Q3 2022 Church & Dwight Co Inc Earnings Call
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Good morning, Ladies who can walk you through the church <unk> Dwight third quarter 2022 earnings conference call before we begin I've been asked to remind you that once they call. The company's management may make forward looking statements regarding among other things the company's financial objectives and for cat.
These statements are subject to risks uncertainties and other factors that are described in a detailed in the company's SEC filings I would now like to introduce your host for today's call Mr. Matt Farrell, Chief Executive Officer of Church <unk> Dwight. Please go ahead Sir.
Okay. Thank you operator, and good morning, everyone. Thanks for joining us today.
Let's talk about I'm going to begin with a review of Q3 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.
First off I'll say, we revised our full year revenue outlook in early September and.
And we're tracking to hit 3%, which was the midpoint of our 2% to 4% range at that time, and Q3 reported revenue was up 0.4% and that exceeded our expectation of minus 1% as you read in our release, while the majority of our brands are performing well we have three businesses that are coloring our results this year.
Waterpick, our vitamin business and flawless and those businesses account for accounted for 6% sales headwind in Q3.
Adjusted EPS was <unk> 76 cents now this was 11 cents higher than our EPS outlook, driven by higher international sales lower SG&A and timing of marketing spend.
The U S portfolio grew consumption in 11 of 17 categories to trade down to value laundry detergent continued his arm <unk> hammer liquid detergent achieved an all time high market share of 14, 3%.
Arm <unk> hammer clumping litter batiste dry shampoo and thorough brass mouthwash also achieved all time high market shares Trojan condoms returned to share growth and Oxiclean stain fighters arm <unk> hammer baking soda delivered double digit consumption growth.
The strong performance of these businesses is offsetting the impact of the distressed discretionary businesses and vitamins on reported sales.
In Q3, our most discretionary brands order pick and flawless, which account for approximately 10% of our global sales were impacted by lower consumer spending.
Similarly, the gummy vitamin category, and which are vital fusion brand competes was impacted by a decline of consumption as fewer households purchased vitamins and supplements and we were also lapping the COVID-19 Delta variant in the prior year quarter.
In Q3 online sales as a percentage of total sales was 15% and we continue to expect the online sales for the full year to be above 15%.
Now I'm going to comment on each business first step is the U S.
U S consumer, which had one 7% or organic sales decline.
Looking at market share seven of our 14 power brands held or gained share looking ahead, we expect even further improvement in our market share positions in Q4, as we expect our highest fill rates of the year and our highest quarterly promotional and marketing spend now I want to look at a few of the important categories in the U S. I want to start with laundry.
The trade down to value detergent, which began in Q2 continued in Q3.
During Q3, the liquid laundry category grew three 1% now if we break that down value laundry detergent grew at 9% while premium laundry declined 3%.
Arm <unk> Hammer unit dose also benefited from the trade down our arm <unk> Hammer pods grew consumption by 25% in the quarter compared to the unit dose category growth of four 5%.
With more consumers migrating to arm <unk> hammer.
Long term benefit through the arm <unk> Hammer brand similar to the last recession.
In litter the category grew 11% while arm <unk> Hammer litter grew 14%. So we gained share in the quarter.
Both are black box, which is premium and our yellow box, which is value had double digit consumption growth in Q3.
And same fighters Oxiclean gained share as consumption was up 10%.
While the category grew 7% the dry shampoo category was up 18% in Q3, driven by Batiste consumption, which was up 37% and we now enjoy a 46% market share and dry shampoo.
Condom category was up three 5% in Q3, while Trojan consumption was up four 5%. So again, we gained 60 basis points of market share. Thanks to our new Trojan bear skin raw condom and the success of more targeted marketing.
Our most recent acquisitions are performing well.
Thorough breath, which we acquired in December of 2021 had a great quarter with 46% consumption growth Sarah breath grew share four three points to 17, 8% of the alcohol free mouthwash category.
<unk> is the number two non alcohol mouthwash and the clear number for brand in total mouthwash thorough breath is expected to be a long term grower for church <unk> Dwight in the future.
Zicam also delivered strong results. This quarter you may recall, we acquired <unk> in December of 2020, So I canvass the number one brand in the cold shortening segment with a 76% share in Q3 now looking ahead to Q4, the regular flu season in the U S is projected to be far more severe than recent years.
And as a reminder, approximately 40% as ICANN consumption happens in Q4.
We closed on our latest acquisition hero in mid October now, while we did that one hero in Q3, the brand performed extremely well growing consumption of 56% and gaining three six share points to achieve a 14% market share in the total acne treatments category, there's a great deal of excitement.
Here about this business as we look ahead to 2023 and longer term.
Alright next up is international our international business delivered organic growth of three 2% in Q3, primarily driven by the international subsidiaries, which posted strong growth in the quarter on the other hand, our global markets group has been impacted by weakening demand in China due to Lockdowns and we expect this to continue in Q4.
Finally specialty products, our specialty products business delivered 1% organic growth in the quarter, but keep in mind that the 1% organic growth is on top of 18, 5% organic growth in Q3 2021 now.
Now I want to spend a couple of minutes discussing our two discretionary brands were to pick a flawless, which have longer purchase cycles and after that I'll talk about the vitamin business.
First waterpick.
So what is the number one brand in water flushes waterflood us as we continue to see lower dollar consumption for waterflood is in the U S. However, waterpick unit volumes are actually positive both in Q3 and year to date as consumers trade down to lower priced cordless models.
If we look back at 2021 and 2020, the consumer was healthier and a good portion of our growth came from our Super premium products like Sonic fusion.
