the year. We did we did do a deal once upon a time that started in mid November we close it by the end of December we know thats possible, but I would say with respect to right where it criteria.
It hasn't changed.
Okay, Great and then you guys also mentioned that you may resume share buybacks. So is it fair to assume that you may prioritize share buybacks or readout paydown near term.
Well I mean, you've got to keep in mind, a refresh that our debt to EBITDA levels are still one point.
Net debt to EBITDA is 1.1 times by an end of the year. So in my mind, we can do both no no problem.
Okay, Great and then maybe just one last question. So there has been some questions just around just around thinking about gross margins going forward at the grille you have some headwinds this year Im yourself tailwinds from lower promotional environment. How do you think about the base level gross margins as we as we look to an extra like if it's a flat I guess, there's a modestly if you get the 20.
At this point decline in gross margins, if not the right way to think about the new base level or could there be more are now more headwinds this year that artificially depressing that base level.
Well, yes, I mean, you heard Matt and we talked about the Cobi costs. As an example that we think are extraordinary high this year that won't be as high next year, but again in January February when we go through our outlook. We'll go through it in detail today, we just want to leave you guys with that we're confident in achieving our evergreen model and that means gross margin expansion.
Okay, great. Thank you.
Thanks Rupesh.
Thank you. Our next question is from Lauren Lieberman with Barclays.
Great. Thanks, good morning.
I wanted to talk a little bit about the vitamin business. I know you guys have expressed a high degree of confidence in both at being taking vitamins and health and wellness concerns being is a sticky habit and I think assuming that you can you know.
Lap the performance this year with growth in 21 has to be a key part of the outlook because as I look at it at least using the Nielsen not knowing you know I don't have a full look of all channel.
Vitamins is growing is contributing maybe 50% of the topline growth in consumer domestic right now so.
I mean, historically Vms has been a fairly cyclical business overall for the industry. So can you just maybe talk a little bit about.
Why you think this time is different why you think that taking vitamins is going to be something that really persisted people.
Peoples degree of belief that immunity comes from vitamins.
I think it'd be really helpful perspective, as it feels pretty critical to the outlook. Thanks.
Yes, Thank you a little bit high on your 50% the Esteban and just using Nielsen. That's that's why that's fine yes.
Clarified here, you're a bit over the line. There I think you have to remember that when we bought this business.
Gummies for 3% of Vms and obviously, that's that's grown over time and I think a lot of people have discovered gummy vitamins as a result of the pandemic. So you have a lot more consumers oriented towards gummy vitamins than they were in the past so thats.
That's number one.
There are two is we're not growing as fast as the category in Q2 Q3 the category.
On average grew 55%.
We grew 40% this year, we grew 35% Q2, and this is consumption Lauren and 49% in Q3.
So if consumers are looking for product. We're the number one brand and we're sold out we're capacity constrained. So we're going to take the governor off the business as soon as we get this third party capacity online and we expect to get our fair share that which we're missing out on right now and like I said in my remarks.
Thanks.
Take a while for for a new habit to stick.
But I don't expect the current levels to return back to 2019 levels. If anybody is thinking that's.
Possibility I would dispel that wary and just to give you some color Lorne on a we usually don't do this but since you asked the question.
Lastly, we'll we'll do it.
Yes, and this is out of the 9.9% organic was about a third so a third of the growth out of the company's growth.
Andre was about 10% water Pik was about 20 Oxiclean that was about 10 letter was about 10 could booming Bacon said it was 10. So it was pretty broad based in my mind this quarter.
Okay, Great. That's Super helpful. Helpful color and then just on the non linear thing too I think that that with respect to health and wellness Tigana and also keep in mind.
Water pit waterflood users. So they took a big hit in the second quarter.
So far as dish sales being down year over year. So.
That that business is not going to grow year over year and 20 versus 19.
That's right, but this is a perennial grower and this is a business have been growing 10% a year since we bought it. So you got to kind of a reset this year for water pik, but there's so much growth ahead of us both in the us and internationally, that's just going to get restarted on next year. So long term. That's another one that's going to benefit from this focus on health and wellness.
Okay, that's great and then on the Capex.
