Q2 2022 Church & Dwight Co Inc Earnings Call

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[music].

Good morning, ladies and gentlemen, and welcome to the Church <unk> Dwight second quarter 2022 earnings Conference call before we begin I have been asked to remind you that this call.

On this call the company's management may make forward looking statements regarding.

Regarding among other things the company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings I would now like to introduce your host for today's call Mr. Matt Farrell, Chief Financial Officer of Church.

Please go ahead Sir.

So I got promoted to CEO about seven years ago.

But anyway, hey, good.

Morning, everyone.

Thanks for joining us today, we've got a lot to talk about I'll begin with a review of the Q2 results and then I'll turn the call over to Rick Dierker, our CFO and when Rick is done we'll open the call for questions.

So Q2 was a solid quarter for US reported revenue was up four 2% organic sales grew three 4% and this was in line with our $3 to 4% outlook.

Adjusted EPS was <unk> 76, this was <unk> <unk> higher than our outlook, but that was due to lower marketing.

We grew consumption in 11 of our 17 categories in which we compete and in some cases on top of big consumption gains last year Phil.

Fill rates have improved to 90% in June and we expect to get back to historical levels by the end of the year regarding brand performance, we experienced double digit consumption growth in six of our 17 categories and I'll name them for you arm <unk> Hammer scent boosters arm <unk> hammer baking soda arm <unk> hammer clumping litter.

<unk> dry shampoo, zicam zinc supplements and thorough breath mouthwash and we gained share on eight of our 14 power brands. So that's a good story shares are healthy.

In Q2 online sales as a percentage of total sales was 16%.

Our online sales increased 15% year over year, and we continue to expect online sales for the full year to be up be above 15% as a percentage of sales.

Since early 'twenty, one we have announced price increases to combat inflation and through mid 2022, we have already announced price increases covering 80% of our global portfolio and we did a second round of price increases in laundry and litter that just hit the shelves.

But at the same time cost inflation continues to climb.

So since we spoke to you in April we are now expecting $15 million of new incremental cost inflation. So the cumulative incremental cost inflation is $135 million. Since we gave our initial full year outlook way back in February .

The incremental $50 million of inflation combined with the currency headwinds caused us to lower our full year EPS outlook.

We now expect 6% operating income growth offset by a much higher year over year tax rate.

Now I am going to comment on each business first step is U S consumer business, which grew organic sales by two 4%.

Looking at market share as I've said before we had good numbers as eight of our 14 power brands gained share looking ahead, we expect even further improvement in our market share positions by year end as our fill rates will improve and promotional and marketing spend increases in the back half.

Let's look at a few of the important category, so let's start with laundry.

The trade down to value.

<unk> has begun.

Give you some numbers for example during Q2, the liquid laundry category grew 7%, but value laundry detergent grew 11% while premium laundry grew 4% in.

In litter the category grew 12% both are black box, which is premium and our yellow box, which is value had double digit consumption growth in Q2.

The dry shampoo category was up 18% in Q2, while batiste consumption was up 43%.

Our growth would have been higher if not for our difficulty in securing aerosol cans and actuators.

Over in Gummy vitamins, the sequential quarterly growth of the category is slowing down.

For the last three quarters the category growth rate has been 16%, 10% and most recently, 5% we expect the category growth to turn negative in Q3 simply because we are lapping the consumption spike from the Delta variant and last year's Q3, and we continue to struggle with fill rates, which is hampering our ability to.

Grow.

Our most recent acquisitions are performing well, Sarah breath, which we acquired in December 2021 had a great quarter with 33% consumption growth for Airbus grew share three one points to 16, 4% of the alcohol free mouthwash category thorough breath as the number two non alcohol mouthwash and is solid.

Italy, the number four brand in total mouthwash.

<unk> is our other recent acquisition <unk> also delivered strong results this quarter.

May recall, we acquired XI came in December of 2020, we were hurt in year, one of our ownership due to masking and social distancing.

So I cant cold remedy consumption was up 55% in Q2 and is the number one brand in the cold shortening segment with a 75% share now.

Now looking ahead to the rest of the year the regular flu season in the U S is projected to be more severe than recent years based on what the southern hemisphere is experiencing right now.

Our next step is international despite significant disruptions our international business delivered organic growth of six 5% in Q2, primarily driven by <unk> in Europe , vitamins and Batiste in Canada and growth across the Gmg business, which is our export business.

In April when we spoke to you we expected flattish growth in Q2, and a continuation of the supply chain lows, we experienced in Q1, such as field level issues and delivery issues those actually proved to be less disruptive in the quarter than we anticipated. However.

Fill levels and delivery issues will continue to weigh on our global markets group in the near term.

Step, especially products, especially products business delivered a strong quarter with six 3% organic growth driven by both higher price and volume.

Now I want to spend a couple of minutes discuss discussing our more discretionary brands since they are having an impact on our full year revenue outlook.

We see lower consumption for waterflood in the U S as consumers trade down to lower priced water flushes.

Also the Waterpick Asia Pacific Foster consumption has and is expected to decline as a result of lockdowns.

Similarly, there is a lower demand for water Pik shower heads and this is due to less do it yourself yourself projects a lot of those got completed during Covid times.

<unk> is a discretionary purchase and we continue to invest in demand driving activities, such as lunch and learns to drive household penetration of losses.

It is fair to say gum health has not gone away and still only 16% of the U S. Population forces everyday now this is a business that has averaged high single digit single digit growth top line since we acquired them in 2017, and we're confident that the long term growth prospects for water Pik.

Our sound.

The other discretionary brand we have is flawless, we're experiencing lower consumption, but that is largely due to the absence of our new products. In this fast moving beauty category, China Lockdowns have impacted our manufacturing and the new product launches that were planned for the first half have been delayed until the end of 'twenty two.

Now I want to spend a few minutes on the health of the consumer private label trends innovation and our ability to supply.

Innovation is at a multi decade high and interest rates are rising to tamp down inflation and while wages have risen households are getting squeezed and the consumers are making choices to make their dollars go further.

I think back to April during our Q1 call, we called out the strengthening value detergent segment.

In the latest four weeks ended July 17th value liquid laundry detergent category is up 8%.

Deep value is up 1% and premium is down 1%. So we think the trade down is happening here.

Here's another an early indicator of trade them. This time in oral care, we had one major retailer point to the strength of manual toothbrush, which has held up well for them in contrast to declines in rechargeable and powered toothbrushes. This trend impacts both waterpick and spend brush and here are a few numbers to illustrate the trend the philosophy category.

It's down 7% in Q2 and battery operated toothbrushes the category was down 4% also in Q2.

So we're keeping an eye on these and other trends its important to point out that 40% of our portfolio is value and we expect it performed well in a difficult economic environment, our largest businesses detergent and vitamins or value products and then later our Orange box is also value. So we feel well positioned for what may be coming.

Regarding private label.

Private label shares are stable and the five categories, where we have meaningful exposure to store brands.

As you saw in our release, we have a strong lineup of innovation across our personal care and household categories I want to highlight the early success of arm <unk> Hammer baby laundry detergent, which has already achieved a 10% share of the baby launch a category at Walmart the other.

Product like the highlight is Trojan raw, which is the thinnest condom now in the market, which is already the number six out of 400 Skus sold at Amazon.

I also want to mention our recent launch of our new lightweight litter that we call hard ball we.

We expect over time this will enable us to get our fair share of the lightweight litter category.

For the cat owners on the call today, we named it hard ball because of the hard ultra compact clumps, it's quite a unique consumer experience now regarding our ability to supply you may recall, we hit bottom in Q1 with the omicron resurgence when we saw our fill rates dip below 80%.

The overall Q2 fill rates improved to 89%, although recovery in our high margin personal care side of the business is still lagging.

We're on track to be near historical fill levels by the end of the year and the good news is July continues to show improvement.

And we have confidence in our revised full year outlook look for several reasons, improving fill rates trade down to value healthy new product innovation and consumption strength and our recent acquisitions regarding support we have key promotional events lined up in the second half and two thirds of our full year advertising.

Spend is concentrated in the second half and closing we expect our portfolio of brands to do well both in good and bad times and we continue to hunt for new Tsi accretive acquisitions next up is Rick to give you more details on Q2.

Thank you, Matt and good morning, everybody, we'll start with EPS second quarter. Adjusted EPS was <unk> 76 flat to prior year to 76 cents was better than our 17 outlook, primarily due to continued strong consumer demand and lower marketing spend.

Due to a below normal fill rates in our personal care business. The marketing impact was about <unk> <unk> from the quarter.

Good news is our overall fill rate continued to show improvement and had 80, 989% for Q2.

Reported revenue was up four 2%, reflecting a 1% drag from currency organic sales were up three 4% in line with our outlook.

That review the top line for the segment. So I'll go right to gross margin for the company or.

Our second quarter gross margin was 41, 2%.

220 basis point decrease from year ago.

Let me walk you through the Q2 bridge gross margin was impacted by 600 basis points of higher manufacturing costs, primarily related to commodity inflation distribution and labor as well as a 10 basis point drag from currency. These costs were offset by a positive 270 basis point impact from price volume mix positive 20 basis points from.

<unk> and a positive 100 basis points from productivity.

Moving to marketing marketing was down $14 million year over year marketing expense as a percentage of net sales was seven 8% and we expect two thirds of advertising to be concentrated in the second half as case fill improves.