In 2022, the decline in our philosophy sales is driven by trade down and inventory reductions by retailers shipments for full year 2022 are expected to decline approximately 20% as retailers reset their inventories and product mix, we continue to invest in demand driving activities for war.
<unk>, such as lunch and learns with dentist and hygienist to drive household penetration of <unk> and in 2023. So next year, we expect to return to pre pandemic levels for lunch and learns I remember waterpick as the kleenex of water philosophies and not at nine out of 10 dentist recommend the product by its brand name.
This is extremely important as 60% of consumer purchases are driven by a recommendation from a dental professional it's.
It's fair to say that gum health is not going away and still only 16% of the U S population pluses everyday.
Now looking back Waterpick average high single digit top line growth from 2017, when we acquired the business through 2021. So we're taking a big step back in 2022, but we're confident that the long term growth prospects for water pick our sand.
Now the other discretionary brand we have is flawless, which is the number one brand in women's health hair removal, we're experiencing lower consumption in this category, which resulted in higher inventories at retail.
Sure has been further hurt by the by the delay in launching new products caused by the China Lockdowns at our supplier.
After the conclusion of a 30 month earn out period, which ended in 2021, our marketing team took over the front end of the business and has been narrowing the product assortment to the winners so as you're familiar with the brand that's face brow, Manny and petty and we're also shifting the focus from older consumers to digital targeting a younger consumer.
And the beauty space and we believe these changes will have a positive impact on the long term prospects for the business now finally over in Vms, we have the number one adult gummy vitamin category consumption is being impacted as temporary consumers who were interested in prevention during COVID-19 times have exited the category.
Beyond category dynamics divided fusion brand is also lost some share due to our lower full rates, particularly earlier in the year.
It's clear that fewer households are purchasing vitamins and supplements post COVID-19 and our category is being impacted by the recession. So here are some stats for the last three quarters. The category growth rate has been plus 10% Q1, plus 5% in Q2, and most recently minus 8% in Q3.
Now the minus 8% compares to a plus 33% increase in the category in Q3 2021, and there is some good news here in the first few weeks of October the rate of category decline has moderated to minus 4% and longer term the transition from pills and capsules to gummy vitamins gives us confidence in the longer long term.
Appeal of the Gummy category and I'll conclude with a few takeaways I would like to leave you with.
The majority of our business is strong we believe the three brands that are coloring. Our numbers have good long term prospects case fill is now over 90% and improving we've ramped up our marketing and trade promotion investment in the second half, especially in Q4, and we have confidence in our Q4 outlook and I'm going to turn it over to Rick to give you more details on <unk>.
Q3.
Thank you, Matt and good morning, everybody, we'll start with EPS third quarter EPS was <unk> 76 cents down 5% to prior year to 76 cents was better than our 65 cent outlook, primarily due to higher sales lower SG&A expense and timing of marketing spend.
Reported revenue was up 0.4%, including a 1% drag from currency revenue was higher than our outlook of minus 1%.
Organic sales declined <unk>, 7% as volume was down eight 5%, partially offset by positive pricing of seven 8%.
Matt reviewed the top line for the segments. So I will go right to gross margin for the company. Our third quarter gross margin was 41, 7% a 250 basis point decrease from a year ago. Let me walk you through the Q3 bridge gross margin was impacted by 580 basis points of higher manufacturing costs, primarily related to commodity inflation distribution and labor.
These costs were offset by a positive 190 basis point impact largely from pricing positive 20 basis points from acquisitions, and a positive 120 basis points from productivity.
Moving to marketing marketing was down $20 million year over year. Although this was a significant increase of $40 million sequentially from our first half 2022 levels of 8% of sales as our fill rates have improved fill rates in Q3 were 91% and we expect further improvement in Q4.
Marketing expense as a percentage of net sales was 10, 7% in the quarter. We expect a continued increase in marketing spend in Q4 to approximately 13% of net sales.
For SG&A Q3, adjusted SG&A decreased 30 basis points year over year. Other expense all in was $19 4 million, a $7 3 million increase resulting from higher average outstanding debt levels and higher interest rates.
For income tax our effective rate for the quarter was 22% compared to 24% a year ago.
And that of cash for the first nine months of 2020 to cash from operating activities decreased to $119 5 million to $534 million due primarily to higher inventory levels from water Pik flawless and vitamins, we expect inventory levels to come down over the next 12 months.
And as of September 30th cash on hand was $438 million.
And ahead to Q4, we expect reported sales growth of approximately 2% organic sales decline of approximately 1% and gross margin contraction. Adjusted EPS is expected to be 58 to 62 per share a three 9% decrease from last year's adjusted Q4 EPS.
This decline is primarily due to significantly higher quarterly tax rate of 25% versus an unusually low tax rate in the prior year of three 7%, which was largely due to a high number of stock option exercises a year ago.
Turning to the full year, we expect our full year outlook for reported sales growth to be approximately 3% the midpoint of our previously.
2% to 4% range, we expect organic sales growth to be approximately 1% the strong consumption across most of our businesses in 2022 has offset the slowdown in discretionary brands.
<unk> talked about.
We now expect full year adjusted EPS to be $2 83 to 287, a decline of two years to 3% compared to 2021. The range is influenced by the extent of margin mix within the portfolio.
We continue to expect our full year tax rate to be 23%.
We now expect cash from operations for the full year to be approximately $800 million.
And our full year Capex plan is now approximately $170 million as we continue to expand manufacturing capacity in anticipation of future growth in laundry and litter.
