Q2 2021 Honest Company Inc Earnings Call

August 13, 2021

[music].

Ladies and gentlemen for attending by.

Welcome today.

The company's second quarter fiscal 2021 earnings conference call at this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a.

A question and answer session.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to Mr. Sung Kim VP finance and strategy at the honest company. Please go ahead Sir.

Thank you.

Good morning, everyone. Thank.

Thank you for joining us for our second quarter fiscal year 2021 conference call.

Joining me today are Nick Vlahos, Chief Executive Officer, and Kelly Kennedy Chief Financial Officer.

Before we start I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the meaning of the federal securities laws.

Including statements about the outlook of our business and other matters referenced in our earnings release issued today.

These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Please refer to our SEC filings as well as our earnings release issued today for a more detailed description of the risk factors that may affect our results.

Please also note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results of any revision to the forward looking statements in light of new information or future events.

Also during this call, we will discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.

You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in todays financial results earnings release.

A live broadcast of this call is also available on the Investor Relations section of our website at investors <unk> com.

With that I'll turn the call over to Nick.

Thanks, John Good morning, everyone. We're excited to speak with you on our second earnings call as a public company.

All of this is dedicated to providing safe clean and effective products to consumers around the world.

We continue to tirelessly worked to drive our mission of inspiring everyone to love living consciously.

As you saw in our earnings release, we had a solid quarter with topline growth sequential gross margin expansion and continued progress against our strategic initiatives, despite facing a challenging environment.

We saw our seventh consecutive quarter of year over year revenue and volume growth even in light of the significant COVID-19 demand in the second quarter of 2020.

Revenue grew 3% in the second quarter of 2021 on top of the 16% growth that we saw in the second quarter of 2020 versus 2019.

Additionally, we achieved solid gross margins of 36% in the second quarter as our cost inflation initiatives and improved product mix offset inflation headwinds and normalized levels of trade spend.

As we mentioned in our Q1 earnings call, we were impacted by a reduction of inventory at a key digital partner even in the face of the 6 million dollar headwind, our first half revenue and volume grew 8% compared to the first half of 2020.

That's on top of the 25% growth rate in the first half of 2020 versus.

2019.

Our focus continues to be executing against what we can control our strategic initiatives to remain constant.

We continue to focus on broadening awareness of our brand introducing breakthrough product innovation, increasing our digital and retail presence and continuing our commitment to ESG.

Now I will provide an update on our progress across these initiatives in Q2.2021.

Starting with marketing innovation, we continue to expand brand awareness and consumer touch points through the use of marketing campaigns, leveraging our content community and commerce strategy.

By inspiring authentic dialogue and creating lasting connections we drove six 2% growth in our skin and personal care business this quarter and 28% growth for the first half of 2021.

This continues to remain a strategic focus for us as more than 40% of new auto.

Consumers are acquired through our skin and personal care products.

Throughout the second quarter of 2021, we continued to invest in integrated marketing campaigns supporting our skin and personal care business, which combined earned media coverage.

<unk> influencer content urged user generated content and paid media.

Campaigns that exemplify this whole bundled tactics, we're honest beauty radiant campaign that featured our vitamin C serum and gloss see lip gloss and our see Europe beauty campaign around our high portfolio, including our hero Mascara product.

In total these campaigns generated roughly 900 million total impressions across over 70 earned media placements 100 pieces of sponsored content and paid media, including weightlifting in brand handle amplification.

Jessica Alba created original content to support each campaign, the amplified influencer content to help expand their reach.

These campaigns led to a strong consumer engagement.

Increased traffic to other Stockholm and featured our award winning products, including our most recent award win.

More readers choice award for extreme Whitesmith, Skara and Lash primer.

We believe these campaigns positioned our beauty business extremely well as we launched our sustainable packaging initiatives for beauty in the third quarter of 2021.

Given the continued success of these programs, we expect to lean into marketing in the back half to continue to support the restage and pursue growth in skin and personal care.

Second we continued to support our breakthrough product innovation in the first quarter of 2021, we introduced our clean conscious diaper that delivered improvements in performance sustainability and margin. This innovative product fully phased into the market in the second quarter of 2021, driving a lift on diaper consumption.

Trends in the marketplace.

These improvements in performance and sustainability, we saw mid single digit growth for the quarter on our diaper business. Despite COVID-19 startup impact in the year ago period.

Our diaper market share increased this quarter as our diaper retail consumption growth outpace the market.

<unk> grew 33% compared to the total diaper market up 20%.

Beyond the breakthrough diaper innovation, we also introduced new innovation in our lives.

Fossil and wellness and beauty categories in the second quarter with items, such as our benefit wipes.

Which hydrates and nurse spin as a clean.

Our centers Sanitizing, wipes, which introduced natural fragrances tourist sanitizing wipes line.

And our honestly healthy serum infused lapsed change and plant based <unk> gel.

Which helped to build our IP portfolio.

Around our hero beauty products for extreme like Maths spirit.

Third.

We were pleased to deliver strong growth in our retail channel as our integrated Omnichannel strategy led to a more balanced mix of revenue across our channels.

Our retail channel accounted for 53% of our total revenue in the second quarter as opposed to only 36% in the second quarter of 2020, when consumers sheltered in place and shifted to online shopping.

In line with this macro trend, we are seeing increased consumer willingness to get back into stores as more people have become vaccinated as.

As a result, we have seen a channel shift from digital to retail, causing an acceleration of revenue growth within our retail channel.

Our retail channel grew 51% in the second quarter of 2021 compared to 2020, we.

We believe we are well positioned with our omnichannel strategy to capture growth wherever our consumer chooses to shop.