Just and I know you feel going around it and maybe on kind of missed the specifics, but the usual run rate is about 2% of sales than I think you are going up to three to four over the next couple of years.
It sounds like for vitamins, it's more going to be less third party. So just wanted to understand a lot of where this extra capex is going because I think laundry was added this year.
Together, some more color and for how long you think that high rate of Capex continues.
Yeah, No I said in my remarks is approximately 3.5%, so and I said it.
For the first time you at your conference.
This had three to four of them, but as for about 3.5% for about two years and its laundry litter and vitamins a lot.
Laundry, we just had.
We just are experiencing in three or four years of growth in one year and many of our categories and laundries not there's no exception.
We just I think weve talked publicly last quarter about how we were sometimes better better to be lucky than good and we had a a line come on and late March early April and that's already fully utilized.
Really a brand new line fully utilized within a four.
Four to six months right and so we have great plans for laundry that business is doing extremely well.
And so we know that we have to add capacity there litter.
You know I think you heard from Matt I think in the quarter as an example is up 8% and consumption we.
We have some great new products. So again, we need to lay the groundwork for litter.
Provided means you are right. We said initially you going to go outside but you have to go outside if you need volume within months over the long term.
Of course, that's one of those businesses that we want to have in house, because we have expertise and gummy manufacturing.
Okay. That's great. Thanks for all the time I appreciate it.
Okay.
Thank you our next question from Carmel Gosh, Walmart with credit Suisse.
Hi, good afternoon.
Giving us a little more on AD spend the increase your your plans on increased and that's been maybe percentage of sales into Fourq you and also maybe some context of how much of the AD spend you are maybe pulling forward from 2021 into the back half of this year given the strength of your PML year to date.
I wouldn't I wouldn't necessarily think of us as a pull forward remember Rick said on a full year basis, we're going to be comparable to 2019. It's just that in Q2, we have we've pulled away back because we had lots of in stock. So we're spending at a 10% level.
And the Thirteens, meaning 10% as a percentage of sales in Q2.
Q3 was obviously higher.
13, and change and then fourth quarter will be roughly half.
So we have a lot of spending coming in the fourth quarter and again, it's behind the these big new product launches, we just happen to have two big ones coinciding at the same time and so we're concentrating our effort in the second half yes. The only thing I'd add to that is last quarter. When I was asked.
For the full year outlook on marketing I said as somebody said, hey, 11.5% to 12% is that sweet spot and I said, yeah. It is and if you. If you do the math based on our gross margin outlook and and everything else. It would put you at that maybe the lower end of that range and now we're saying we're closer to eliminate.
For the full year, which implies kind of a step up from where we thought even three months ago.
Okay got it and if I could I know, we talked about gross margins a lot, but just trying to understand a little bit better from some of the information you gave us is.
Some of the gross margin pressure sounds like it will continue into the first half of next year, but some of it such as duplicative storage and such sound like they are more temporary can you give us maybe a read on how.
How much of the pressure is temporary how much might be permanent as it relates to some of the things you putting in place.
Yeah No. That's it's a fair question I would say, we kind of talk to I would just go through a couple of different lines, we talked about covance right and those costs should.
It should be rolling back in terms of some the inefficiencies on on how we shipped especially early on in the front half.
The water Pik tariffs.
That will be probably a headwind in the first half.
You know the flawless accounting the good news is we're out of that the acquisition accounting, we've lapped all that noise and that theres going be no impact next year from acquisition accounting, which has been a a 40 basis point drag this year. So that's that's fairly significant.
In a commodities for us.
We have actually we've we've discussed this last few calls and resins and ethylene for US has been up last few quarters.
So nothing really new there.
That will likely be a bit of a headwind, but then our productivity program, which I just said was.
Kind of hit an all time record. This year is going to be a tailwind and will offset that so I'm not going to get into the quarterly cadence I would just tell you that at this point in time, we're confident of gross margin expansion for next year and a lot of those investments with the hear me walk through.
For Q4, specifically, our discrete onetime nonrecurring items.
Okay got it thank you.
Thank you. Our next question is from Joe Altobello with Raymond James.