In closing we continue to perform in a volatile environment. We expect further market share gains in Q4, as we invest in our brands and our supply chain fill levels continued to improve.
With that Matt and I would be happy to take any questions.
Yes.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one on your Touchtone telephone again, if you'd like to ask a question. Please press star 111 moment. Please.
Our first question comes from the line of Darren.
Hey, Wayne.
Morgan Stanley Your line is open.
Hey, guys.
Hey, good morning first.
Just a detailed question can you just be a bit more explicit on what changed.
In the earnings guidance for this year post the early September update I know there is year over year tax rate pressure in Q4, but I think that was known so just curious on what's changed.
And then second just on the vitamins side, you guys have articulated that.
The business is suffering from tough comps versus Covid variance last year that makes sense as you think about the business longer term some of the people that were brought in during Covid, who maybe aren't as loyal to the category is there sort of risks that this.
Weakness lingers.
Perhaps they are more susceptible to a pullback in consumer spending it won't be as loyal to the category.
From these sort of on defense users who were brought in during Covid. So just any thoughts on vitamins as you look out for next year. Thanks.
Yes, Hey, Dara, it's Rick I'll take the margin mix and Matt will take the vitamin discussion so.
Really the change in the outlook is pretty straightforward it is.
We didn't change the revenue outlook, we're still fill the midpoint to 3% number.
Mix to get there has been a little bit different though the businesses like flawless and water Pik and vitamins have come down and the rest of the household portfolio has gone up and so that's created a mixed pressure Matt also talked about how there's a trade down.
For water pick them from the higher priced units to the lower priced units. That's also caused a mixed issue on a profit basis and Thats impacted earnings.
Yeah with respect to vitamins.
As you heard in my opening remarks, we've lost some.
So im sure do the.
Fill rates. So we had some less some consumers to other brands earlier in the year. So we got to win them back and there's definitely fewer households.
<unk>. Your question is Steve is can we call the bottom and do we do we know that.
All of the consumers, who are leaving the category overlap obviously not knowable.
I will say that.
Coming flu season actually should bolster the Vms category.
Just beyond Covid, because we haven't had a weaker flu season for a few years, but.
Given that it's been it's been many quarters now since several.
Several quarters since the end of Covid, we do think things are starting to bottom out.
As I mentioned since we saw that in the fourth quarter that.
At least early in the fourth quarter.
The decline year over year is reduced to 4%, where it was 8% in the previous quarter. So it's possible that we could be hitting an inflection point, where the category may flatten out and then start to grow.
Great. Thanks.
Thanks, Steve Thanks there.
Thank you.
Question comes from the line of Chris Carey at Wells Fargo with the carrier your line is open.
Yeah.
Hey, good morning, everyone.
Chris.
I'm trying to determine how much water pik.
Wallets vitamin pressure impacted your Q.
Domestic versus your international segment, you previously given some.
Perspective on geographic mix of.
These businesses I Wonder if you can update us on the U S versus non U S exposure today.
Or how things look today for those businesses.
And then just connected to that do you have a sense of what your organic sales growth.
Would have been in your consumer domestic and international businesses, assuming that these three businesses were mutual growth. Obviously, you gave the 6% headwind, which is quite helpful. I'm wondering how that.
Lets out between year.
Porting regions.
Yes.
All of this.
Comment that as you know water Pik as a global.
<unk> fill it affects both international and U S U S being the lion's share of the business.
U S is even more skewed.
Flawless is even more skewed towards the U S. So I don't have those numbers for you but.
I think it's fair to say that.
That 6% is probably somewhat equally split for water picks for its U S versus international is more skewed towards the U S. For flawless, yes, I would only add to that that alright, we tried to give you a little bit more visibility and granularity into it but if we were flat for the quarter on net sales we said.
Yeah, those three businesses were about a 6% headwind and as Matt said, our divisions are usually 80 20.
Flip it water picks probably more 50, 50, but I don't think well get into more any more granularity, but we had a 6% headwind in the quarter, Yes, Chris The reason, we call that out in the release.
On the call. This morning is because now we want to put a ring fence around where our problems are.
We've got 80% of the business Thats Thats really clicking.
We have three businesses, we like them are on a long term basis, but certainly hurt us in the environment, we have weakening consumer weakening economy.
That's really helpful. If I could just follow up quickly and then get back in the queue.
As it pertains to when the headwinds came.
Team together for these businesses and as such when you could potentially start lapping those headwinds is it.
It's reasonable to just look at your personal care business in the web.
The growth started to come off and then.
Can you just confirm whether youre seeing any seat.
Sequential worsening or you expect stabilization and this is really just about yes.
Beyond tough comps. So thanks, so much sure yes, im sure a lot of people have questions about the 2023, but.
We can say about about.
That 10% of the business water Pik and forces that next couple of quarters, we do expect to be choppy, meaning Q1, and Q2 of next year, just looking on a year over year comps et cetera, but we think after that things are going to even out and then on the vitamin side, we think that as Matt said in his prepared remarks that we're starting to see.
A minus eight to minus four just because of the delta there and year over year, and we're seeing that start to inflect.
And a good pattern so.
That's about the color we can give you.
Okay. Thank you very much.
Thank you our next.
Our next question comes from the line of Camille Gala of Credit Suisse. Your line is open.
Hey, guys good morning.
Maybe talk a little bit about.
You alluded to some of this but how are you balancing between how much to advertise.
How much capex to put it on the vitamin side.
<unk> is uncertainty of demand because it sounds like there's a fill rate problem, but there is a demand problem and theres incremental capex in advertising going into it. So how are you managing these.