Significant white space opportunities exist expand our onshore presence and the depth of our product offering with new and existing retail partners. For example, we secured.

New physical and digital distribution for the back half of 2021 in line with our expectation with over 30000.

New distribution points with approximately half coming in the skin and personal care product category.

Highlights of this distribution expansion include the launch of our diapers with Walmart Canada.

The launch of diapers and wipes on Bjs Dot com.

Launch of a digital strategic partnership with go past EMEA.

And the expansion of our total brand assortment with key grocery partners, including broker.

Our whole hannaford and wafer.

Before I turn it over to Kelly I wanted to take a moment to reiterate our commitment to ESG, which has been part of our DNA since our founding.

I have a deep sense of purpose and infuse the ethical values of transparency sustainability diversity and inclusion and all that we do.

From developing products designed to be safe.

Working hand in hand, with our charity partners to serve those indeed.

To embracing diversity and inclusion.

We're on a mission to create real and meaningful impact.

This quarter, we're excited to highlight our renewed partnership with our official Treasury shares.

We will partner ABB.

Since inception honest has donated over $26 million products, making an impact with individuals and families in need.

To celebrate maybe the baby's 10 year anniversary, we are committed to generating 10 million products over the course of 2021 and 2022.

To further support our community and help baby the baby distribute central items to underserved communities.

In summary, we believe we have built the foundation for all of US to continue to grow as a leading clean and natural wellness brand. We continue to capitalize on our strong content community and commerce platform to drive good growth across product categories, and all consumer touch points, we're pleased with our solid start to the year.

Year, and believe we're well positioned to continue to advance our strategic growth plan.

Now I would like to turn the call over to Kelly Kennedy, Our Chief Financial Officer to review, our second quarter results.

Thank you, Matt and welcome everyone.

This quarter reflects our seventh consecutive quarter of year over year topline growth with solid gross margin and profitability performance. Despite the challenging comparison to the COVID-19 started making here in 2020 and the headwinds are significant inventory destocking by a key digital partner.

This quarter's performance reflects a positive look.

The Onyx brand.

As well as our teams strong execution against our strategic priorities.

Starting with our financial results and key drivers.

Second quarter revenue totaled $75 million, a 3% increase over Q2.2020.

As Nick highlighted this was on top of the 16% growth we delivered in Q2 of 2020.

After adjusting for the estimated $3.7 million of diapers in bike revenue driven by COVID-19 startup in the second quarter of 2020.

Revenue growth in Q2 of 2021 with 9%.

Diving into the key drivers by product category.

Starting with diapers and wipes.

The category decreased 2% as we lap COVID-19 stock up behavior in diapers and wipes in the second quarter of 2020.

Oh, no we saw mid single digit type of growth behind our new diaper innovation as we had our first full quarter with the innovation and market.

Based on retail consumption from syndicated data for the last 13 weeks ended June 27, our diaper business.

33% and we grew diaper market share during that time period.

On a two year basis.

<unk> grew 17% in Q2.2021 versus the second quarter of 2019.

Skin and personal care grew 16% driven by higher sales volume within the retail channel.

Omni channel demand for our skin and personal care products was driven by our continued investment in our content commerce strategy and incremental merchandising programs with our retail partners.

Based on retail consumption from syndicated data for the last 13 weeks ending June 27.

We grew our personal care business, 18%.

Increasing our market share during the second quarter.

Skin and personal care grew 39% in Q2.2021 as compared to the second quarter of 2019.

Household and walnuts declined 6% as consumer and customer demand for standardization products decreased as people became vaccinated and customers manage heavy levels of inventory.

Now turning to results by channel for.

Quarter, the digital channel revenue declined 24% to $34.8 million.

11% on a two year stack basis.

Retail channel revenue increased 51% to $39.8 million up 45% on a two year stack basis.

Like many other brands, we saw a stronger than expected rebound in the retail channel in the first half of 2025.

Outside the retail growth was aided by a strong rebound in store traffic and vaccinated consumers increasingly return to in person shopping as compared to the second quarter of 2020, when consumers sheltered in place and shifted their behavior heavily to online shopping.

In the second quarter of 2020, our retail business only represented 36% of total revenue.

We saw a significant shift to a more balanced mix of revenue in the second quarter of 2020 as consumers came back into stores and retail accounted for 53% of total revenue.

We also benefited this quarter from expanded distribution and incremental merchandising events with partners like target and Costco and both are diapers, and wipes and skin and personal care categories.

The decrease in the digital channel revenue was largely impacted by the reduction in inventory on hand by our key digital partner to cut inventory and consumables in the second quarter to free up space for other products ahead of a major promotional events.

While this inventory reduction was not specific to audits due to our higher digital penetration it was more impactful for us.

During the second quarter of 2021 revenue for this key customer declined by $6.4 million, while consumption by this partners and consumers increased by 3% each as compared to the second quarter of 2020.

Turning now to gross margin.

Gross margin achieved 36% for the quarter, a sequential improvement of 110 basis points versus Q1.

Gross margin for the second quarter was down approximately 50 basis points versus the second quarter of 2020, which benefited from lower levels of trade spend as retailers pulled back on events during the pandemic.

Q2, gross margin was up over 700 basis points versus the second quarter of 2019.

I think progress on diversifying our portfolio to higher margin products and delivering against our cost of Asian projects.

Overall input costs were higher in Q2 of 2021 versus Q2 of 2020, including higher transportation and freight costs.

Those margin headwinds were offset in part by our continued focus on cost deflation.

Operating leverage and improved mix across the business.

In Q2, we captured a full quarter of our clean conscious diaper innovation, which has improved our diaper margins by over 100 basis points.