Thanks, Hey, guys good morning.
First question you guys have been very clear that year.
We remain confident in hitting your evergreen targets next year I know that you talked about a lot of permanent changes going on a consumer habits, which are clearly not net beneficial to you. So I guess, what do you guys need to see to maybe rethink those evergreen targets at least on the top line.
Heading into 21 and beyond.
[laughter].
Yes, Joe.
Got it gives us a few months and moved through we typically come out in February with these numbers, but just want to give everybody a assurance that the.
The the evergreen model's intact for next year as far.
Hi, aside we have to we'll we'll come out with that in February.
Well you said 66 days. So I think you were beyond that period.
Just kidding.
[laughter].
Secondly on on strong.
In terms of the revised outlook you know.
8% is obviously still a good number but its not 15, how much of that Delta is coded related and how much of that is coming from other factors.
Yeah, I mean, we're not going to that but but just know that.
Right specialty retail or letters were closed for a period of time right.
So that Jeff.
Jumping off point the baseline.
Is it really that was depressed, but if you look at consumption right now and you guys see this but consumption for that business is really strong it has been and it has been strong for the last six months. So it's a good indicator.
Okay, and just one last one if I could add to the online sales you mentioned it was up I think 77%. This quarter I think was up 75 last quarter. So do you think that take that step back.
Next year or do you think this is a new plateau and we continue to increase penetration off of that 13% base going forward.
Yeah, well look one of the things that we found is that there are many consumers that rarely used ordered online and that now have discovered it and more and more people are discovering it and I think as we get into the winter months and Thats sounds like that this is covance things not going away it could be a resurgence warm.
More people will get used to it. So I do think you may have one more quarter.
Q1, where you will have a big growth year over year discuss Q1 last of 20.
Didn't spike as much as Q2 and Q3.
But I do think it's going to this March is going to continue Joe overtime.
We went back to 2015.
We had 1% of our sales online just 1% and this year will be 13% now last year was nine or eight this ain't going to 13.
So we had a big pop this year 500 basis points, but we fully expect that this is going to be.
Significant part of our sales online sales in the future. So we'll be we'll be well over 20 in a few years.
Got it okay. Thank you guys.
Thank you. Our next question is from Bill Chappelle with Truest Securities. Please go ahead.
Thanks, Good morning.
Yup.
I guess.
First question on Lawless, just any color around the timing of of I guess, the change of the payout and and is it just.
Tobin related.
They couldn't get to the three year numbers in part because of that and that the weak start or is there something else on the outlook, where you did you were seeing that you need to make a change now.
And Joe just asked a similar question Bill I would say that our original or earn out methodology. It was an extremely aggressive growth number right and.
It was 15% plus it was an x. excess of 15%. So as we go through and time gets closer to that into 2021, we.
We have to rightsize, those expectations and a and yet it's been a little bit choppy because of the current economic environment, but.
Like I said to Joe we've had.
Some really good consumption, we feel confident in that business and eight and 8% plus CAGR. We had signed up for that business. Every every day of the week.
Sorry, I believe many mid you may not be it may not be as big.
Earn.
As you might have initially been contemplated but.
Yes.
The prospects for the business are bright so we think it's a dumb math is going to work out this is going to be a real good acquisition for us.
Gosh it will in the same vein of Joe's questioning how do you figure out on.
Contract manufacturing versus.
Internal expansion for some of the categories like.
Vitamins are you there or are there at home type categories. It's your spiking now which.
Maybe they continue to grow in 2022 at this rate, but that certainly it would seem like it would come back to Earth, Let me.
Are there areas, where you're thinking look contract manufacturing makes sense for the next couple of years until we know more or are you changing your capex budget for next year at this point, we need to step it up even faster.
No. That's a good it's a good question Bill. It's a fair question I would tell you that for those businesses most of the keystones of the company or the growth drivers and Weve had capacity plans in place we have an outlook on three or four or five year capacity and volume forecast and it's it's not like it's a new demand. Its just fast forward in some of those plans that were already in place.
Yes.
Okay.
Did you change your Capex budget for next year over the past few we did yes.
Yes, we are.