Pieces.
I'll start with Capex, and then maybe Matt can end up on the consumer so.
And I'll talk about demand a little bit too. So on Capex. For example, we had said for 2023, we're going to have about $300 million of Capex.
And that was laundry litter and vitamins to recall.
We put a pause on the vitamin Capex and so that new number for 2023 will be I believe between $2 $52 70, we will finalize that when we give our full 2023 outlook.
So that's that's.
On the Capex side, yes.
And you had a question about.
About marketing.
If you look back over the last few quarters, just kind of round numbers Q.
Q1, and Q2, we have 8% marketing as a percentage of sales and why because we had lower fill rates.
So that it was prudent not to be spending at a higher rate and that amped up in Q3 were $10 seven and you can see we're calling a 13% in Q4 and then I'd say next year. So on a full year basis. This year, we're probably around 10% but.
But we do expect next year or two to build on that so that will move to a higher number.
Fill rates become more normal the marketing spend will also returned to a normal rate.
And on vitamins I would just add I think it's really key to understand when we're talking about the category right and yet the category was down 8% in 2022, but it was up 33% in 2021, and that's what Matt said in his comments on the stack basis, it's up 25%. So it's not like the category is Cratering I think it is just coming back in line.
With Super Super High.
Growth relative to pre COVID-19 levels.
In fact, if you look at the stack rate for Q2, it would be similar to Q3.
Okay, Great and then on laundry was any of the strength linked to.
Your ability to supply versus the competition, we've obviously heard of.
Some shortages at some of your competitors just wondering if it is indeed trading down or is it perhaps better supply at the moment than in some others.
No I don't I don't think supply would be would be a very big factor here.
I think this is entirely driven by by the economy and the consumer.
We've seen this before many many years ago during the great recession. So we see it we are seeing in liquid laundry detergent, we're seeing in pods and we didn't talk about is <unk>.
Scent boosters.
The category was flat, but we were up three 4%.
So everywhere, where we have a value and I am sure you comment about supply does not extend to.
Liquid laundry pod booster every aspect of laundry. So we're seeing it in so many subcategories within laundry.
Week concluded it is real and it will continue.
Great. Thank you.
Thank you.
One moment please.
Our next question comes from the line of Stephen Power of Deutsche Bank. Your line is open.
Stephen powers of Deutsche Bank. Your line is open.
Oh, sorry, sorry didn't hear you call my name.
Hey, guys. Thanks.
I guess there is.
As I listen to you in the third quarter.
You had both like demand degradation for sure.
Flawless and water Pik.
In vitamins.
As well as well.
Continued supply constraints across the business and then retailer destocking kind of impacting the total portfolio.
As we think about going forward when are you able to when do you see yourself shipping to consumption.
Whether in the core consumables business or in the businesses that have been.
And the biggest drag.
Yes, well.
That answers a little bit more complicated, but our fill rates in Q3 were 91%. We expect in Q4 theyre going to be closer to 90, 394% remember historical full numbers were 98%. So we're within spitting distance of that there's a few key areas that.
Largely raw materials that are still on this back on a couple of key categories and some in some cases as capacity for international that's being addressed as well. So I think as we exit this year and.
In most categories will be shipping to consumption.
As far as inventory in the channel Steve It's.
It's more of the focus here is more on water Pik and flawless and that's why we think for the next.
Next six to eight months.
Chop year for those two brands, but we don't have.
Worries about ship to consumption with respect to the rest of the business.
Okay, Okay and then.
Then.
You talked about marketing into next year could you give us an update on <unk>.
Whether or not you've layered on any.
Coverage on the cost side of things 23 at this point and if so how much.
And I guess just in broad brush strokes do you want.
Let's walk away from this call thinking that evergreen is on the table for next year or is that too ambitious.
Hey, thanks.
Okay.
We have a range for Q4.
You are asking us for for a commentary on 2023 so.
There are pluses and minuses.
That.
When you think about the 2023. So you know the majority of our business is doing well.
Certainly there.
Inflation next year, but but early days with respect to rfps for procurement and input and things like that we're seeing seeing some things come back.
But we won't know for really the next for the next 90 days.
Those rfps turn out.
As I said, we're going to have a few choppy quarters from water Pik and flawless laundry is super strong right now.
Value is winning.
So obviously, we expect that continue for the next 12 months.
Going the other way.
Everybody is dealing with into higher interest rates and FX. So that's a drag and then obviously if we're going to be.
Reinflate, our marketing spend.
In 2023 so.
Maybe a couple of other pluses and minuses, Rick anything else you want to throw in there yeah I would just say as Matt said higher marketing because we're going to have higher fill rates. So that kind of normalizes normalized incentive comp we're going to have a gross margin tailwind, though is what we expect so lots of puts and takes we're not ready to call. It 2023, yet we'll do that in three more months I would just say we are having some glimmers of hope on.
On the Rfps on some of the commodities are starting to inflect.
But again, we're not going into that today, it's just way too early to call it Steve.
Okay.
And then Rick.
Has there been any forward buying in coverage as it relates to commodities for next year or are you still floating position.
That's a good question. So usually just for context right. We are usually about 60% to 70% hedged by now I said last call. We were approximately zero percent hedged I would tell you today, we're about 25%.
We did do some diesel before the run up as an example.
But mostly we're still.
Not back to historical levels on the hedging because we believe those costs will continue to come down.
So all those factors, Steve the raw material, one way or the other.
Question is.
How big are each of them once we get to the end of January when we call. It 2023.
Understood Alright, thanks, Thanks, a lot.