We also have a number of other cost divisional initiatives launching throughout 2021 headlined by our beauty sustainability restage that launched in Q3 and is projected to improve beauty gross margin by approximately 800 basis points.

Given our record levels of cost inflation cost inflation will continue to be a focus area for us in 2021.

We recognize that there is uncertainty around the input cost environment, we plan to closely monitor our productivity plan in relation to current inflation levels.

Total operating expenses increased $19.8 million versus Q2 of 2020.

Primarily driven by three items.

First we had $11.1 million in one time, IPO and transaction related expenses.

Second operating expenses included a $4.3 million increase in stock based compensation, including the expense recognized in connection with performance based equity that vested upon our IPO offering.

Finally, we invested an incremental $3.4 million in marketing versus Q2.2020, as we supported the accelerated growth of our skin and personal care business and the <unk>.

Launch of our new clean conscious Steinberg.

Adjusted EBITDA for the second quarter of 2021 was a loss of <unk> 8 million.

We ended the quarter in a healthy position with $95 million in cash and short term investments with no debt on our balance sheet.

We believe we are well positioned to execute against our 2023 strategy and retain financial flexibility as we invest in marketing innovation product innovation and domestic and international expansion over the next few years.

Looking towards the remainder of the year.

Trends for the back half of the year remains volatile as we navigate an environment that is dynamic the significant input cost pressure and continuing uncertainty around the COVID-19 pandemic and its impact on consumer behavior.

That in mind I will now share some thoughts on our outlook for the remainder of 2021.

As it relates to revenue, we continue to expect our diapers and wipes and skin and personal care product category to perform in line with our expectations for the year, which reflects continued market share penetration and double digit topline growth in total.

We believe our clean conscious diaper resonates with consumers and will drive time for market share expansion.

In the back half of the year, our baby wipes will return to a more normalized comparison period, and our skin and personal care business is prime for growth behind our content community Commerce strategy and our beauty restage.

Based on macro household and wellness trends consumer demand for sanitizing and disinfecting products has decelerated at a more rapid pace than we expected as people become vaccinated and return to their pre COVID-19 routines.

For example, total market consumption data at retail for hand, sanitizer products declined by 74%.

And consumption for household cleaners, and disinfecting products declined by 12% during the 13 weeks ending June 27, as compared to the same time period in 2020.

We had planned household and well into 2021 to be roughly flat to the prior year, but we now expect 2021 household and Walmart revenue to be roughly half of last year's revenue.

As we look forward to the future of our household and wellness product category. We are developing plans to reinvigorate this category, including product innovation that will allow us to continue to diversify our portfolio and drive growth.

As it relates to margin we are pleased with the gross margin we've been able to achieve in the front half of the year driven by our cost reduction initiatives and improved product mix.

While we have ongoing cost initiatives coming in the back half of the year, including our beauty sustainability restage.

We do see continuing headwinds from input cost pressures, such as transportation and labor.

As such we expect our back half of 2021 gross margin structure to be in line with year to date results.

As we reflect on 2021 performance to date.

For the first six months of the year, we were proud to deliver against our topline revenue target in diapers, and wipes and skin and personal care in total.

We also exceeded our gross margin and adjusted EBITDA expectations for the overall business. Despite the headwinds of a significant destocking event at a key digital partner.

As we continue to execute our strategy 2023, we have strong conviction in our growth algorithm.

Our clean and natural market is outpacing growth versus conventional brands and our product categories.

We are growing our market share in our core product categories, as we invest behind our product and marketing innovation.

We are expanding our points of distribution and driving our omnichannel strategy with retail and digital partners.

Our focus is on executing on our growth plan and driving higher shareholder value over the long term, while solidifying honest position as the next generation modern CPG company.

With that I'll turn the call over to the operator to begin the Q&A portion of the call.

Thank you ladies and gentlemen.

Question, you will need to press. The Star then the one key on your Touchtone cellphone to withdraw your question. Please press the pound key please.

Please limit yourself to one question and one follow up.

We can't put any additional questions. Please standby, while we compile the Q&A roster.

Our first question coming from the line up.

Dan with Morgan Stanley Your line is open.

Hey, guys.

So just wanted to start with e-commerce, the inventory drawdown, you mentioned that one of your key customers.

Is that something that's sort of permanently comes out or is that more of a timing shift.

And then strategically as we think about the business longer term on E. Commerce. It does seem like retail is coming back quicker than you expected e-commerce, not as strong as expected with.

With the return to retail we're seeing from a consumer standpoint, so just wanted to understand.

Might that impact your long term growth expectations and how 'bout your strategy change as a result of that shift that we're seeing.

Yeah. Thanks Dara.

At least as we kind of think about the inventory impact that we saw in the quarter I think we called out at our Q1 call. You know that this partner chose to decrease inventory in certain categories really to free up space.

Head of their promotional event.

Overall, what we saw was historically just because honest as a high growth brand and the tight digital penetration. This partner tended to carry more weeks of supply than they did in other.

Kind of other kind of.

Large CPG companies, we saw them reduced from about 12 weeks of supply down to roughly eight so that was the $6.4 million that we called out was about four weeks of inventory.

As we look at what we're seeing in Q3, we have seen the order volume will return to kind of pre destocking levels. So kind of in line with consumption, but we have not seen them return to higher weeks of supply.

And we're not planning on it.

We do have a new program with this partner that we're pretty excited about that will allow them to kind of take over a small part of our D C and ship out of there.

And this is a program that they offer.

What are there other large CPG company.

We're pleased to participate in that.

As we think about the retail direct mixed I think Youll book fall going back to kind of our approach and we talked a lot about in a couple of years being kind of an equal balance between retail and direct kind of 50.50 ish.