For SG&A Q2, adjusted SG&A decreased 10 basis points year over year.

Other expense all in was $15 1 million, a $3 $7 million increase resulting from higher average debt outstanding and for income tax our effective rate for the quarter was 24, 1% compared to 24% a year ago.

Net of cash for the first six months of 2020 to cash from operating activities decreased 10% to $310 million due to lower cash earnings and higher working capital driven by higher inventory levels, we expect inventory to get back in line by year end and as of June 30, cash on hand was $640 million.

Looking ahead to Q3, we expect reported sales growth of approximately 2% to 4% organic sales growth of approximately 1% to 3% and gross margin contraction sequentially. We are decelerating from Q2, as our Vms business comps the COVID-19 surge from year ago, and we see a tightening in the consumer for our discretionary products such as water pick a flawless.

So those two reasons coupled with the inventory issues, we've all heard from retailers compressed Q3 growth.

Adjusted EPS is expected to be 65 per share a 19% decrease from last year's adjusted Q3 EPS. This is largely due to higher SG&A, which is normalized levels of incentive comp versus a year ago, plus higher market marketing and promotional support.

We expect higher EPS in Q4 to offset the Q3 declines driven by acceleration of organic growth and the absence of prior year, one time investments.

And now to the full year, we now expect our full year outlook for reported sales growth to be approximately 46%, reflecting an incremental drag from currency of 1%.

We now expect organic sales growth to be approximately 3% to 4% as you read in the release, we announced that incremental $135 million of cost inflation for the year, which is $50 million higher than our April outlook on a longer term time horizon and we continue to plan on offsetting inflation with incremental pricing laundry compaction and productivity.

Continue to anticipate full year reported gross margin to be down versus 2021 is inflation as partially offset by pricing and productivity.

We continue to expect gross margin to improve sequentially in Q3, an increase year over year in Q4.

Marketing spend is now expected to be lower in 2022, driven by the lower spend in the first half of the year.

We now expect full year adjusted EPS to be flat to 2021 due to incremental inflation and currency headwinds. We continue to expect the full year tax rate to be 23%.

We expect cash from operations for the full year to be approximately $900 million down from $920 million and our full year Capex plans now approximately $180 million as we continue to expand manufacturing capacity.

In closing we continue to perform in a volatile environment our share performance improved again in Q2, and we expect further market share gains in the second half as we invest in our brands and supply chain fill levels improve and with that Matt and I will be happy to take any questions.

Certainly ladies and gentlemen, if you have a question at this time. Please press star one on your telephone one moment for our first question.

And our first question comes from the line of Kevin Grundy from Jefferies. Your question. Please.

Great. Thanks, good morning, everyone.

Two for me if I could Matt So I think you've probably been a little bit more cautious on the consumer probably earlier than maybe some of your peers.

Thank you everyone got off practice call. This morning.

They are calling for a category slowed down as well so without asking you to be redundant, Matt you called out some of your more discretionary categories, you're also calling it out in laundry.

Maybe you could just talk about the scope and the exposure within your product portfolio in terms of where you expect to see further trade down and outside of what you called out maybe talk about the change in category growth rates underlying your underlying your guidance for the year and then I've a follow up thanks.

It's a pretty broad question.

Kevin as far as the categories go let's start with.

Discretionary so it did mentioned that both.

Waterflood Sirs and.

And flawless were both struggling due to trade them trade down for water Pik, but also the absence of new products for for flawless.

But if you think about our portfolio and 90% of our portfolio, our just our everyday essentials and only 10%.

That's related to discretionary products.

So we so.

Though we spent a lot of time talking about the discretionary products because they do have have had an impact on our full year call.

It's not the whole story do you have I mentioned that we had growth in 11 out of our 17 categories that we're in and we do expect that to continue in the second half. There are there are a few categories I'd call that besides that waterpick and fall off like <unk> for example, battery rapid was down.

A little bit.

As far as others near is another one that was soft in the quarter Depilatory and also orajel.

But everywhere else those categories you saw you saw growth.

So again a couple of them.

Yes, My follow up is probably is probably for Rick just in terms of the EPS outlook.

The environment is clearly challenging cost have gone worse FX not as big a headwind for you guys, but nevertheless, still a headwind.

Can you talk about the constraints on the pricing front, and then historically and insurance as well thought of and run pretty lean, but other levers to pull here in terms of productivity to offset.

Offset some of the cost headwinds and then I can pass it on thank you.

Sure Kevin.

No.

From an EPS perspective.

We've announced the second round of pricing as an example for laundry and litter that'll be a tailwind or personal care fill levels returning from.

Low 60 is back to normal will be a tailwind.

Promotional support because we didn't have the fill levels in the first half of the year to do promotions like we normally would do is in the back half. That's that's a tailwind we think trade down as a tailwind in general laundry.

Matt quoted some numbers on there about.

How will the value category is starting to grow and just that segment. So we think we're well positioned that for all those reasons for EPS. We also mentioned Q3 is down big but Q4 is up big in Q4 is also lapping some of those investments and one timers that we had talked about previously so.

So that's on the EPS side on productivity now we.

Last quarter I think Laura asked the question about productivity phasing.

So true because early on in this year and even late last year.

To break into to get line time to go do qualification to do any productivity type efforts and so we said it last quarter is still true it's going to continue to build through the year.

As we have back at the right capacity and fill levels. Then we will have more and more time to devote to productivity at our plants.

Very good. Thank you guys good luck to Kevin.

Thank you one moment for our next question.

And our next question comes from the line of refresh Patrick from Oppenheimer. Your question. Please.

Thanks for taking my question. So I guess I just wanted to go back to the gummy vitamin category. So you guys talked about slowing category growth. So I'm curious, what's driving that lower category growth and then secondarily you mentioned that your fill rate is still being challenged when do you expect your fill rate to get back to where you'd like it to be.

We expect the fill rates that would be.

Or where it should be which is in the mid to high 90% by the end of the year Apache.

Household is ahead of personal care right now of course personal care is our higher margin stuff. So.

That's why we're focused on the most right now.

Just to give you. An example on that refresh rate we were in the low sixes on fill rate for personal care within the portfolio. In Q2, we had 74% in the month of July so we have visibility into rapidly rapidly improving that number.

As far as the vitamins galaxy keep in mind.

<unk> really gigantic base based on the last couple of years with growth in 2020 one so although the.

The growth rate is slowing down it's because of the comps year over year, but that last year Q3 was just a huge spike in.

In the quarter because of the Delta versus Q3 last year.

So consequently, I think that's a really tough comp.

Consequently, we expect it to go negative year over year as an example.

Q3 last year the category grew 33% the rest of the quarters grew 19% in Q1 Q2 and Q4. So it's just it's more of a comp issue than a year.

Okay. That's helpful. And then just on the cost side and obviously the cost pressures continue just based on your visibility right now any sense of the cost pressures could be peaking and maybe if you look forward to next year. Some of these pressures could rollover.

And then just maybe just more color on the risks that you see to your cost outlook for the balance of the year.

Yes, I'll leave you with two thoughts really on.

On the cost side.

We do think there'll be inflation next year, we think that <unk>.

<unk>.

We will only come down as demand comes down and so if we enter into a recession, we think that demand will start to slow.

In general for the macro economy. So we're now usually we would be I don't know.

80% hedged.

From a commodity perspective for next year by now we're not hedging at all as an example.

Hopefully that gives you some context.

Okay, great. Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Chris <unk> from Wells Fargo. Your question. Please.

Hi, good morning, everyone.

Hello, Chris.

Hi, I'm, just maybe we could talk a bit more about the phasing for the year Q3 versus Q4.

I'm, specifically trying to understand.

Really the snapback that youre expecting in Q4, and what's driving that and perhaps within that you can comment on whether there are specific volume headwinds you expect to improve in Q4 versus Q3 do you have specific promotional plans in Q3, which.

We will not reoccur in Q4 is this really a call on the consumer trading down and that benefit accruing to us so.

Just trying to get some incremental context, then really confidence on on that recovery that you're expecting now into Q4 relative to the Q3 and I have a follow up yes. Okay.

There are a lot of factors influence in this so for example, the fill level improvement.

Leaving money on the table.

In several categories. So.

We do think that once that gets fixed particularly in the personal care side that we're going to benefit from that and that's more back end loaded to Q4 than in Q3. It is true that we've got.

Both trade and advertising in place for Q3 and Q4, we do think as the economy.

The recession or what some people call a recession deepens that.

The trade down will continue and accelerate so that's an element.

Of it as well, so I mean, youre, calling out the the right levers with respect to the second half and let me. Let me give you some numbers to go with that so our guide for Q3 organically as one to three which implies a 5% plus number in Q4, so as Matt said personal care fill levels are fully back.

Professional supports there we think trade down is accelerating as well in Q4. So all of those reasons, we think organically we're doing better at that helps EPS as well of course.

But we also have some higher inflation expectations in Q3 higher SG&A as we had some.

A onetime catch up year ago for.

For incentive comp.

A lot lower a year ago, and then we have higher taxes in Q3 as well. So we believe both organically and from an EPS perspective, we havent inflection going from Q3 to Q4.

Okay. Thank you.

Two quick follow up would just be.

Q2 price mix was.

Blow our expectations, perhaps a bit below your expectations going into the quarter I'd be curious your thoughts there.

Despite what we're seeing as pretty strong pricing in consumption data.