Thank you.
One moment please.
Next question comes from Nik Modi of RBC. Your line is open.
Yes, Thank you and good morning, everyone.
Hello.
Hello, Matt just a couple of.
Brand category level questions just on laundry looking at some of the numerator data it looks like.
Is it penetration is down and I was just curious on your thoughts around that what do you think is happening there and then extra in this kind of environment with typically do better than what I'm seeing at least in the scan data. So I just was hoping you could just comment on that and then I had a follow up.
Question on <unk>.
Flawless.
Yes, well as far as households, loosen households.
It's been a topic for discussion here.
As far as people less people.
Doing wash loads.
So I can't go any further on that first extra goes.
We've been prioritizing arm <unk> hammer over extra for the past.
18 to 24 months, just because the fill rate issues that's behind us now.
But we are expecting that in 2023.
Extra could clearly be a winner.
Our deep value detergent, and we did see the same phenomenon back in.
During the great recession. So I think Thats ahead of US and you said you had another one to Nick on a flawless, yes, Paul its just.
Kind of Euthanizing the brand from the older consumer to the younger consumer and I'm curious.
Yes.
20 years of covering the space when anytime a company does that it tends to be a lot of disruption from the alienating the older consumer base right as you've tried to make the brand name. There I'm. Just curious if you guys have looked into that are worried about that have seen that.
Would that kind of prolong the recovery of that brand.
No I would say that because the size of the prize is so great.
The younger consumers that we don't think that that shift is going to be so so dramatic and so noticeable is that its going to alienate the older consumer So I would say no that's not a worry.
Okay, Great and then just one more question that sorry.
Colgate earlier today talked about some inventory destocking in some of their.
Categories at brick and mortar retail I'm just curious.
Their fill rates, obviously have been recovering I'm just curious if you've seen any of that happening around in the categories you guys operate in.
Yeah, Hey, Nick it's Rick I'll take it early in the quarter, we talked about that we gave updated guidance in September when we said part of the reason was actually because of inventory destocking at retail and it wasn't just one category with multiple categories and so that was implicitly already and are minus one outlook and so we saw that early in the quarter, but after we've.
Through that we didn't really see it any further okay. So it's basically over okay. That's what I was trying to get at excellent. Thank you Rick.
Thank you. Our next question comes from the line of Kevin Grundy of Jefferies. Your line is open.
Great Hey, good morning, guys.
A question for both of you on the promotional environment.
Just what are your expectations, there near term and then as we.
We sort of look out to next year with fill rates normalizing gross margin is still under quite a bit of pressure lot of commodity inflation in the P&L.
That should start to subside, we are seeing some of that in pricing is starting to start to catch up.
Then of course, I'm, asking about the promotional environment and trade support within the context of some of the earlier discussion around trade down in laundry and it seems to be some difference in opinion I guess between some of your commentary in one of your key competitors as to what's driving the share loss, but thats, all kind of a big windup whats.
What's your expectation for trade support.
And are you anticipating seeing perhaps considerably more with.
Procter and a better supply position.
Yes, I can't comment on.
Our competitors. So you can appreciate that.
But if I look at it look at take.
Larger detergent and cat litter. So on the household side of the house and those are the most promotional area. So that the category sold on deal for liquid laundry was 32% in Q3.
We were at 26% and obviously, we have competitors that are that are higher than that.
But that 32% was actually down.
Year over year, so I still think that the category spend promotional environment is still lower than it has been historically and then it's probably worthwhile talking about litter as well.
Sold on deal in litter was.
Was 10% in Q3, and that's also historically low as well and that we were at 13% in Q3.
The 10% and 13% or so lower than historical levels, which are typically in the high teens level. So it's all ahead of US right now, but I wouldn't say that the environment has been super promotional in Q3 and that could change in Q4 and Q1.
Got it thanks, Matt a quick quick follow up just on M&A any any thoughts I know the balance sheet is in good shape you guys can transact maybe just comment on the pipeline and then in general just with some of the volatility and albeit.
The large majority of the portfolio is performing well, but some of it is not in and given that.
Volatility in some of the focus that it takes for management.
And the fact that Youre integrating euro does it give you any pause to potentially transact on something else, even if the balance sheet.
A good place.
To consummate a deal so your thoughts there would be helpful. And then I'll pass it on.
Yes, well, it's important to remember when we acquired businesses. So that they can go back to <unk> for example.
We didn't take a whole lot of employees from thorough breath and we already have an oral care business right. So the oracle business handles.
Toothbrushes toothpaste.
Orajel. So we're already in the category of dealing with the same buyers. So that's that was really a tuck in and then when you think about about hero now keep in mind for hero, we're hanging onto the three founders are sticking with us for the next few years and we want to retain all employees. So.
Intact high performing team.
To run that business. So we don't feel like we're in a position where we can look at another business.
And as you say the balance sheet is pretty strong and as far as the pipeline goes we're always looking.
New deals.
And has that been even looked at <unk>. The hero deal close so it's not to say, we're going to transact, but we.
We're always looking for strong brands in good categories.
Kevin It's always a measure of how much complexity. The organization can handle at one time and that has to do with when we.
And how much we're integrating and their breath deal as Matt said is was an easy tuck in we're fully integrated from a systems perspective already.
Zero, we're going to integrate from a systems perspective.
By middle of the year so.
That's a pretty quick process.
Okay Fair enough. Thank you both guys good luck.
Okay. Thanks, Kevin.
Thank you. Our next question comes from the line.
<unk> per week.
<unk> Company your line is open.