<unk> accelerated theres no really structural change in how we think about the business our strategy.

Really just what we've seen is a more accelerated shift.

And when you think about kind of this year, we do expect it to be roughly equal between retail and direct and I think it's just the noise as it relates to quarter.

Given that retail with only 36% in Q2 last year, just because people were in stores.

And then this quarter it was impacted not just because of that shift back.

Should we tell that it was also impacted because.

But just destocking.

<unk> took a $6 million out of our digital dollar so kind of if you added that back in digital actually would've been a little larger than retail for the quarter.

Okay, and then just one follow up with the higher commodity costs that were foods.

Have you put any thought into taking incremental pricing.

What are you thinking in terms of pricing actions relative to the increased inputs that you're seeing thanks.

And there's no change in what we disclosed last quarter, we're taking a wait and see.

The opportunity to take share really gain trial with consumers as we know our competition, particularly in diapers is taking pricing some of that pricing has gone Amazon would be in the fall.

Still an option that we're considering it is on the table, but we have not announced any pricing action at this point and as you've heard.

We gave a little color as we're thinking.

We're feeling pretty good about our results year to date, our gross margin. We did give some guidance what we think the back half of the year will be in line with that as well. So we're feeling like we haven't really good balance between our observation products to offset the input cost inflation that we're seeing which is predominantly kind of a small parcel DTC shipping and in our.

Our in downstream transportation.

Well the only thing I would add the only thing I would add Dara good to hear your voice is the fact that we.

We continue to take market share right now so when you take a look the underlying consumption of the business and that's what I think we got a drill down into which is the diaper business behind our conscious diaper initiative.

Growing share you.

You take a look at 33% consumption increase over the last 13 week time period through June 2007 personal care. When you look at the consumption data up 18% overall and again taking share and then when you look at the overall business from a consumption perspective for that same.

<unk> were up about 17%. So the key here is when you look at the first six months of the year and again.

New company.

When you look at the size of this business theres going to be fluctuations when you look at the quarter, but what we like seeing us.

You talked about when we came out.

Making sure that yes drive the top line and you look at the top line for the first six months up 8%. That's volume related if you look at the industry and you guys know where the industry sits from a volumetric perspective.

Over the first six months of the year most are at negative mid single digits to flattish over the last quarter negative 10.

Flattish from a volume perspective, so at the end of the day a lot of conviction around the strategy. When it comes to the gross margin piece as we had talked we're happy that we've exceeded for the first six months of the year, our gross margin expectations as well as when you take a look at our adjusted EBITDA exceeding kind of what we said so we are not.

Emily here is kind of the external component around this partner from a digital perspective that made a choice, but when you see the fundamentals of the business very strong based on kind of what we had talked about what we're delivering.

Great. Thanks.

Thank you Sir.

And our next question coming from the line of Andrew.

Andrea Teixeira with Jpmorgan Your line is open.

Hi, good morning, everyone. Thank you.

I have two questions first for <unk> I.

I want to talk more of innovation and the marketing investment.

So should we continue to see an elevated marketing spending in the second half from your commentary and how much of new products have contributed to sales in Q2 against Q1 in terms of sequential contribution and also a question for Kelly.

I appreciate the breakdown for each division and the double Jason its expectations for U T.

The key product lines, and then the wellness gain probably have for the full year. So how we should be thinking.

It implies a big for you to getting to a double digit about what it implies a pretty strong.

We found clause.

I think on the white background half or suddenly this going forward.

The company will be more high single credit yeah.

Yeah. Good morning, Andrea I'll start off as it pertains to innovation, we started the year from a strategic perspective, there are two big innovations for US one was this conscious diaper and we're executing with excellence against that when you take a look at the diaper business right now we'd referenced sit within Q2 mid single digit growth.

Against the diaper business and as we've referenced kind of where the consumption sits right now with 33% increase when you look at the consumption over the last.

Over the last 13 weeks.

So taking share.

Sorry.

We're very excited about how that's performing to date.

The second component was our beauty restage with the second big element.

Our innovation for the year and that just started to hit the market and what we're seeing now within the personal care and skin business again consumption data showing about 18% increase overall for the 13 week time period. The other thing that we're seeing behind the marketing investment. So we're leaning in.

With the marketing investment because we are bringing new consumers into the franchise one area. We're looking at our datasets as just looking at honest dot com and our digital side of our business.

Over the last year in 2020, we brought in about 34% new consumers came to all the Stockholm within skin and personal care.

This year, thus far what we're seeing is roughly about 44%.

Coming in through our skin and personal care business. So you start to see kind of that shift from a mix perspective, and youre starting to see that innovation that we put into the market.

People are coming to us as we're leveraging the marketing investment coupled with the innovation to drive really our strategy that we've talked about.

Relevant content community advocacy and then the commerce piece, which is omnichannel, so wherever that consumers interested in shopping we're positioned for that this quarter, we saw the consumer gravitate more towards retail.

We're available there that's why retail grew 51% versus year ago now as things fluctuate because we look at the back half of the year as people start talking about Delta, we start talking about lambda in different areas that might shift, but we're well positioned to be able to capture that so again, one innovation is working as planned too we're marketing.

And spending against that innovation and we're going to continue to plan to spend against it because we are seeing overall market share increase we're seeing new consumers coming into the franchise based on our strategy as we start driving skin <unk> personal care in these categories.

Just for some clarification as it relates to the numbers I think we've communicated that we believe 50% to 17% as a percentage of sales is the right level for us for marketing because we have such big launches and innovation. This year, we do expect to be at the high end of that range.

On.

As we think about innovation clearly.

It is driving predominantly to growth this year between the clean conscious diaper and our beauty with stage so.