And so.

Can you maybe provide some context on why that's happening did promotional activity accelerated.

Heavier than you were expecting in the quarter and now thats falling into the back half of the year and perhaps that's why the organic is getting called down in addition to volume.

Were there specific mix impacts that were a bit worse than you had been expecting so really what im trying to get a sense of is the Q2 price to make the key drivers and just how that's really informing your back half expectations. Thanks.

It's pretty straightforward, Chris no change related to our pricing aspect of it that's all going well, we throw out another round of laundry and litter.

That's going well early days.

We're continuing to evaluate whether we need to do incremental pricing is cost inflation happens, but Q1 to Q2, we decelerated from a price volume price mix perspective from seven eight in Q1 to six point to that entire deceleration as negative mix from water Pik and what do I mean by that I mean consumers.

Consumers trading down from our higher priced unit to a lower price units. So thats the entire delta right there.

It inflect positively again in Q3 and Q4 for the company because of the next round of laundry and litter price increases.

Okay. Thank you.

Thank you.

For our next question.

Okay.

And our next question comes from the line of Olivia Tong from Raymond James Your question. Please.

Great. Thanks first I just wanted to follow up on that and ask you to talk a little bit about your price mix expectations from here.

Given that you called out two highest price per unit categories as you've seen the deceleration how you think about that going.

Overall for the slowdown period, the macro slowdown I'm curious, how you're thinking about price mix.

And then just broadly if you could just comment about.

And what Youre seeing in terms of elasticities of demand private label.

As private label starts coming back how thats impacting your view on trade down it sounds like Youre expecting some benefit from trade down, but do you see any risk that the lower end of your consumer base could potentially trade down as well. Thanks.

Yes, I'll take the price mix.

Question, So first half.

Volume would be down, 4% and price mix was up 7% and that's how we got our first half result of around 3%, we think the second half.

Is down 3% on volume, that's really a slowdown on the discretionary stuff like Waterpick shower heads for example are flawless.

And.

Offset by.

The value trade down and whatnot price mix. Another hand is pretty consistent 7% in the first half 7% in the second half and that's what I said before to Chris was really lower mix on water Pik.

Trade down happens there for as a negative, but then the positive as higher price on laundry and litter.

Yes, and your question about the private label as I said in my opening remarks.

<unk>.

<unk> five categories.

Where we compete with private label in those private label shares have been largely.

Stable.

That's moved up a little bit as litter smoothed up about 1%. It's now 11, 9%, but we havent been interacting with with private label in that category as opposed to some of our competitors. So that's why we feel confident that private label is at least in the near term next six months, we don't expect that's going to be a big issue.

For us that help you Olivia.

Yeah, that's perfect. Thanks.

Thank you one moment for our next question.

And our next question comes from the line of Bill Chappell from tourists to your question. Please.

Thanks, Good morning.

Couple of just specific I guess housekeeping type things one on kind of the the cost environment and your hedges historically I thought you did some hedging on diesel costs. So it didnt know with the runoff of energy prices the potential kind of come back around energy prices. If if you were locked in more or have some.

Potential where that could be a relief in the back half and then the second one just on currency and FX exposure can you just remind us versus the euro the peso et cetera, what kind of what's your exposure is and what we should be looking for thanks.

Yes, so I'll take the commodity one first.

I think I said earlier, we have very limited hedges out for 2020.

Three.

We entered this year and I'd say, we're about 80% hedged most of the cost inflation that we're talking about.

As.

Primarily raw material and pack and that's coming through incremental.

Discussions with third party manufacturers and it just takes a while for it to get through the supply chain.

Our outlook at this time versus last time is minimal.

On commodities I would say of course, the up diesel is up in but that is hedged to some degree.

And ethylene is up and that is hedged to some degree.

So thats in the commodity side.

On currency.

<unk>.

A couple of comments on currency.

For us we're not that exposed to currency, we just called out a 1% drag on the top line, 1% drag on the bottom line. We don't of course hedging translational transactional we hedge about 80% of our transactional exposures, whether thats the euro or the Canadian dollar.

Great. Thank you.

Yes.

Thank you one moment for our next question.

And our next question comes from the line of Andrea <unk> from Jpmorgan. Your question. Please.

Good morning, and thank you I was hoping if you can comment on the mix impact on gross margin you may see with CMS.

Yes, going negative in Q3, and possibly Q4 Im assuming thats a headwind I just wanted to confirm and also are you seeing you don't trade of that category from your brands into private label and.

And I do remember you got away from some of the contracts in private label. So I was just double checking.

Yes.

If it happens.

On trade as you mentioned in some categories like laundry that helped you in this case you may not.

Be helped if you are no longer making private label for some of these customers just quantify hi, Andrew This is Matt just with respect to private label private label shares in <unk>.

The vitamins are stable so we're not seeing the growth in private label.

Only of the five categories. We compete in it's only litter that it had an uptick and youre right. We.

We walked away from.

Private label manufacturer, providing them a couple of years ago, and we have no plans to get back in.

And of that on gross margin mix.

There is not much of a mix impact on vitamins, whether it grows or declines from a revenue perspective, just to talk about gross margin.

In aggregate right in Q1, we were down 190 in Q2, we said it was a lot like Q1 and it did down to 'twenty Q3, we're going to improve from from.

A little bit from Q2, but it's not going to be the same perimeter that we had thought previously and then in Q4, we think we're going to inflect positive.

Same reasons, why we talked about last time personal care fill levels productivity builds around two of pricing and gross margin in Q4 last year was one of our lower quarters.

I know you didn't ask the detailed gross margin.

Andrea but I thought that would be helpful context.

Super helpful. Thank you I'll pass it on.

Thank you one moment for our next question.

And our next question comes from the line of <unk> <unk> from Credit Suisse. Your question. Please.

Hi, guys.

Quick question on inventory just to make sure we heard it correctly so.

Inventories are.

I guess inventories you need to work through a little bit so should we assume that your results are.

Going to lag what we see in terms of consumption for a little while.

And then can you also maybe talk about what inventories look like at retail for particularly for Warner picking some of the discretionary items. This discretionary items at retail and a series of other categories seem to.

Be quite high.

Yes, I think.

You saw in our release, we said we had to get back in line by year end and really Waterpick wasn't really because of consumption per se. It was more because we were trying to get ahead of the Chinese lockdown that happened.

So we built up supply and so yes. It takes a couple of quarters to work through that.

Especially as consumption comes in a little bit, but we think we'll be in a good spot by end of the year on that one.

Similar similar answer.

The answer on flawless, we think we're going to be in a good spot there as well.

<unk>.

And then at retail I think in stock levels are good, especially for our household business I think where we're still struggling as our personal care is our fill levels are lower than we like but we think that we're going to recover pretty quickly in the back half Dan you asked about water pik as well on inventory at.

On shelf where at the retailers.

Kind of remind everybody.

Order pick about half to half that flush of businesses online.

And so there isn't a lot of inventory thats really carried.

But the online class of trade. So we don't we don't see it as an issue there with respect to.

Waterpick inventories are or softness in sales because of high inventories in the channel.

Okay got it and then following up on Olivia's question a little bit.

I know you mentioned many many times private label share has been flat, but if we can maybe just talk about.

That that consumer and the value part of your portfolio and just from a consumption perspective, not trading down or trading up I know youll benefit from trading down but are you seeing any thinking just in terms of consumption just with that consumer.

Isolating attuned to that consumer.

Specifically talking about vitamins.

No no no im sorry, Im talking about the.

40% of your portfolio that would be considered value.

I'm just curious what youre seeing in terms of that consumer I know youre, not seeing trading down, but maybe they're consuming less buying less clearing clearing their pantries curious what youre seeing.

That way you should think about.

Value detergent out some of the numbers that I quoted just like in the last.

Four week period ended.

July 17th is a value laundry detergent is up.

11%.

And deep ties up one and premium is a minus one.

So we would say and by the way there isn't a lot of private label in the laundry category liquid laundry detergent, it's generally mid tier so it's higher priced than our brands.

That's not an issue when it comes to.

That category.

In litter.

The category grew I think like 11, 12% in the quarter, we grew even faster.

It wasn't just our premium.

Our brand our black box competency, but our yellow box, which is the value grew double digits as well.

There is literal private label, but as I said earlier.

Picked up a 1% to 11, 9%, but we havent interacted as much.

With the private label as some of our peers.

The other big category would be would be vitamins, where.

Stable and just a few other ones just dimensions, you have baking soda and also <unk>.

Oral analgesics, which is orajel and.

Again.

Label shares are pretty pretty stable right now.

Thank you.

Okay.

For our next question.

And our next question comes from the line of Steve Powers from Deutsche Bank. Your question. Please.

Hey, guys good morning.

I just wanted to start going back to vitamins I think you call in the third quarter is pretty clear, but what do you think that category goes your business goes beyond <unk> number one and then as you think about the fill rate include improving in vitamins as that.

More to be a function of your capacity improving or is it is it actually the category kind of comes back to you.

Against the pressure through declines.

Hey, Steve It's Rick I think.

I think the back half the category will be under pressure as it was.

It was elevated in really all of Q3 for the Delta Spike last year and a little bit in Q4. So.

That's our view now remember if you take a big step back the category has more than doubled over the last two or three years. So.

Again, we're really happy with with the vitamin category.

In terms of fill levels for vitamins.

Get better every single day.