Thanks for taking my questions. So on the inventory price of inventories were up 22% do you guys see any risk of obsolescence or markdowns with with higher inventory levels.
Yeah, Hey, refresh the trick yes, it's a fair question I'd say two things one.
We expect inventories to get back in line over the next 12 months is what I said in my prepared remarks, right. We've adjusted production levels for some of those long lead devices, we source out of China. As an example, like water Pik and flawless just takes months to run through that inventory as consumption slowed a bit.
But we have taken some inventory reserves, both in Q2 and Q3.
Whenever we have long dated product like that so we feel like we have.
We've already recognized some of that.
Okay, Great and then Rick on the gross margin I know you guys called out the mix shift that's a new headwind in Q4, but maybe if you can just walk through some of the puts and takes as you look out for the balance of the year.
Yes, I mean, I kind of went through the bridge a little bit in my in my prepared remarks, I would just probably keep it high level and I would say.
Our.
Previously in Q4, we had said that was the quarter that we expected to inflect positively finally for gross margin and we've been saying that all year long and so now we're saying contraction I would just say that we think is going to contract slightly I think it's going to be much improved.
Sequentially, we I think we were down $2 50.
In Q3, we're not going to be down.
Our opinion not near that much in Q4 so.
<unk> from that perspective, and thats, partly because of comps on commodities is partly because.
Q4 itself and the prior year is a little bit lower baseline.
But I mean, those are a couple of puts and takes.
Great. Thank you I'll pass it along.
Thank you.
Our next question comes from the line.
Jason English of Goldman Sachs.
Well I mean, you launched it.
Good morning, David Good morning.
I guess I want to come back to the question earlier about trying to unpack the impact of the three challenged businesses on the U S side of things it looks like it's around $80 million drag and if we assume 80% of that hit the U S, which it sounds like that may actually may be high given the water back pack water Pik.
Split.
But either way, if we assume 80% of it.
Then it equates to about a 14% drag in your U S personal care business organic.
Organic sales.
Over there it looks like they are down around 16, so even stripping it out it looks like your organic sales would still be declining in personal care. Despite the robust growth youre talking about with batiste and despite the recovering growth youre talking about with Trojan. So can you unpack that a little bit more for us and help us understand underneath the hood of that personal care business what else is weighing on performance.
Right now.
Yes.
We haven't done the math.
You took a swing at it back of the envelope, but we're not prepared to tell you okay.
International and for the U S business.
We're going to.
A recast what we put in our release by Division.
Yeah, I would just add I would just add to that.
Remember our order fill is 91% for the quarter right. That's a tale of two cities is probably like 94% for household is in the mid eighties for personal care.
So youre right the bulk of.
The decline in personal care are those three businesses, it's flawless from water Pik in vitamins, we still have four or five key issues on personal care that we're trying to solve.
And we're not going to go through all that detail, but I'll give you. An example, right.
<unk> is growing like Crazy is doing fantastic, we can't meet all the demand.
<unk> is up dramatically and theres cash toward shortages out there right you hear that in the beer industry. As an example, and so aluminum cans, but we're trying to add that as quickly as possible to meet that unbelievable demand.
Another example would be.
Vms not just because the category is down but our fill level down.
Is lower than we would like because of one key ingredient on one specific SKU. So there is some personal care pressure because our fill rates that we expect to largely be behind us as we exit Q4, okay. Okay and.
And you mentioned the reload with some investment as you go into next year and a normalization of our return to more normal marketing what is more normal marketing mean and also incentive comp is that.
It is a headwind as we go into next year can you give us any context around how incentive comp. This year is tracking versus a more normalized level.
Yeah.
Yes, I would say incentive comp is going to be a headwind next year, we're tracking anywhere between.
A 30% payout as an example is probably the best ballpark I'd give you and so that will be a headwind next year as we get back up to a one one.
One point of payout would be our expectations.
Your first question was on remind me, Jason marketing marketing, Matt mentioned that you expect to return to more normal marketing and my question was what does that mean.
Yes, and I think we'll get to that in February .
Very clear on what it is and what it means.
I think you should expect that it's a stair step over time back to what we think is been our sweet spot in marketing from a historical perspective.
Understood. Thanks, guys.
Thank you one moment please for our next question.
Our next question comes from the line of Andreas area of Jpmorgan. Your line is open.
Thank you operator, good morning, everyone.
So my question is on <unk>.
Again I understand this segment and correct me if I'm wrong about represents about 10% of sales.
And on top of the water peak and flawless issues that you discuss it.
It seems that.
The show has been consumption and obviously I understand youre Comping, a very high comparison from last year.
But how much of the Dms business. This is all in the quarter and year to date, so and with that are you worried about.
Retailers. If there is excess inventory I know is a fast moving item, but I was just wondering if that can be that's embedded in your guidance in the fourth quarter that there could be some.
Some issues with Destocking, there as well except for of course that SKU that is.
That is not being served thank you.
Yeah, Thanks, Andrea I think.
There is there's two core issues with the vitamin.
Portfolio. One is the category that is the overarching and greatest issue and we quoted a little earlier, but 2021 in Q3 was 33% growth and so we're coming off that extreme high it's coming off a little bit more than we thought.
But that's what's been happening in these last 13 weeks or so and we expect that to.
And 10 years, but inflect, a little bit better as we move forward right. So that's the biggest one the second one is sale levels and Matt kind of went through that a little bit as well and we expect that as we exit the year, our fill levels for vitamins will improve so that'll help our share. So those are the two biggest things.