As we think about kind of innovation as a percentage of our total growth, it's really outpacing really driving that growth and finally, just a clarification as we think about that.

No.

And kind of the outlook that we're seeing double digit growth. When you take household and wellness added equation, so diapers and wipes skin and personal care in total for the year, we're going to be able to deliver double digit growth and I think the important thing to remember is as we highlighted we called out this COVID-19 acceleration in 2020.

Of about 20 million, so kind of when you pull that out think about the base at $2.80 for 2020, clearly you can see what is kind of a strong robust kind of mid mid teens growth for the business, which is kind of the way we're thinking about it.

Okay.

Thank you will.

Thank you.

And our next question coming from the line of Stephanie Wissink with Jefferies. Your line is open.

Thank you good morning, everyone I just wanted to follow up on Andrew's. Prior question, just with respect to the growth and Kelly maybe the clarification is you want us to some diapers and wipes and skin and personal care together to get to double digit growth not the categories in isolation should each grow double digits.

Correct I think the most important thing is that we.

Our communicated with diapers and wipes and personal care kind of delivered on our expectations for the first half and all indications are that we will deliver and are in line with our expectations coming into the year. So no change there, but the change is really the deceleration of the household and wellness category.

But at a much more rapid pace I think than we expected.

As we look at we've seen some small signs as COVID-19 cases and increased debt.

There is potential for that to come back and we delivered some great innovation in household and wellness.

Just launching in Q3 income Michelle.

<unk> be a huge driver for us, but just thinking about that household and wellness last year, our expectations for the year were flat and right now what we did what we saw in the first half what you saw from our numbers at about half the pace of what we anticipated coming into the year, even though we did anticipate especially in the back half of significant.

Year over year decrease.

It's actually declining faster than that.

Okay, and then I want to translate that down to gross margin because I think you're saying second half in line with the first half. So just wanted to make sure. We have the base correct. If the first half was around 35, and a half or 35 six.

What is the effect of that reduction in the household and wellness.

Revenue on the gross profit as there are no absorption burden there.

And then maybe secondarily on that with if I just start with that with the mix shift towards.

Youre clean conscious diaper, which I think was a cost of Asian improvement and beauty and personal care being higher margin. Just wondering why we're not seeing a bit of a step up in margin in the back half.

Yes. So so when you think about our health and wellness, we haven't broken down margins by category, but we really think about it household and Wow. This is pretty much in line with the total so kind of declines in that category doesn't drive product mix shifts within our gross margin in any material way.

When we think about kind of the puts and takes I think clearly we are seeing input costs like everyone else.

At much higher rates than we anticipated, that's really coming in transportation and freight.

Ocean freight and a small amount of <unk>.

Our input costs like that in.

The other thing that I, just want to remind I think we talked about this at our Q1 call, but Q2 retailers, we're canceling our promotional events not just ours everyones. So we also the biggest headwind we have on it.

For the back half is kind of the normalized trend of trades for the back half of the year.

Q2 was the largest quarter of that incentive but for the whole year that'll that'll be impactful in the <unk>.

Positives again, the clean conscious diaper.

It fully in market in Q2, so we don't have the full year, but we'll get the benefit of that 100 basis point improvement across the diaper line.

Beauty.

Restaging it still getting on the shelves.

Early MBT week agents kind of getting up and running in Q3, we will get the benefit of that so cost deflation being the biggest positive within our gross margin. We are also benefiting by product mix Youll see skin and personal care was 33% of our overall business in Q2 versus 28% last year. So we are getting the benefit.

But that product mix, although again, it's getting personal care in line with expectations that was anticipated within our within our numbers.

And then we again are benefiting from operating leverage not as much to the extent because of household and while legacy revenue declines.

Okay.

Okay. Thank you very much.

Thank you.

Yeah.

Our next question coming from the line of Bryan Spillane with Bank of America. Your line is open.

Hey, good morning, everyone.

My name is Dave Hi, So a couple of questions.

First one Kelly just just on on.

The household and wellness.

Is this a base now that we should be using for projecting going forward. If we basically kind of reset this business for.

What was I guess, maybe a COVID-19 benefit enhanced sanitizer, just trying to understand what we do with it.

With the new revenue base here is this is it.

Used to sort of.

<unk> forecast normalized growth off of.

Yeah. That's what we are doing I mean, there's a lot of uncertainty as you know around COVID-19 in a while.

We might get some kind of pickup from the lows that we've seen kind of an in sanitizing and disinfecting sprays in Q2, we are not anticipating that.

Had they come back to prior levels.

We will have some innovation I think we talked a little bit as we get kind of into 2022 on some innovation coming in household and wellness, but yes.

A very large and significant component of that $20 million in COVID-19.

The impact in 2020 and more than half of it within the Telcel and wellness space. So that's that's really the driver.

Right that makes sense and then on the gross margin commentary for the back half of the year the comps.

The quarterly comps in the back half are pretty different so should we interpret it as being flat to each quarter or.

I guess, the fourth quarter last year, the gross margins were lower than the third quarter. So do.

Do we smooth that I'm, just trying to understand if there's anything we should be contemplating I guess in terms of phasing.

The gross margin commentary.

Yeah, Great question. So last year, there was an anomaly in the fourth quarter, we expect it to be normalized no callouts or puts and takes that you would call out between Q3 and Q4 on margin for us.

So you could expect what we say it's in line with first half.

That would be consistent revenue, thank you price up.

And then just last one just on the inflation and again just thinking about the relative from the last earnings call.

Inflation has been.

I guess in.

In view really over the course of the year.

But it sounds like in the last month or two you've seen some things that are maybe inflating more so.

I'm, just trying to get an understanding of kind of where those areas are and and if he can.