We really havent two issues on two skus and that's really driving the issue right now and it's ingredient related.

We have finally worked through all of our alternatives in the next 30 days or so we should be back on vitamin Phil and Steve The only other thing just to add to what Rick said, Yes, we're super happy with the growth of the category over the last.

A few years, but keep in mind that the other tailwind as that transition from pills and capsules to gummies.

That's going to sustain the growth.

<unk> category in the future and of course, our new ingredients, new product offering assess any other catalyst.

Yes, and you guys are value priced in the category too.

Okay.

I wanted to pivotal six month and a half ago, we talked a good deal about.

How your portfolio has evolved.

Okay.

Yeah, and you guys are value priced in the category too.

Okay. So then I wanted to pivot a month and a half ago, we talked a good deal about.

How your portfolio has evolved since 2009 and I thought you did a good job of underscoring how in fact, there are still a lot of similarities today versus 2009, and your resiliency in terms of the before the 40% value exposure.

I was reassured I guess.

I'm wondering if that was a bit of a false sense of security just given the fact.

But you've added you've added discretionary categories and I appreciate it's only 10% of the portfolio now, but it's obviously having a.

An impact so I'm curious number one just what your outlook is on those categories going forward and what what kind of drag which maybe if.

The economy evolves the way that it seems like you're you're positioning for in 'twenty three number one and number two I'm wondering if it changes at all.

How you approach incremental M&A because a good deal of your M&A with flawless and Waterpick is skewed to the discretionary categories of late and I'm. Just wondering if this if this experience changes that at all.

Well it is.

Let's start with M&A.

Two most recent acquisitions.

Whereas I came in a couple of years ago in 2020, which got us into cold shortening category, and then thorough breath, which got us into.

Our mouthwash.

So we continue to seek out everyday essentials.

We're very happy with the <unk> acquisition of course, it's discretionary it's a longer purchase cycle, but this business grew high single digits.

Since since we bought it in 2017 and long term it has terrific growth prospects for the long term investor.

This is a good brand to one we've got a lot of opportunity.

The U S and yes, okay, we're going sideways right now, but keep in mind that the change in EPS is driven by cost and currency.

We've left money on the table in the first six months here because of our fill rates.

Not for that we'd be in far better shape, but it's water under the bridge. We do think by the end of the year, we will have our fill rates back in line.

We'll be growing from a smaller base with respect to water Pik, but we do think that once once the economy settles down again that it will rekindle the growth of water Pik and as far as acquisitions go.

Those acquisitions Waterpick met all of our criteria.

We don't have a criteria that it's got to be that it can't be discretionary, but certainly we are oriented towards buying everyday essential brands and you can expect that from us in the future.

Okay. Thank you very much okay.

Thank you one moment for our next question.

Our next question comes from the line of Lauren Lieberman from Barclays. Your question. Please.

Great. Thanks.

Just wanted to ask a little bit about pricing I think when you spoke.

And we think conferences and even last quarter you discussed that you thought.

Should you need incremental pricing beyond the July increases that you've mentioned they would come more likely in the form of package size adjustments. So I was curious if that's still the case and then b.

I think you'd also mentioned that building that that approach would require some capex investment and some lead time to deal with tooling.

And the Capex guidance is a little it's small, but a little bit lower for this year. So I was just curious how that kind of fits into pricing dynamics. As you look ahead and anything you need on the capex side to implement those.

Okay, Hey, Lorne.

Really.

From a pricing perspective, you're right, we said last quarter that primarily at next year, we're focused on pack size.

Versus pure price increases now of course, with new inflation and new news, we will react accordingly, and we will see if we have to do any incremental price changes as well right. So I'd say it'd probably be both on on Capex.

It's immaterial.

Capex outlook on unchanged parts for like aligned for a carton or for a new mold for.

A bottle so it's.

A handful of million or so it's not.

That impactful.

Okay.

Relative to the comments previously about the Capex. It was more about the time needed to implement rather than it being a cost exactly right. It's more about six to 12 months in order to design a mold.

Cut our mould.

<unk>.

Change parts or the change parts for aligned to do different sized carton. Those are the types of things that take time.

Great. Thanks, a lot I appreciate it.

Thank you one moment for our next question.

And our next question comes from the line of Dara <unk> from Morgan Stanley . Your question. Please.

Hey, guys.

So just to follow up on that on the incremental $50 million of cost pressure.

Are there any plans to take incremental pricing or is it more productivity in the pack size changes I guess I just wanted to understand that incremental part obviously theres always some timing lag, but is there a concrete plans to take incremental pricing.

And if not I guess why not.

I think right now like <unk>.

Set with Warren, we're really focused on pack size changes.

And adjustments that way, which is effectively a price increase we just think not as severe for a consumer and then if inflation continues to go and we continue to chase the ball downhill will evaluate to an incremental pricing.

Okay.

And then on the demand elasticity front.

The volumes appear to reacting more to pricing than some of your CPG peers, but obviously some of that may be more tied to supply. So.

Just as you guys sort of parse through the consumer demand elasticity. So far in terms of what youre seeing at retail more than your shipments.

Can you give us an update on where you are coming in versus what you expected and if you've seen any sequential change recently on that.

Thank you hit it on the head there.

In general our comments wouldn't change from last quarter, we saw a 20% 30% better than expected elasticity is for volume.

A new laundry and litter price increases just went into effect a few weeks ago. So it's kind of too early to comment.

But if there's any noise, it's usually because of fill levels not because of price volume sensitivities.

Okay, and then last just in terms of price gaps, obviously with a lot of substantial pricing and then more in July are there any categories where <unk>.

Price gaps.

Have either expanded where your premium or narrow where your value where you think they may have gotten out of whack with competitors I'm. Just wondering if you can characterize the competitive environment on the pricing front relative to the pricing that you guys have realized.

Yes, well, what I would say there is.

Through the end of June we were pretty happy with the Elasticities remember we have new price increases that are just hitting shelves in July that will be fruit, both laundry and.

Litter. So that's the one we're going to watch now over the next over the next quarter and as far as the promotional environment goes.

There was a pullback in Q2.

If you look at liquid laundry for example, the sold on deal was around 31% and that was down 60, or 70 basis points year over year and there are some big pullbacks.

Brand by brand, so yoga pure X was down 500 basis points.

Year over year, we were down $3 40, so we pulled back because we were going through concentration now theres maybe pulling back.

So a way to modulate.

Price and also on litter litter is also.

Category that promotions are down again year over year celadon.

Celadon deals around 11%, it's normally in the high teens, and then back to liquid laundry or at 31% sold on deal that's normally in the mid thirties.

So the promotional environment has been pretty tepid, so far year to date and as for our most recent price increases and we're going to kind of watch the third quarter and see how they react with our peers.

There I will say that in general we're happy with all of our price gaps and even when we've led in a category. If you take a step back.

The category is also <unk>.

Reacted and so within a few months all the price caps are back to normal.

Okay.

Great. Thanks, guys.

Thank you.

Great.

Okay.

Our final question for today comes from the line of.

Jason English from Goldman Sachs. Your question. Please.

Awesome. Thanks, so much so I guess I'm closing thanks for sneaking me in.

Hey, Jason.

Hey, guys I think I heard you in prepared remarks that you're expecting maybe in the press release and I know, it's all it's all jumbled in my head at this point in time.

But you have in anticipation of accelerating trade down in the fourth quarter, which categories do you expect to benefit the most from that.

Laundry is the big one where we expect to trade down I would say, that's the big Big Swinger.

<unk> already seen it we start to see this number in Q1.

What we said was that the previous several quarters that value detergent had been.

Losing share to premium that changed in Q1.

It held share versus versus premium.

Q2.

Value starts growing faster than premium and in the latest four weeks value detergent.

It is up significantly 11% versus the premium down 1%.

So we do think that that's going to accelerate now that could be muted a bit with our most recent price increases and consequently, we have to see what happens with our competitors.

The timing of their price increases, but I think everything is going to be in place by the fourth quarter. Many price increases that others have been contemplating.

Yes, we do have a fair amount of support both the advertising and trade.

Heiner detergent.

The second half so those are reasons context for why we think things are going to accelerate.

Okay.

<unk> talked about laundry on its earnings call earlier did reference margin promotional activity tapered back.

Got to get more price, but because we had a capacity ceiling. That's now been resolved and they suggested that they're going to start leaning back in now.

We're advertising more retail merchandising.

If that transpires, but how much.

How many how much or how many of that jeopardize your outlook indeed.

Expectations for the fourth quarter.

Yes, you got to remember type premiums twice the price of arm <unk> Hammer.

So I don't think that Thats as big a factor now yes. It is true that tide simply is is still.

Is around that that was not in place back in 2009 in the last recession.

But.

Up until up until our recent price increase we had a significant price gap with tide simply and we'll have to see what happens with their pricing in the second half pricing and trade.

Yes fair point on the spread there.

Thanks, a lot guys I'll pass it on.

Okay. Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Matt Matthew barrel for any further remarks.

Okay, well look it's a simple story.

Ported now for the full year is 4% to 5% organic three to four and we did call down the EPS from 4% to flat why the 1% as currency and the rest of <unk>, 3% as cost shares are healthy fill rates are improving.

Laid down is happening and we've got big support in place for the second half and we will talk again with you at the end of October .

Thank you, ladies and gentlemen for your participation in todays conference. This does conclude the program you may now disconnect good day.