I, probably wouldnt give you a much more detailed than that in terms of how big that we tried to give you a little bit more granularity at this time that hey, 10% of the business is the discretionary portfolio flawless and water Pik.
And then another 10% is this vitamin number I think the key take hold.
Take him comment, though is really two parts of it and it's predominantly more of the category and a celebration.
That's fair and then the 80% of the remaining business is probably growing mid single.
<unk>.
Yes, if you do the math if you do the math, 80% of the rest of the business is growing for four 5%, which is which is fantastic.
Okay. That's helpful. Thank you so much I'll pass it on.
Thank you.
Our next question comes from the line of Anil resolve of Bank of America. Your line is open.
Hi, good morning. Thanks, so much for the question I just wanted to follow up a little bit on the topic of promotion we've been hearing from some of your peers that promotions are essentially not really going to return to the same as they were pre COVID-19. There just wondering if youre comfortable here with your frequency and.
The promotions, where you are now versus pre COVID-19.
Yes, I mean, where we are right now we are winning.
Okay.
Some of the numbers I quoted the category in liquid laundry is 32% were at 26%.
And we're gaining share so.
Youre right. It would appear that there is no need for a heat up but I can't predict what the competitors will do in the next six months.
Okay. Thank you.
Thank you.
Our next question comes from the line of Olivia Tong of Raymond James Your line is open.
Great. Thanks My question.
On pricing and promotion you obviously saw a one.
One point sequential acceleration in price mix in Q3, but obviously some pressures on the higher price portion of your portfolio.
Excuse me, while pricing on behalf everyday consumables. So can you give a little bit of color on what impact mix had versus price and then perhaps a little bit on domestic household versus personal care. Thanks.
Yes.
I don't have the domestic household personal care in front of me, but I can say I can help you with the price volume mix kind of across time in Q1.
We had seven eight.
Percent growth in price mix and then we went to six 2% in Q2, when he said that was largely because of the waterpick mix issue.
In Q2 to Q3, we bumped back up to seven 8% and so that new laundry and litter price and that was really announced in Q2, we had a full year full quarter impact of that in Q3, So that was overweight any other.
<unk> drag from water Pik or whatnot.
So then yes, so that's kind of the sequence of events on some of the drivers of price mix.
Got it and then on on vitamins I'm curious your view on what you think vitamin consumption trends will be longer term you, obviously recognize that could be a factor near term.
Still very into Cohen here and there but.
Where do you think consumption and ultimately ends I mean does it get back to where it was does it.
Does it stay above pre COVID-19 levels or does it end up getting back to where it was pre COVID-19 in your view what are you planning for.
Well look we were planning on expanding.
Expanding our capacity kind of put a pause on that.
But we do think so long term, we're going to need that capacity.
The transition from pills and capsules.
The gummies is pretty important factor. So if you look at the percentage today, it's 27% of the total Vms category as gummies and.
We expect that's going to continue in the future and a lot of people discovered the category as a result of Covid.
Yes, certainly some people have exited but but not all.
So consequently, we think the future is still bright for the business, but we're going to have a kind of a rough ride here at least for the next couple of quarters.
Thank you.
Yes.
Thank you. Our next question comes from the line of.
Lauren Lieberman of Barclays. Your line is open.
Great Thanks, and good morning Lauren.
So just a few questions. The first thing is just gross margin progression I know Rick you mentioned.
Yes.
Tailwind overall next year, but when I look at this quarter, what's implied for for Q and that you've talked about a continued headwind.
In the first half first half of the year more or less than more discretionary businesses. It feels like that gross margin progression is still like.
Getting back in you're probably not inflicting to up until we get towards the second half of 'twenty three.
I mean is that is that fair just again, given the mixed dynamics that you've kind of called out on the discretionary side of the internet.
Yes.
I'm not ready to give quarterly or first half second half guidance on 2023, yet I would just say that.
We kind of get ahead of ourselves talking about grain train three at all until we were just trying to give broad brushstrokes and I would tell you the answer as of right now our visibility is gross margin expand next year and we'll get into all the details all the bridge that you guys want to in February .
Yes.
And then I wanted to come back again on fill rates.
The question is just kind of grappled with a couple of times already just youre really going back over the last 12 plus months, but.
Fill rates have been improving as you said and thats been an achievement I understand categories were.
<unk> ability to supply of course, it makes sense not push on a string in terms of marketing, but you've also said out of stocks haven't been an issue.
So I just still don't really understand why improving fill rates.
Is it true tailwind to the <unk>.
Yes.
As we move forward I mean, nothing that you didn't have to fix it and you did but I just want to understand the tailwind to sales growth that should come from improving fill rates of out of stocks haven't been a problem.
Yes, I think it's Matt I'm sure has some comments too but.
Overall.
Fill rates we think.
Being at 98% means that.
Uh huh.
For 2023 means that we're gonna be able to match consumption all year long that we're not going to be able to have to turn down promotions in certain areas. Because that has happened. This year, we've said as much as we would like to we cant.
And I'm not going to go through the different examples of that but.
That exists so that's kind of kind of in the back of my mind, what we're talking about there.
And then when we say out of stocks or are a lot better.
Less of an issue, it's because we finally cracked the low ninety's, but.
Still even money on the table.
Out of stocks at 90% is not something we're proud of and by the way, we're still get it with retailer funds.
Because of our inability to fill so that's about another a drag that we have.
Our gross profit so.
We definitely do.
Certain categories of certain Skus that are problems for us that are creating a drag on our on our organic sales Florida.
Okay and final thing with just the SG&A in the quarter.
<unk> not terribly different in <unk> than last quarter, but just any way im sorry than year ago, but just.