Maybe separate how much of it is coming from pure.

I don't know commodity inputs or market based.

Cost increases on certain inputs and how much of it is just more tied to.

Maybe some of the bottlenecks were seeing in supply chain economies, because it seems like.

One may be more transitory than the other but just trying to understand the differences there.

Yeah.

We don't have a specific breakdown between market based and bottlenecks, but both are contributing.

We think about kind of.

Ocean freight, which is just a small piece of our business that comes on.

Kind of over Ocean, but just a transportation across the board on the main call out that we are highlighting that was different than where we started the year predominantly if not in the input costs and transportation and.

Freight because we didn't anticipate that it's really around the labor, where we have seen some.

It's higher.

Across the board and you've heard this as.

We think about our labor in the distribution center across the board it's been challenging.

And rates have gone up there we have to stay kind of consistent with what we're seeing in the market. So that's the one one place.

There are other smaller impact rather than other things that are kind of packaging related for us.

We're partially shielded because of our fixed price contract for our large commodity impacts.

<unk>.

But again, we take surgical pricing I think we talked a little bit about not taking broad based pricing at this time, but.

But certainly as we see certain categories being impacted we have had really good success.

On an individual skus or individual product lines to try to offset that and we will continue to do so we're very focused on and trying to offset these costs.

But it's just a reality that we're seeing particularly in the labor market got it okay. Thanks, Kelly I appreciate it.

Thank you Frank.

And our next question coming from the line of Laura Champine with loop capital. Your line is open.

Thanks for taking my question.

Tom the household and wellness business.

Because that's the most the most radical change in your thought process sort of year on year is this all just difficulty forecasting the shifts related to COVID-19 recovery or is there something else happening in the channel.

That's that's driving the reduced expectations this year.

Yes, I'll take that one I think from a macro perspective, I mean, no one would have predicted kind of.

Last year during the same time period kind of what transpired with Covid hit at the levels, but that happened you saw it in disinfecting sprays and wipes you saw it.

Toilet paper and all the things that happened a year ago as it translated that this year.

Took into consideration that the overall revenue would be about 75% of what call ahead transpired, but when you look at.

Macro perspective of kind of what's happened in the market and when you look at the last 13 weeks, we'll say negative 74% consumption.

In places like hand, sanitizer or down, 11%, 12% and disinfecting type spreads those are the things.

We've bought as we've looked at the players that consumption and behavior would start to be would've been a bit more sticky at this point.

And we're not seeing that so based on data and based on the information we see today, that's why again.

You look at diapers and our wipes business you look at our personal care skin business, we're executing as expected. The anomaly here is this macro event, that's happened last year and that right now based on the visibility we have.

We're not seeing that consumption pacing based on that expectation from a forecasting perspective that we had no.

Things are changing Delta variant Lambda variant, what transpires, we're well position like we were a year ago to be able to capitalize on that but again, that's something that we're monitoring closely and as things as consumers start to potentially ship, we are well positioned with the brand with our products as well as <unk>.

Fortunately the Omnichannel component of this for both the digital and retail perspective to capture that consumer.

Got it thank you.

Thank you Laura.

Yes.

And our next question coming from the line of Lauren <unk> with Guggenheim. Your line is open.

Yes, good morning, everyone.

I'd like to come back actually to do the very first question I mean, the $6.4 million borrowers and the headwind you had in ecommerce.

Even if you assume that that's a D.

D e-commerce.

Customer was growing 3% that said the impact was I mean ballpark in seven minute Burns.

If you if you added that to the segment that you still have did you told them that.

Segment being down 9%.

Or about $6 million. So is that actually the shift you are seeing from.

e-commerce to retail.

Or is it.

You got anything else, we should know.

Forecast better per area.

E Commerce.

Digital segment going forward.

Yeah outside of that was one of them.

The destocking of that.

Total digital category customer behavior that we're seeing and everyone is talking about is people are vaccinated theyre going back to the stores Youll see many many retailers talking about this huge traffic surge there.

And growth in their business and not at the expense.

The digital business, so as a true omnichannel business, we talk about being where the consumers want to shop I think that's a real advantage.

As Nick mentioned, you know who knows what the future ladies and where they can.

<unk> shifted it creates significant noise, but yes that impact overall and I think youre seeing that when you look at the tracked channel data for example.

Our diapers.

Orders were up 33% the whole category was up 20% in the track channel that only represents about a third.

A picture into about a third of our business clearly if people aren't buying 20% more diapers that has completely shifted.

Between digital to retail and what we're excited about.

Cited out we're outpacing the category growth that driving an expansion of market share thats, great for us, regardless of where whether it's digital or retail.

Two really are.

Our total market share kind of regardless of what channel people shop it.

Yeah.

And I had a quick follow up on that shift I mean, even if it's fair to assume that.

E commercial digital is more profitable than the.

The retail and.

And by a much for you and does it impact gross margin as I assume.

Then the rest of the P&L.

Yes for us when we take a look at whether it's digital retail and this was part of our thesis from the get go is we're agnostic when it comes to where that consumer shopping because when you look at the margin profile across those business or their equivalent so that's a little different than maybe some of the traditional players.

To talk about one piece of business a certain way we talk about it through this omnichannel ones around the successor ability component and that's why we have that ability to turnaround and deliver against where that consumer is at that point in time and now as you start to see.

From a strategic perspective consumers shifting more into retail we're positioned to be there if that starts to shift again back into digital when you look at again some of these variance that.

A lot of folks are now talking about.

We're well positioned there also.

Okay. Thank you I'll pass it on thanks.

Thanks, Mark Thanks.

Hum.