Maybe like a boxing announcer.

[music].

[music].

[music].

Good morning, ladies and gentlemen, and welcome to the Church <unk> Dwight second quarter 2022 earnings Conference call before we begin I have been asked to remind you that this call it that.

On this call the company's management may make forward looking statements regarding <unk>.

Regarding among other things the company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings I would now like to introduce your host for today's call Mr. Matt Farrell, Chief Financial Officer of Church.

Please go ahead Sir.

Actually I got promoted to CEO about seven years ago.

But anyway, hey, good morning, everyone.

Thanks for joining us today, we've got a lot to talk about I'll begin with a review of the Q2 results and then I'll turn the call over to Rick Dierker, our CFO and when Rick is done we'll open the call for questions.

So Q2 was a solid quarter for US reported revenue was up four 2% organic sales grew three 4% and this was in line with our 3% to 4% outlook.

Adjusted EPS was <unk> 76 cents now this was <unk> <unk> higher than our outlook, but that was due to lower marketing.

We grew consumption in 11 of our 17 categories in which we compete and in some cases on top of big consumption gains last year Phil.

Fill rates have improved to 90% in June and we expect to get back to historical levels by the end of the year regarding brand performance, we experienced double digit consumption growth in six of our 17 categories and I'll name them for you arm <unk> Hammer scent boosters arm <unk> hammer baking soda arm <unk> hammer clumping litter.

<unk> dry shampoo, zicam zinc supplements and thorough breath mouthwash and we gained share on eight of our 14 power brands. So that's a good story shares are healthy.

In Q2 online sales as a percentage of total sales was 16%.

Our online sales increased 15% year over year, and we continue to expect online sales for the full year to be up be above 15% as a percentage of sales.

Since early 'twenty, one we have announced price increases to combat inflation and through mid 2022, we have already announced price increases covering 80% of our global portfolio and we did a second round of price increases in laundry and litter that just hit the shelves.

But at the same time cost inflation continues to climb.

So since we spoke to you in April we are now expecting $15 million of new incremental cost inflation. So the cumulative incremental cost inflation is $135 million. Since we gave our initial full year outlook way back in February the.

The incremental $50 million of inflation combined with the currency headwinds caused us to lower our full year EPS outlook.

We now expect 6% operating income growth offset by a much higher year over year tax rate now.

Now I'm going to comment on each business first stop is U S consumer business, which grew organic sales by two 4% looking.

Looking at market share as I said before we had good numbers as eight of our 14 power brands gained share looking ahead, we expect even further improvement in our market share positions by year end as our fill rates will improve and promotional and marketing spend increases in the back half.

Let's look at a few of the important category, so let's start with laundry.

The trade down to value detergent has begun.

To give you some numbers for example during Q2, the liquid laundry category grew 7%, but value laundry detergent grew 11% while premium laundry grew 4%.

In litter the category grew 12% both are black box, which is premium and our yellow box, which is value had double digit consumption growth in Q2.

The dry shampoo category was up 18% in Q2, while batiste consumption was up 43% our growth would have been higher if not for our difficulty in securing aerosol cans and actuators.

Over in Gummy vitamins, the sequential quarterly growth of the category is slowing down.

For the last three quarters the category growth rate has been 16%, 10% and most recently, 5% we expect the category growth to turn negative in Q3 simply because we are lapping the consumption spike from the Delta variant and last year's Q3, and we continue to struggle with fill rates, which is hampering our ability to.

Grow.

Our most recent acquisitions are performing well, Sarah breath, which we acquired in December 2021 had a great quarter with 33% consumption growth for Airbus grew share three one points to 16, 4% of the alcohol free mouthwash category thorough breath as the number two non alcohol mouthwash and is solid.

Italy, the number four brand in total mouthwash so.

<unk> is our other recent acquisition <unk> also delivered strong results this quarter.

May recall, we acquired XI came in December of 2020, we were hurt in year, one of our ownership due to masking and social distancing.

Zicam cold remedy consumption was up 55% in Q2 and is the number one brand in the cold shortening segment with a 75% share now.

Now looking ahead to the rest of the year the regular flu season in the U S is projected to be more severe than recent years based on what the southern hemisphere is experiencing right now.

Our next step is international despite significant disruptions our international business delivered organic growth of six 5% in Q2, primarily driven by <unk> in Europe .

Vitamins and batiste in Canada and growth across our Gmg business, which is our export business.

In April when we spoke to you we expected flattish growth in Q2, and a continuation of the supply chain lows, we experienced in Q1, such as fill level issues and delivery issues those actually proves to be less disruptive in the quarter than we anticipated. However.

Bill levels and delivery issues will continue to weigh on our global markets group in the near term next.

Next up, especially products, especially products business delivered a strong quarter with six 3% organic growth driven by both higher price and volume.

Now I want to spend a couple of minutes discussing discussing our more discretionary brands since they are having an impact on our full year revenue outlook.

We see lower consumption for waterflood is in the U S as consumers trade down to lower priced water flushes.

Also the Waterpick Asia Pacific Philosophy consumption has and is expected to decline as a result of lockdowns.

Really there is a lower demand for water Pik Showerheads and this is due to less do it yourself yourself projects a lot of those got completed during Covid times.

<unk> is a discretionary purchase and we continue to invest in demand driving activities, such as lunch and learns to drive household penetration of losses. It's.

It's fair to say gum health has not gone away and still only 16% of the U S. Population forces everyday now this is a business that has averaged high single digit single digit growth topline since we've acquired them in 2017, and we're confident that the long term growth prospects for water Pik.

Our sound.

The other discretionary brand we have is flawless, we're experiencing lower consumption, but that is largely due to the absence of our new products in this fast moving moving beauty category, China Lockdowns have impacted our manufacturing and the new product launches that were planned for the first half have been delayed until the end of 'twenty two.

Now I want to spend a few minutes on the health of the consumer private label trends innovation and our ability to supply.

Innovation is at a multi decade high and interest rates are rising to tamp down inflation and while wages have risen households are getting squeezed and the consumers are making choices to make their dollars go further.

And I think back to April during our Q1 call, we called out the strengthening value detergent segment.

In the latest four weeks ended July 17th value liquid laundry detergent category is up 8%.

Deep value is up 1% and premium is down 1%. So we think the trade down is happening here.

Here's another or an early indicator of trade them. This this time in oral care, we had one major retailer points to the strength of manual toothbrush, which has held up well for them in contrast to declines in rechargeable and powered toothbrushes. This trend impacts both waterpick and spend brush in here a few numbers to illustrate the trend the flustered category.

Is down 7% from Q2 and battery operated toothbrushes the category was down 4% also in Q2.

So we're keeping an eye on these and other trends its important to point out that 40% of our portfolio is value and we expect that performed well in a difficult economic environment, our largest businesses detergent and vitamins or value products and then later our Orange box is also value. So we feel well positioned for what may be coming.

Now regarding private label.

Private label shares are stable and the five categories, where we have meaningful exposure to store brands.

As you saw in our release, we have a strong lineup of innovation across our personal care and household categories I want to highlight the early success of arm <unk> Hammer baby laundry detergent, which has already achieved a 10% share of the baby launch a category at Walmart.

The other product like the highlight is Trojan raw, which is the thinnest condom now on the market, which is already the number six out of 400 Skus sold at Amazon.

Also want to mention our recent launch of our new lightweight litter that we call hardball.

We expect over time this will enable us to get our fair share of the lightweight litter category.

For the cat owners on the call today, we named it hard ball because of the hard ultra compact clumps, it's quite a unique consumer experience now regarding ability to supply you may recall, we hit bottom in Q1 with the omicron resurgence when we saw our fill rates dip below 80%.

The overall Q2 fill rates improved to 89%, although recovery in our high margin personal care side of the business is still lagging.

We're on track to be near historical fill levels by the end of the year and the good news is July continues to show improvement.

And we have confidence in our revised full year outlook look for several reasons, improving fill rates trade down to value healthy new product innovation and consumption strength and our recent acquisitions regarding support we have key promotional events lined up in the second half and two thirds of our full year advertising.

Spend is concentrated in the second half and closing we expect our portfolio of brands to do well both in good and bad times and we continue to hunt for new Tsi accretive acquisitions next up is Rick to give you more details on Q2.

Thank you, Matt and good morning, everybody, we'll start with EPS second quarter. Adjusted EPS was <unk> 70, <unk> flat to prior year to 76 cents was better than our 17 outlook, primarily due to continued strong consumer demand and lower marketing spend.

Due to a below normal fill rates in our personal care business. The marketing impact was about <unk> <unk> from the quarter.

Good news is our overall fill rate continued to show improvement and had 80, 989% for Q2.

Reported revenue was up four 2%, reflecting a 1% drag from currency organic sales were up three 4% in line with our outlook.

That review the top line for the segment. So I'll go right to gross margin for the company or.

Our second quarter gross margin was 41, 2%.

220 basis point decrease from year ago.

Let me walk you through the Q2 bridge gross margin was impacted by 600 basis points of higher manufacturing costs, primarily related to commodity inflation distribution and labor as well as a 10 basis point drag from currency. These costs were offset by a positive 270 basis point impact from price volume mix.

20 basis points from acquisitions, and a positive 100 basis points from productivity.

Moving to marketing marketing was down $14 million year over year marketing expense as a percentage of net sales was seven 8% and we expect two thirds of advertising to be concentrated in the second half as case fill improves.