You know I announced a at Barclays and I reemphasize is today that for the next two years, we're going to approximate 3.5% of sales as we invest in capacity for laundry litter and vitamins and distribution capacity as well.
Okay, great. Thank you.
Thank you and our next question is from Mark asset Chan with Stifel. Please go ahead.
Thanks, and good morning, everybody.
Wanted to ask on promotional activity to Eddie curiosity, who is pushing increasing.
Promotions or point of sale or any sort of.
Step up there or is it being done because as you've talked about you've got some upside to numbers want to reinvest I know not all of that goes into.
The CLO selectively in a somewhat marketing, but is it the CPG companies is that retailers both in.
How do you think about that looking out to 2021, obviously with a lot of uncertainty, but yes. It would.
Team greater than this year at least an absolute signing there could be helpful.
Yeah.
In my comments earlier, where that is.
If you look at Q2 versus Q3.
Sold on deal had.
[noise] has.
Increased sequentially, but it's still down significantly year over year. So the short hand is both laundry and litter sold on deal as 800 basis points lower in Q3 of 2020 compared to Q3 2019.
Yes, so in the reason for that recovered a bit as because of in stock levels.
As far as the.
You are trying to figure out what's going to happen in 2021.
Look it's possible that it could stay where where it is right now.
For a period of time.
Supposed to keep creeping up because obviously all the the competitors are benefiting from the lower sold on deal year over year, and it doesn't seem to be affecting consumption, but.
I think we'll just we'll update everybody with our thinking about 21 sold on deal or promotion.
When we get to February that bill, but too soon to speculate on that.
Got it Okay, and then just quickly back to flawless so maybe.
Maybe building on the other question is why why now in terms of changing the.
The payout in the CAGR, especially given your commentary last quarter about seeing increasing at home consumption given.
So on closings closings and such and maybe bigger picture is does this at all change your thinking about which categories you focus on from an M&A standpoint, meaning.
More kind of the legacy.
HPC business versus some of the hardware businesses that you've acquired in recent times.
Yeah, maybe I'll take the first part and then Matt can talk about M&A, but.
The reason we do it now is the accounting guidance as we need to look at it every every quarter and last quarter.
The last really the last two quarters.
It's.
It's tough to go through the haze of of.
The macro environment, when there's a cobot impact or when retailers are closed and some were waiting for a bit and as time goes by you get a little bit more credence on what's actually happening from a consumer trend and while consumption is positive.
It was just going to have started at a lower baseline because of some of the retailers being closed and some of the.
Okay consumption and demand trends. So I guess my answer would be yes, we do look at it every quarter, we didn't make a big adjustment last quarter, because we didnt have the visibility into the baseline like we do now.
As far as the category itself.
We will.
We've made a lot of investments in categories, we thought there could be a tailwind.
And so if you go back and we say we bought gummy vitamins in 2012, because they thought there would be a transition from from.
Capsules too.
Gummies overtime and Thats proved to be true and we obviously benefited from what's happened this past year and we were awarded pick it was obviously a device but.
But we believed that gum health was going to become more important to consumers overtime and I think that's proven to be true. So we think there's a lot of opportunity there going forward.
When it comes to two flawless flawless is hair removal or using a device and.
So historically been a stigma attached reducing the devices women using devices to remove facial hair, both face and browse we thought that was going to pass over time, we think that the.
Cove, It has been to spas and salons being close has helped to the business.
Because people have discovered the at home solution and so.
As far as how that's going to work and that's going to work out well for both the both the seller and buyer church and Dwight as far as.
The the multiple that ultimately we will have paid for it but but our criteria hasn't changed and all of those investments meet the same criteria and be a number one brand is going to be able to grow going to be a high gross margin.
Asset light and that need to be have a competitive advantage.
Thank you.
Okay.
Thank you and I'm not showing any further questions in the queue I would like to turn the call back to Mr. apparel for his final remarks.
Yeah, Hey, thanks, everybody for joining us today, and we're looking forward to February when we tell you about our 21.
Lance so thank you.
Thank you, ladies and gentlemen for participating in today's conference you May now disconnect have a wonderful day.
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