And our next question coming from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Good morning, everyone parsing apart to digital and retail side of the business. It sounds like you've got new distribution points also I think you mentioned over 30000, new distribution points.

Is that typical in terms of distribution points and what you see in terms of the retail cadence going forward and then I have a follow up thank you.

When we introduced our strategy 2023, and we put our plans in place. This is part of our plan to be able to continue to drive.

Our omnichannel business and we look to drive accessibility with strategic partners. So the 30000 distribution points that we referenced was planned and when you look at those partners. They are both on the dot com side as well as on the physical retail side. So we love the fact.

But we've got a partnership with folks like beaches Dot com now.

That represents another footprint for us as we drive kind of the east coast up in Canada, securing Walmart, Canada physical stores with our diaper business now we had some personal care business, there and Thats done well and now we've picked up the diaper business. So that is part of the cadence of kind of how we do.

Five the business as we look at both physical retail as well as the right strategic digital partners and as we look forward you're going to see a consistent cadence based on our long range plans to be able to continue to balance.

That omnichannel component.

Got it and then as you think about the gross margin, which is now guided to flat in the back half of it is in line with year to date results in the back half of the year.

It seems like typically you would get an uplift in the gross margin.

You see that is this is the new normalization.

How do you envision that go forward.

Yeah, our thesis around gross margin expansion Hasnt changed.

We had some great cost of Asian.

Highly unusual year as it relates to input costs and inflation.

So we're actually quite proud to be able to deliver kind of a 36% for the year.

As we think about continued expansion with the beauty restage product mix.

We'll continue to benefit us again operating leverage as we grow the business.

The biggest driver really cost of Asian, and we do have cost ovation lined up coming in in years to come so nothing has.

Ranged in our overall thesis.

Some of the timing of when we will be able to get to kind of our target gross margin will be.

Reliant on some of these historic highs.

As it relates to input cost backing down.

In some way.

So that will impact the timing.

Thank you.

Thank you Dana.

Oh.

Our final question coming from the line of Jon Andersen with William Blair. Your line is now open.

Yes, thanks for the question.

I wanted to ask again about the SEC.

Second half of the year, just a little bit more detail on the outlook.

In diapers and wipes it looks like the comp in the third quarter is about as challenging as the comp in the second quarter and then if you look at skin and personal care the.

The comp actually gets more challenging in the third quarter relative to the second quarter, but more broadly speaking.

When you talk about double digit growth in diapers, and wipes and in skin and personal care individually in the second half of the year.

Is there any more color you can give us on.

The relative magnitude.

I'm, assuming diapers and wipes you'd be looking for something in the let's say low single low double digit range something much stronger than that on the back of the beauty restage in skin and personal care, but just a little bit more color there would be helpful.

Yes, and again, we haven't guided to each category individually being double digit we were just in total when you take out household them all that so clearly the beauty restage will as you said, we've seen outpaced growth in our skin and personal care, we anticipate that to continue for the back half but.

In line with our expectations.

I think when we look at what we're seeing right now in diapers.

We're seeing strong consumer response to the clean conscious diaper and we are also seeing continued market share expansion there as well. So we're actually quite pleased with kind of where the trajectory is for diapers.

<unk> had a.

Pretty challenging first half in Q2.

And that does the comp gets less challenging as we go into the back half of the year for wipes.

And so as we think about diapers and wipes in total.

It's the strength of what we're seeing right now in consumption trends.

And you can see some of that in the tracks retail data and then coming off of a softer comp on white and in skin and personal care again, the trajectory that we're seeing.

It's really early in the beauty restage, but we have good expectations in the back half of the year that.

That will fuel skin and personal care brands.

I would just add John what just building on what Kelly just highlighted just to get a crystal clear here.

As we had planned at the start of the year and we've communicated the back half diapers and wipes no change based on our expectations skin.

Skin and personal care back half no change based on our expectations and really what we've kind of articulated here today is in this household and wellness macro factor that's happening in.

In the marketplace that you guys have been seeing within the market around consumers.

Driving the incrementally from a consumption perspective that was expected post the initial COVID-19 bump a year ago.

Haven't seen that and Thats the component that we're talking about as being the change within the plant.

Okay. That's helpful. Thank you.

Just as a follow up on.

Some of the information that you shared around customer acquisition.

And a larger portion.

Okay household acquisition or consumer acquisition coming in through beauty.

Yeah.

Is that a.

A deliberate thing on your part.

Being driven by.

The incremental marketing spend against that part of your business and is that something that you like to see or.

It's better to acquire new customer into the beauty franchise as opposed to the diapers and wipes franchise, just trying to get a little bit of a sense for how you're thinking about that.

And what Youre doing to drive it. Thank you.

Sure absolutely. It's a great question number one from a strategy perspective, we talk this during the road show time period, and we're talking about.

When we introduced under the strategy.

To each of you.

Number one making sure that we're looking to bring new consumers into August through different categories in skin and personal care was one of those a year ago. We brought in about 34% new folks in this year, we're seeing about 44% coming in on a stock comp through the skin and personal.

Sure. So yes from a strategy perspective, we like seeing that and then what we're driving is cross pollination around not only are they coming in within our scanning product, but then how do we also then ship them over to potentially a color product and we like seeing that because again when you look at our strategy.

Eric honest, we're interested in driving that penetration going deeper with consumers to buy that second and the third item from a consumer perspective, and that's a key focus for us as we continue to drive our strategy.

And what I'll, just add real quickly John as we think about kind of what we take away its really a diversification of our customer base, becoming a broader appeal.

A couple of the stats that we saw in Q2, we have talked in the past about kind of just the male consumer the growth in the male consumer for us It did tick up slightly from 18% of our overall business.