For SG&A Q2, adjusted SG&A decreased 10 basis points year over year.

Other expense all in was $15 1 million, a $3 7 million increase resulting from higher average debt outstanding.

And for income tax our effective rate for the quarter was 24, 1% compared to 24% a year ago.

And now to cash for the first six months of 2020 to cash from operating activities decreased 10% to $310 million due to lower cash earnings and higher working capital driven by higher inventory levels, we expect inventory to get back in line by year end and as of June 30, cash on hand was $640 million.

Looking ahead to Q3, we expect reported sales growth of approximately 2% to 4% organic sales growth of approximately 1% to 3% and gross margin contraction sequentially. We are decelerating from Q2, as our Vms business comps to Covid surge from year ago, and we see a tightening in the consumer for our discretionary products such as water pick a flawless.

So those two reasons coupled with the inventory issues, we've all heard from retailers compressed Q3 growth.

Adjusted EPS is expected to be 55 per share a 19% decrease from last year's adjusted Q3 EPS. This is largely due to higher SG&A, which is normalized levels of incentive comp versus a year ago, plus higher market marketing and promotional support.

We expect higher EPS in Q4 to also for Q3 declined driven by acceleration of organic growth and the absence of prior year, one time investments.

And now to the full year, we now expect our full year outlook for reported sales growth to be approximately 446%, reflecting an incremental drag from currency of 1%.

We now expect organic sales growth to be approximately 3% to 4% as you read in the release, we now expect an incremental $135 million of cost inflation for the year, which is $50 million higher than our April outlook on a longer time horizon, and we continue to plan on offsetting inflation with incremental pricing laundry compaction and productivity.

Continue to anticipate full year reported gross margin to be down versus 2021 is inflation as partially offset by pricing and productivity.

We continue to expect gross margin to improve sequentially in Q3, an increase year over year in Q4.

Marketing spend is now expected to be lower in 2022, driven by the lower spend in the first half of the year.

We now expect full year adjusted EPS to be flat to 2021 due to incremental inflation and currency headwinds. We continue to expect the full year tax rate to be 23% we.

We expect cash from operations for the full year to be approximately $900 million down from $920 million and our full year Capex plans now approximately $180 million as we continue to expand manufacturing capacity.

In closing we continue to perform in a volatile environment our share performance improved again in Q2, and we expect further market share gains in the second half as we invest in our brands and supply chain fill levels improve and with that Matt and I will be happy to take any questions.

Certainly ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone one moment for our first question.

And our first question comes from the line of Kevin Grundy from Jefferies. Your question. Please.

Great. Thanks, Good morning, everyone two.

Two for me, if I could Matt so.

I think you've probably been a little bit more cautious on the consumer probably earlier than maybe some of your peers.

Thank you everyone got off practice call. This morning.

They are calling for a category slowed down as well so without asking you to be redundant, Matt you called out some of your more discretionary categories, you're also calling it out in laundry.

Maybe you could just talk about the scope and the exposure within your product portfolio in terms of where you expect to see further trade down and outside of what you called out maybe talk about the change in category growth rates underlying your underlying your guidance for the year and then I have a follow up thanks.

It's a pretty broad question.

Kevin as far as the.

The categories go let's start with.

Discretionary.

So I did mentioned that both.

The waterflood <unk> and and.

And flawless were both struggling due to trade them trade down for water Pik, but also the absence of new products for for flawless.

But if you think about our portfolio and 90% of our portfolio, our just our everyday essentials and only 10%.

That's related to discretionary products.

So we are so.

Though we spent a lot of time talking about the discretionary products because they do have it have had an impact on our full year call.

It's not the whole story do you have I mentioned that we had growth in 11 out of our 17 categories that we're in and we do expect that to continue in the second half. There are there are a few categories I'd call that besides the waterpick in fall of Flex spend Rush for example battery rapid was down.

A little bit.

As far as others <unk> is another one that was soft in the quarter Depilatory and also orajel.

But everywhere else those categories you saw you saw growth.

So again, a couple of them yes.

Yes, My follow up is probably is probably for Rick just in terms of the EPS outlook.

The environment is clearly challenging cost have gone worse FX not as big a headwind for you guys, but nevertheless, still a headwind.

Can you talk about the constraints on the pricing front, and then historically and insurance as well thought of and run pretty lean, but other levers to pull here in terms of productivity to offset or offset some of the cost headwinds and then I can pass it on thank you.

Sure Kevin.

So.

From an EPS perspective.

We've announced that second round of pricing as an example for laundry and litter that'll be a tailwind or personal care fill levels returning from.

Low 60 is back to normal will be a tailwind.

Promotional support because we didn't have the fill levels in the first half of the year to do promotions like we normally would do in the back half. That's that's a tailwind we think trade down as a tailwind in general and our laundry.

Matt quoted some numbers on there about.

How will the value category is starting to grow and just that segment. So we think we're well positioned that for all those reasons for EPS. We also mentioned Q3 is down big but Q4 is up big in Q4 is also lapping some of those investments and one timers that we had talked about previously so.

So that's on the EPS side on productivity now we.

Last quarter, I think Lauren and asked the question about productivity phasing and that's so true because early on in this year and even late last year, it's hard to break into to get line time to go do qualification to do any productivity type efforts and so we said it last quarter is still true it's going to continue to build through the year.

As we have back at the right capacity and fill levels. Then we will have more and more time to devote to productivity at our plants.

Okay very good. Thank you guys good luck to Kevin.

Thank you one moment for our next question.

And our next question comes from the line of refreshed Patrick from Oppenheimer. Your question. Please.

Thanks for taking my question. So I guess I just wanted to go back to the gummy vitamin category. So you guys talked about slowing category growth. So curious, what's driving that lower category growth and then secondarily you mentioned that your fill rate is still being challenged when do you expect your fill rate to get back to where you'd like it to be.

We expect the fill rates that would be backwards, where it should be which is in the mid to high ninety's by the end of the year Apache.

Household is ahead of personal care right now of course personal care is our higher margin stuff. So.

That's why we're focused on the most right now.

Yes, just to give you. An example in that refresh rate we were in the low sixes on fill rate for personal care within the portfolio. In Q2, we had 74% in the month of July so we have visibility into rapidly rapidly improving that number.

Yes as far as the vitamins goes you can keep in mind.

One offs really gigantic base base. The last couple of years with growth in 2020 one so although.

The growth rate is slowing down it's because of the comps year over year, but that last year Q3 was just a huge spike.

In the quarter because of the Delta variant Q3 of last year.

So consequently, I think that's a really tough comp and so consequently, we expect it to go negative year over year. As an example, Q3 last year. The category grew 33% the rest of the quarters grew 19% in Q1 Q2 and Q4. So it's just it's more of a comp issue than a year.

Okay. That's helpful. And then just on the cost side, obviously the cost pressures continue just based on your visibility right now like any sense the cost pressures could be peaking and maybe if you look forward to next year. Some of these pressures could rollover.

Maybe just more color on the risk that you see to your cost outlook for the balance of the year.

I'll leave you with two thoughts really.

On the cost side.

We do think there'll be inflation next year, and we think that.

Inflation.

We will only come down as demand comes down and so if we enter into a recession.

That demand will we will start to slow.

In general for the macro economy. So we're now usually we would be I don't know.

50% hedged.

From a commodity perspective for next year by now we're not hedging at all as an example.

Hopefully that gives you some context.

Okay, great. Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Chris Carey from Wells Fargo. Your question. Please.

Hi, good morning, everyone.

Hello, Chris.

Hi, I'm, just maybe we could talk a bit more about the phasing for the year Q3 versus Q4.

I am specifically trying to understand.

Really the snapback that youre expecting in Q4, and what's driving that and perhaps within that you can comment on whether there are specific volume headwinds you expect to improve in Q4 versus Q3 do you have specific promotional plans in Q3, which.

We will not reoccur in Q4 is this really a call on the consumer trading down and that benefit accruing to us so.

Just trying to get some incremental context, then really confidence on on that recovery that you're expecting now in Q4 relative to the Q3, then I have a follow up yes. Okay.

There are a lot of factors influence in this so for example, the fill level improvement.

We're leaving money on the table.

In several categories. So.

We do think that once that gets fixed, particularly on the personal care side that we're going to benefit from that and it's more backend loaded in Q4 than in Q3. It is true that we've got.

Both trade and advertising in place for Q3, and Q4, but we do think as the economy.

The recession or what some people call a recession deepens that.

The trade down will continue and accelerate so thats an element.

Of it of it as well so I mean, youre, calling out the right levers with respect to the second half and let me. Let me give you some numbers to go with that so our guide for Q3 organically as one to three which implies a 5% plus number in Q4, so as Matt said personal care fill levels are fully back.

Professional supports there we think trade down is accelerating as well in Q4. So all of those reasons, we think organically we're doing better at that helps EPS as well of course.

But we also have some higher inflation expectations in Q3 higher SG&A as we had some one.

One time catch up year ago for.

For incentive comp.

A lot lower a year ago, and then we have higher taxes in Q3 as well. So we believe both organically and from an EPS perspective, we havent inflection going from Q3 Q4.

Okay. Thank you.

A quick follow up would just be in Q2 price mix was.

Although our expectations, perhaps a bit below X your expectations going into the quarter I'd be curious your thoughts there.