Curious on the levels of SG&A spending if there's like an incentive comp reset we should be thinking about but presumably that would come next year, but any color on the SG&A piece would be great too.
Yes, I think thats kind of alluded to it last last quarter that we expected SG&A favorability and unfortunately, it is because of incentive comp. When you have some of these recessionary pressures on discretionary items bragging, that's dragging the whole company below some of the key metrics and so I just answered adjacent instead, our payout was tracking around 30%.
And so that's a benefit in the quarter per say and for the year not the one that we would want.
That will have to get <unk>.
We refunded next year.
Okay.
Lauren we have we have four.
Targets annually right sales gross margin EPS and cash in in the last two.
Zero and so.
That's what's affecting our incentive comp.
As you well know where EPS is on our cash flow.
Okay. Thanks, so much I appreciate it.
Okay.
Thank you.
Our next question comes from the line of Bill Chapelle of choice. Your line is open.
Thanks for squeezing me in.
A couple of just clarifications I guess on Jason and Lauren's question. So.
I assume you accrued for variable comp in the first two quarters was there a reversal, but given a bigger benefit in the third quarter or will it in the fourth quarter or is that not the way you look at it normally.
You always have to accrue kind of on a year to date basis, and we were tracking more favorably in Q1 and Q2 and then as some of these pressures like on inventory for example on these discretionary categories impacted cash flow then we have to adjust the accrual and you could like.
It's more of a catch up year to date catch up in the Q3 accrual as an example, so yes, that's true it's been coming down all year long ago.
So there wasn't an outsized benefit this quarter from the reversal of accrual.
There was some benefit in Q2 and a benefit in Q and a bigger benefit in Q3.
His projections for incentive comp would come down got it and then second.
Just trying to couple.
The commentary on the vitamin business I mean I understand thank.
Thank you said, it's starting to stabilize and it's really way up versus kind of 2019 levels, which I appreciate but at some point you said you would put a pause on the Capex expansion. Maybe it was you are lowering your capex by $100 million, maybe that's too aggressive but.
I'm just trying to understand.
How to put those two together if you're if you think we're just getting back to normal why would you kind of take down capex expansion that would probably add capacity two years from now.
Yeah. That's a fair question the nuances when we were doing all of our capital planning and demand forecasting 12 months ago. When we started that project. It was jumping off of a baseline.
This new Covid behavior, assuming all this behavior stock and all of this incremental whatever a 50% increase.
You know from 2019 stock in there there is no decline and so now that we're seeing a decline from that behavior not all of it going back with a decline from that behavior, where just readjusting, our baseline and growing from there. So when we do that it doesn't mean like we're going to not do.
The capacity projects that just means we need to we can easily posit for 12 to 18 months and Thats, what we plan on doing yes. The other thing to Bill as you know during Covid times, we had to go outside and get a third party supplier. So we have more flex in our ability to supply today.
So that gives us more flexibility with timing of the Capex.
Got it thank you.
Okay.
Thank you.
Our next question comes from the line of Jonathan Feeney of consumer edge. Your line is open.
Hey, Thanks, very much I just wanted to follow up on earlier question about M&A.
Obviously.
Congratulations and how you manage the balance sheet, particularly the I think two 3% coupon plus December but marginal funding rates have changed a tremendous amount as I guess would guess valuations have so.
Maybe Rick or Matt.
Do you think about M&A differently right now like have hurdle rates changed how do we quantify that and has it become on margin are better or worse environment for accretive M&A.
With those two no valuations down and funding rates up thanks.
Yes.
It's a great observation when you look at the.
Sure.
Where the tenure is right now and where it's going and just look at change in commercial rates.
It's more expensive to fund an acquisition.
And we're focused on and incremental cash earnings and cash earnings is impacted by interest rates and interest expense. So yes that would make it a higher hurdle.
As far as how we look at deals from a cash earning standpoint.
Yeah, and I would just add to that I actually think it's a net net positive, though like and it doesn't matter if the interest rates, 2%, 4%, 6% a good business.
We want to own and our brand is going to be around for 50 years typically is going to generate a lot of cash earnings and most of the time accretion as well, but for those people that are bidding against us, especially private equity they could not handle 6% or 7%.
Interest rates.
Right makes it makes a lot of sense. Thank you.
Okay.
Thank you.
Our next question comes from the line.
Mcqueen.
Peter Grom of UBS Your line is open.
Good morning, guys. This is Brian Adams on for Peter Thanks for taking a quick question here.
Brian .
Hey, guys. It sounds as though the updated guide doesn't assume things have gotten much worse incrementally in Europe I know it's.
A smaller piece of the business, but I.
It's fair to say some of that you would probably contemplating back in September , but just wanted to get a mark to market on.
The business and how it is performing there and if youre seeing anything in terms of weakening on the part of the consumers.
September thanks.
Yes.
Saiful question.
We are worried about the European consumer over the next six months and just focus on the effect of heating bills.
So you've read about the <unk>.
Government support to try to cover some of that but just to give you an illustration like our utility bills.
Our UK plant are up 80%.
Year over year. So it is something to watch it's something we've built into our Q4 look.
It is it is a concern so that's a good observation Brian .
Hey, guys I'm good.
Okay.
Thank you I'm showing no further questions at this time, let's turn the call back over to Matt Farrell for any closing remarks.
Okay, Hey, thanks, everybody for joining us today, and we do look forward to talking to everybody about.
2023, so thanks for joining us.
Thank you ladies.
The conference. Thank you all participating you may now disconnect have a great day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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