19% in Q2, we've also seen continued expansion in our Gen Z.

Appeal with and this is within DTC it jumping from 11% of our revenue in Q1 to 13% in Q2. So we continue to see great progress and so it's a combination.

Kind of having broader appeal of bringing more new customers in.

As well as <unk>.

Really growing share of wallet and having more products that really appealed to.

Resonate with consumers, so really expanding the overall brand presence within the household so two very intentional strategies on our part.

Great. That's helpful. Thank you.

Thanks, Sean.

I'm showing no further questions at this time I would now like turn the call back over to management for any closing remarks.

Very good well first of all thanks, everyone for joining us on this Friday morning, and I think the way I would summarize this as you know as.

We look at kind of the remainder of this year, we have confidence in our plans we have confidence in our three year strategy 2023, our roadmap that we've introduced and that we're well positioned and this is just the beginning when you look at on US as we continue to build this as the next generation modern CP.

G Company and we appreciate you spending the time with US today, and we look forward to talking to you next quarter. Thank you.

Thank you.

Yeah.

Ladies and gentlemen that does one go conference for today. Thank you for your participation you may now disconnect.

Okay.

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Gross profit.

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Yes.

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Okay.

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Ladies and gentlemen, he forthcoming by our work on Covid.

The company's second quarter fiscal 2021 earnings conference call at this time all participants.

On a listen only mode. After the speaker's presentation there'll be a question and answer session.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to Mr Song, Kim VP Finance and strategy at the honest company. Please go ahead Sir.

Thank you.

Morning, everyone.

Thank you for joining us for our second quarter fiscal year 2021 conference call.

Joining me today are Nick waters, Chief Executive Officer, and Kelly Kennedy Chief Financial Officer.

Before we start I would like to remind you of our legal disclaimer that we will make certain statements today that are forward looking within the meaning of the federal securities laws.

Including statements about the outlook of our business and other matters referenced in our earnings release issued today.

These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Please refer to our SEC filings as well as our earnings release issued today for a more detailed description of the risk factors that may affect our results.

Okay.

Please also note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release the results any revision to the forward looking statements in light of new information or future events.

Also during this call, we will discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.

You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in todays financial results earnings release.

A live broadcast of this call is also available on the Investor Relations section of our website at investors thought on <unk> Dot com.

With that I'll turn the call over to Nick.

Thanks, John Good morning, everyone.

We're excited to speak with you on our second earnings call as a public company.

All of this is dedicated to providing safe clean and effective products to consumers around the world.

Continue to tirelessly worked to drive our mission of inspiring everyone to love living consciously.

We saw our seventh consecutive quarter of year over year revenue and volume growth even in light of the significant COVID-19 demand in the second quarter of 2020.

Revenue grew 3% in the second quarter of 2021 on top of the 16% growth that we saw in the second quarter of 2020 versus 2019.

Additionally, we achieved solid gross margins of 36% in the second quarter as our cost innovation initiatives.

<unk> product mix offset inflation headwinds and normalized level of trade spend.

As we mentioned in our Q1 earnings call, we were impacted by a reduction of inventory at a key digital partner even in the face of the $6 million headwind, our first half revenue and volume grew 8% compared to the first half of 2020.

That's on top of the 25% growth rate in the first half of 2020 versus two.

2019.

Our focus continues to be executing against what we can control our strategic initiatives to remain constant.

We continue to focus on broadening awareness of our brand introducing breakthrough product innovation, increasing our digital and retail presence and continuing our commitment to ESG.

Now I will provide an update on our progress across these initiatives in Q2.2021.

Starting with marketing innovation, we continue to expand brand awareness and consumer touch points through the use of marketing campaign, leveraging our content community and commerce strategy.

By inspiring authentic dialogue and creating lasting connections, we drove a 16% growth in our skin and personal care business this quarter and 28% growth for the first half of 2021.

This continues to remain a strategic focus for us as more than 40% of new audit stock com consumers are acquired through our skin and personal care products.

Throughout the second quarter of 2021, we continued to invest in integrated marketing campaigns supporting our skin and personal care business, which combined earned media coverage sponsored influencer content early user generated content and paid media <unk>.

Two campaigns that exemplify these full funnel tactics, we're honest beauty radiant campaign that featured our vitamin C serum and gloss see lip gloss and our see Europe Ut campaign around our IP portfolio, including our hero Mascara products.

Jessica Alba created original content to support each campaign, the amplified influencer content to help expand our reach.

These campaigns led to a strong consumer engagement.

Increased traffic to other Stockholm and featured our award winning products, including our most recent award win or readers Choice Award for extreme like math, Skara and Lash primer.

We believe these campaigns positioned our beauty business extremely well as we launched our sustainable packaging initiatives for beauty in the third quarter of 2021.

Given the continued success of these programs, we expect to lean into marketing in the back half to continue to support the restage and pursue growth in skin and personal care.

Trends in the marketplace.

Our new diaper is our best performing and most sustainable diaper yet.

These improvements in performance and sustainability, we saw mid single digit growth for the quarter on our diaper business. Despite COVID-19 startup impact in the year ago period.

Our diaper market share increased this quarter as our diaper retail consumption growth outpaced the market.

<unk> grew 33% compared to the total diaper market up 20%.

Beyond the breakthrough type of innovation, we also introduced new innovation in our wipes household and wellness and beauty categories in the second quarter with items, such as our benefit wipes.

Which hydrate and nurse skin and is a clean.

Our scientists advertising lines, which introduced natural fragrances tourist sanitizing wipes line.

And our honestly healthy serum infused last June and plant based brand gel, which helped to build our IP portfolio.

Around our hero beauty products, our extreme line can that spirit.