Despite what we're seeing as pretty strong pricing in consumption data.

And so.

Can you maybe provide some context on why that's happening did promotional activity accelerates.

Heavier than you were expecting in the quarter and now thats falling into the back half of the year and perhaps that's why the organic is getting called down in addition to volume.

Were there specific mix impacts that were a bit worse than you had been expecting so really what im trying to get a sense of is the Q2 price makes key drivers and just how that's really informing your back half expectations. Thanks.

It's pretty straightforward, Chris no change related to our pricing aspect of it that's all going well, we throw out another round of laundry and litter.

That's going well early days.

We will continue to evaluate whether we need to do incremental pricing is cost inflation happens, but Q1 to Q2, we decelerated from a price volume price mix perspective from seven eight in Q1 to six point to that entire deceleration as negative mix from water Pik and what do I mean by that I mean.

<unk> trading down from our higher priced unit to a lower price units, so thats the entire delta.

Right there.

It inflect positively again in Q3 and Q4 for the company because of the next round of laundry and litter price increases.

Okay. Thank you.

Thank you one moment for our next question.

Yeah.

And our next question comes from the line of Olivia Tong from Raymond James Your question. Please.

Great. Thanks first I just wanted to follow up on that and ask you to talk a little bit about your price mix expectations from here.

Given that you called out two highest price per unit categories as you've seen the deceleration how do you think about that.

Going.

Overall for the slowdown period, the macro slowdown period, how youre thinking about price mix.

And then just broadly if you could just comment about.

And what Youre seeing in terms of elasticities of demand private label.

As private label starts coming back how that's impacting your view on trade down it sounds like Youre expecting some benefit from trade down, but do you see any risks that lower end of your consumer base could potentially trade down as well. Thanks.

Yes, I'll take the price mix.

Question, So first half.

Volume would be down, 4% and price mix was up 7% and that's how we got our first half result of around 3%, we think the second half.

Is down 3% on volume, that's really a slowdown on the discretionary stuff like Waterpick shower heads for example are flawless.

And.

Offset by.

The value trade down and whatnot price mix on other hand is pretty consistent 7% in the first half 7% in the second half and that's what I said before to Chris was really lower mix on water Pik.

Trade down happens there for as a negative, but then the positive as higher price on laundry and litter.

Yes, and your question about the private label as I said in my opening remarks.

There's five categories.

Where we compete with private label in those private label shares had been largely.

Stable.

Aluminum has moved up a little bit as litter, it's moved up about 1%.

Seven 9%, but we havent been interacting with with private label in that category as opposed to some of our competitors. So that's why we feel confident that private label is at least in the near term next six months. We don't expect that's going to be a big issue for us that help you Olivia.

Yeah, that's perfect. Thanks.

Thank you one moment for our next question.

And our next question comes from the line of Bill Chappell from <unk>. Your question. Please.

Thanks, Good morning.

Couple of just specific.

Just housekeeping type things one on kind of the the cost environment and your hedges historically I thought you did some hedging on diesel costs. So it didnt know with the run up of energy prices the potential kind of come back around energy prices. If if you were locked in more or have some.

Potential where that could be a relief in the back half and then the second one just on currency and FX exposure can you just remind us versus the euro the peso et cetera, what kind of what's your exposure is and what we should be looking for thanks.

Yes, so I'll take the commodity one first.

I think I said earlier, we have very limited hedges out for 2020.

Three.

We entered this year and I'd say, we're about 80% hedged most of the cost inflation that we're talking about.

As.

Primarily raw material and pack and that's coming through incremental.

Discussions with third party manufacturers and it just takes a while for it to go through the supply chain.

Our outlook at this time versus last time is minimal.

On commodities I would say of course, the up diesel is up in but that is hedged to some degree.

And ethylene is up and that is hedged to some degree.

So thats in the commodity side.

On currency.

<unk>.

A couple of comments on currency.

For us we're not that exposed to currency, we just called out a 1% drag on the top line, 1% drag on the bottom line. We don't of course hedging translational transactional we hedge about 80% of our transactional exposures, whether thats the euro or the Canadian dollar.

Great. Thank you.

Okay.

Thank you one moment for our next question.

And our next question comes from the line of Andrea <unk> from Jpmorgan. Your question. Please.

Good morning, and thank you I was hoping if you can comment on the mix impact on gross margin you may see with CMS.

Yes, going negative in Q3, and possibly Q4 Im assuming thats a headwind I just wanted to confirm and also are you seeing you don't trade of that category from your brands into private label and.

And I do remember you got away from some of the contracts in private label. So I was just double checking.

Yeah.

If it happens this down trade as you mentioned in some categories like laundry that helped you in this case you may not.

Be helped if you are no longer making private label for some of these customers just quantify hi, Andrew This is Matt just with respect to private label private label shares in <unk>.

Vitamins are stable so we're not seeing the growth in private label.

Only of the five categories. We compete in it's only litter that it had an uptick and youre right.

We walked away from.

Divot label manufacturer and providing them a couple of years ago, and we have no plans to get back into that on gross margin mix.

There's not much of a mix impact on vitamins, whether it grows or declines from a revenue perspective, just to talk about gross margin and <unk>.

In aggregate right in Q1, we were down 190 in Q2, we said it was a lot like Q1 and it did down to 'twenty Q3, we're going to improve from.

A little bit from Q2, but it's not going to be the same for me that we had thought previously and then in Q4, we think we're going to inflect positive.

It's the same reasons why we talked about last time personal care fill levels productivity builds around two of pricing and gross margin in Q4 last year was one of our lower quarters.

I know you didn't ask the detailed gross margin.

Andrea but I thought that would be helpful context.

Very helpful. Thank you I'll pass it on.

Thank you one moment for our next question.

And our next question comes from the line of <unk> from Credit Suisse. Your question. Please.

Hi, guys.

Quick question on inventory just to make sure we heard it.

Correctly so.

Inventories are.

I guess inventories you need to work through a little bit so should we assume that your results are.

Going to lag what we see in terms of consumption for a little while.

And then can you also maybe talk about what inventories look like at retail for particularly for water picking some of the discretionary items.

Discretionary items at retail and a series of other categories seem to be.

Be quite high.

Yes, I think.

You saw in our release, we said we had to get back in line by year end and really Waterpick wasn't really because of consumption per se. It was more because we were trying to get ahead of the Chinese lockdown that happened.

So we built up supply and so yes. It takes a couple of quarters to work through that.

Especially as consumption comes in a little bit, but we think we'll be in a good spot by end of the year on that one.

Similar similar answer.

The answer on flawless, we think we're going to be in a good spot there as well.

And then at retail I think in stock levels are good, especially for our household business I think where we're still struggling as our personal care is our fill levels are lower than we like but we think that we're going to recover pretty quickly in the back half Dan you asked about the water pik as well on inventory at.

At the on shelf, where at the retailers.

Kind of remind everybody what are picking about half to half that flush of businesses online.

So there isn't a lot of inventory thats really carried.

But the online class of trade. So we don't we don't see it as an issue there with respect to.

<unk> inventories are or softness in sales because of high inventories in the channel.

Okay got it and then following up on Olivia's question a little bit.

I know you mentioned many many times private label share has been flat, but if we can maybe just talk about.

That that consumer and the value part of your portfolio and just from a consumption perspective, not trading down or trading up I know youll benefit from trading down but are you seeing any thinking just in terms of consumption just with that consumer.

Isolating attuned to that consumer.

Are you specifically talking about vitamins.

No no no I'm, sorry, I'm talking about the.

40% of your portfolio that would be considered value.

I'm just curious what youre seeing in terms of that consumer I know youre, not seeing trading down, but maybe they're consuming less buying less clearing clearing their pantries, just curious what youre seeing.

That way you should think about.

Value detergent now some of the numbers that I quoted just cyclic than the last.

Four week period ended.

July 17th is a value laundry detergent is up.

11%.

And deep values up one and premium is a minus one.

So we would say and by the way there isn't a lot of private label in the laundry category liquid laundry detergent, it's generally mid tier so it's higher priced than than our brands.

That's not an issue when it comes to <unk>.

That category.

In litter.

The category grew I think like 11, 12% in the quarter, we grew even faster.

It wasn't just our premium.

Our brand our black box competency, but our yellow box, which is the value grew double digits as well.

There is literal private label, but as I said earlier.

Picked up a 1% to 11, 9%, but we havent interacted as much.

With the private label as some of our peers.

The other big category would be would be vitamins, where.

Stable and just a few other ones just mentioned as you have baking soda and also <unk>.

Oral analgesics, which is orajel and.

Again.

Label shares are pretty pretty stable right now.

Thank you.

Okay.

For our next question.

And our next question comes from the line of Steve Powers from Deutsche Bank. Your question. Please.

Hey, guys good morning.

I just wanted to start going back to vitamins I think you call in the third quarter is pretty clear, but what do you think that category goes your business goes beyond <unk> number one and then as you think about the fill rate include improving in vitamins as that.

More to be a function of your capacity improving or is it is it actually the category kind of comes back to you and alleviates the pressure through declines.

Hey, Steve It's Rick I think.

I think the back half the category will be under pressure as it.

It was elevated in really all of Q3 or for the Delta Spike last year and a little bit in Q4. So.

That's our view now remember if you take a big step back the category has more than doubled over the last two or three years. So.

Again, we're really happy with with the vitamin category.

In terms of fill levels for vitamins.

Get better every single day.

We really havent two issues on two skus and that's really driving the issue right now and it's ingredient related.

We have finally worked through all of our alternatives in the next 30 days or so we should be back on vitamin Phil and Steve. The other thing just to add to what Rick said, Yes, we're super happy with the growth of the category over the last.

A few years, but keep in mind that the other tailwind as the transition from pills and capsules to gummies.

That's going to sustain the growth.

<unk> category in the future and of course, our new ingredients and new product offerings as any other catalyst.

Yeah, and you guys are value priced in the category too.

Okay. So then I wanted to pivotal six month and a half ago, we talked a good deal about.

How your portfolio has evolved.

Okay.

Yeah, and you guys are value priced in the category too.

Okay. So.

Wanted to pivot a month and a half ago, we talked a good deal about.

How your portfolio has evolved since 2009 and I thought you did a good job of underscoring how in fact, there are still a lot of similarities today versus 2009, and your resiliency in terms of the before the 40% value exposure.

I was reassured I guess.

I'm wondering if that was a bit of a false sense of security just given the fact.

But you've added you've added discretionary categories and I appreciate it's only 10% of the portfolio now, but it's obviously having a.

And impact so I'm curious number one just what your outlook is on those categories going forward and what what kind of drag this maybe if.

The economy evolves the way that it seems like you're you're positioning for in 'twenty three number one and number two I'm wondering if it changes at all.

How you approach incremental M&A because good deal of your M&A with flawless and Waterpick is skewed to the discretionary categories of late.

Wondering if this if this experience changes that at all.

Yes.

Let's start with M&A.

<unk> most recent acquisitions.

Whereas I came in a couple of years ago in 2020, which got us into cold shortening category, and then thorough breath, which got us into.

Our mouthwash.

So we continue to seek out the everyday essentials.

We're very happy with the <unk> acquisition of course, it's discretionary it's a longer purchase cycle, but this business grew high single digits.

Since since we bought it in 2017 and long term it has terrific growth prospects for the long term investor.

This is a good brand to one we've got a lot of opportunity.

The U S and yet okay, we're going sideways right now, but keep in mind that the change in EPS is driven by cost and currency.

We've left money on the table in the first six months here because of our fill rates.

Not for that we'd be in far better shape, but it's water under the bridge. We do think by the end of the year, we will have our fill rates back in line.

We'll be growing from a smaller base with respect to water Pik, but we do think that once once the economy settles down again that it will rekindle the growth of our water pik and as far as acquisitions go.

Those acquisitions Waterpick met all of our criteria.

We don't have a criteria that it's going to be.

It can't be discretionary, but certainly we are oriented towards buying everyday essential brands and you can expect that from us in the future.

Okay. Thank you very much okay.

Thank you one moment for our next question.

Our next question comes from the line of Lauren Lieberman from Barclays. Your question. Please.

Great. Thanks.

Just wanted to ask a little bit about pricing. So I think when you bulk.

And we think conferences and even last quarter you discussed that you thought.

Should you need incremental pricing beyond the July increases that you've mentioned they would come more likely in the form of package size adjustments. So I was curious if that's still the case and then b.

I think you'd also mentioned that those inc. That approach would require some capex investment and some lead time to deal with tooling.

And the Capex guidance is a little it's small, but a little bit lower for this year. So I was just curious how that kind of fits in Q.

<unk> dynamics as you look ahead and anything you need on the Capex side to implement those yeah. Okay.

Hey, Lauren.

Really.

From a pricing perspective, you're right, we said last quarter that primarily at next year, we're focused on pack size.

Versus pure price increases now of course, with new inflation and new news, we will react accordingly, and we will see if we have to do any incremental price changes as well right. So I'd say it'd probably be both on on Capex.

It's immaterial tech Capex outlook on unchanged parts for like aligned for a carton or for a new mold for a.

A bottle so it's.

A handful of million dollars or so it's not that impactful.

Okay.

The comments previously about the Capex it was more about the time needed to implement rather than it being a cost exactly right. It's more about six months to 12 months in order to.

Design a mold.

Got a mold.

To do.

Change parts or the change parts for align to do a different sized carton those are the types of things that take time.

Okay, great. Thanks, a lot I appreciate it.

Thank you one moment for our next question.

And our next question comes from the line of Dara <unk> from Morgan Stanley . Your question. Please.

Hey, guys.

So just to follow up on that on the incremental $50 million of cost pressure.

Are there any plans to take incremental pricing or is it more productivity in the pack size changes I guess I just want to understand that incremental part obviously theres always some timing lag, but is there are concrete plans to take incremental pricing.

And if not I guess why not.

Yes, I think right now like we just said with Warren we're really focused on pack size changes.

And adjustments that way, which is effectively a price increase we just think not as severe for a consumer and then if inflation continues to go and we continue to chase the ball downhill will evaluate to an incremental pricing.

Okay.

And then on the demand elasticity front.

The volumes appear to reacting more to price even some of your CPG peers, but obviously some of that may be more tied to supply. So just as you guys sort of parse through the consumer demand elasticity. So far in terms of what youre seeing at retail more than your shipments.

Can you give us an update on where you are coming in versus what you expected and if you've seen any sequential change recently on that point I think you hit it on the head there in.

In general our comments wasn't changed from last quarter, we saw a 20% 30% better than expected elasticity is for volume.

New laundry and litter price increases just went into effect a few weeks ago. So it's kind of too early to comment.

But if there's any noise, it's usually because of fill levels not because of price volume sensitivities.

Okay, and then last just in terms of price gaps, obviously with a lot of substantial pricing and then more in July are there any categories where.

Price gaps.

Have either expanded where your premium or narrow where your value where you think they may have gotten out of whack with competitors I'm. Just wondering if you can characterize the competitive environment on the pricing front relative to the pricing that you guys have realized.

Well, what I would say there is.

Through the end of June we were pretty happy with the Elasticities remember we have new price increases that are just hitting shelves in July that will be for both laundry and.

Litter. So that's the one we're going to watch now over the next over the next quarter and as far as the promotional environment goes.

There was a pullback in Q2.

If you look at liquid laundry for example, the sold on deal was around 31% and that was down 60, or 70 basis points year over year and there were some big pullbacks.

Brand by brand. So you can look at pure <unk> was down 500 basis points.

Year over year, we were down $3 40, so we pulled back because we were going through concentration now theres maybe pulling back.

As a way to modulate.

Price and also in litter litter is also.

Category that promotions are down again year over year celadon.

Celadon deals around 11%, it's normally in the high teens, and then back to liquid laundry or at 31% sold on deal that's normally in the mid thirties.

So the promotional environment has been pretty tepid, so far year to date and as for our most recent price increases and we're going to kind of watch the third quarter and see how they react with our peers.

Are there I will say that in general we're happy with all of our price gaps and even when we've led in a category. If you take a step back.

The category has also reacted and so within a few months all the price gaps are back to normal.

Yeah.

Great. Thanks, guys.

Thank you one moment.

Okay.

Our final question for today comes from the line of.

Jason English from Goldman Sachs. Your question. Please.

Awesome. Thanks, So I guess I'm closing out thanks for sneaking me in.

I think he got I think I heard you in prepared remarks that you expected maybe in the press release I don't know Paul Paul Jumbled in my head at this point in time.

But you have an anticipation of accelerated trade down in the fourth quarter, which categories do you expect to benefit the most from that.

Laundry is the big one.

We expect to trade down I would say, that's the big Big Swinger and we've already seen it we start to see this number in Q1.

We said was that the previous several quarters that value detergent had been.

Losing share to premium that changed in Q1.

The held share versus versus premium.

Q2.

Value starts growing faster than premium and in the latest four weeks value detergent.

It is up significantly 11% versus the premium down 1%.

So we do think that that's going to accelerate now that could be muted a bit with our most recent price increases and consequently, we have to see what happens with our competitors.

Timing of their price increases, but I think everything is going to be in place by the fourth quarter menu price increases that others have been contemplating.

And yes, we do have a fair amount of support both the advertising and trade behind our detergent in in the second half. So those are reasons to give context for why we think things are going to accelerate.

And.

You talked about laundry on its earnings call earlier.

Did reference margin promotional activity to taper at that.

Not to get more price, but because they had a capacity ceiling. That's now been resolved.

Suggested that they're going to start leaning back into out more.

More advertising while retail merchandising.

If that transpires how much.

How many how much or how many that jeopardize your outlook and your expectations for the fourth quarter.

Yes, you got to remember time premiums twice the price of arm <unk> Hammer.

So I don't think that Thats as big a factor now yes. It is true that tide simply is is still.

Is around that that was not in place back in 2009 in the last recession.

But.

Up until up until our recent price increase we had significant price gap with tide simply and we'll have to see what happens with their pricing in the second half pricing and trade.

Yes fair point on the spread there.

Thanks, a lot guys I'll pass it on.

Okay. Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Matt Matthew barrel for any further remarks, yeah. Okay, well look it's a simple story like our reported now for the full year is 4% to 5% organic three to four.

And we did call down the EPS from 4% to flat why the 1% as currency and the rest of <unk>, 3% as cost shares are healthy fill rates are improving.

Laid down is happening and we've got big support in place for the second half and we will talk again with you at the end of October .

Thank you, ladies and gentlemen for your participation in todays conference. This does conclude the program you may now disconnect good day.