Q2 2019 Earnings Call
Before we begin I have been asked to remind you that on this call the company's management may make.
Forward looking statements regarding among other things the company's financial objectives and forecasts.
These statements are.
These statements are subject to risks and uncertainties and other factors that are described in detail in the Companys cc filings.
I'd now like to introduce your host for today's call Mr., Matt Farrell, Chief Executive Officer of Church and Dwight. Please go ahead.
Okay. Thank you good morning, everyone.
Thanks for joining us today I'll provide a few comments on the quarter and then I'll turn the call over to Rick Dierker, our CFO .
And when Rick is finished we will open up the call for questions.
Q2 was another outstanding quarter for our company.
We have lots of good news, including higher than expected organic sales growth and earnings per share growth.
Q2 reported sales grew 5% organic sales growth was 4.9%, which exceeded our outlook of 3.5 adjusted earnings per share was 57 cents exceeding our outlook by five cents.
And the U.S. organic sales grew 5%.
Our categories are growing in fact 13 of our 15 categories grew during the quarter and our market shares are healthy as evidenced by nine of our 12 power brands growing or holding share.
We continue to have success in the online class of trade online sales continued to grow rapidly at a 28% clip this quarter and we expect online sales to exceed 8% of our annual sales in 2019 compared to 7% in 2018.
Our international consumer business delivered another terrific quarter with 9.1% organic growth.
International is a growth driver and a perennial bright spot for church and Dwight. This is unlike many of our peers UK, Mexico, and our global markets group, which we formally referred to as our export business had particularly strong quarters and one final note on international we exited our Brazilian subscale consumer business in the quarter.
Now turning to specialty products Q2 was another challenging quarter as organic sales declined 5.4%.
We are experiencing lower demand for animal productivity products from our dairy customers, who continue to be hurt by low milk prices milk prices increased in April may and June and recent industry forecasts are projecting no crisis to continue to rise throughout the second half.
We still feel good about our long term, 5% organic sales algorithm as a result of our acquisitions of businesses, serving other species like poultry cattle and swine.
Non dairy represents approximately 25% over animal productivity business right now and we expect that nondairy business to grow sales approximately 10% this year.
Let's go back to the us consumer business for a moment and call out a couple of the bright lights in the quarter in the laundry category, which grew 1.2% Harman hammer larger consumption was up 9.5% and we gained 0.8 share points as anticipated the promotional environment and laundry continued to be muted in Q2.
For our part we reduced arm <unk> hammer laundry percentage sold on promotion by 220 basis points, while maintaining growth.
We expect to continue reducing our year over year promotional spend in the second half.
Our new product Harman Hammer fade defense is doing well and meeting our expectations.
Over in personal care, the new line of the teeth hair benefits has giving consumers the ability to shop for dry shampoo. The same way they shop, the broader hair care category by that I mean by benefit in particular, our new Patese Volumizer thing was the number one SKU in dollar sales growth in the dry shampoo category in Q2.
Our new booties hydrogen pratik for women with fine here is also doing well.
The team continues to gain share with a 33% consumption growth in the dry shampoo category more than doubling the category growth of 16%.
The team has a number one dry shampoo for the 14th consecutive quarter.
The next new product to talk about is that near her leg mass.
They're like mass has been a hit with consumers driving our brand to a record high 70.2% dollar share of Depilatory is in Q2.
I want to point out that Rick and I right now are incurred in Fort Collins, Colorado, We're spending time with awarded pick team. We're seeing first hand, the great momentum that this business is generating as a great example is the award of pick Sonic fusion launch is exceeding expectations for 2019, and we have high levels of interest from both dental professionals and consumers with Sonic fusion you may recall consumers can floss and brush at the same time and in the month of June Sonic fusion was our best selling water Pik model at key retail accounts.
I'm talking about price increases now as you know price increases were executed in late 2018 and in April 2019, and contributed to our gross margin expansion.
We said last quarter the volume impacts on the brands in which we took price were better than we expected and that continues to be the case in terms of category health for the five categories, where we took pricing late last year. All five categories are showing positive category growth despite volume impacts.
We closed the flawless acquisition in May.
And the integration plan is on track.
We are excited to own the market leader in womens electric hair removal products fall. This is a fast growing brand, which complements our specialty hair care business, and we expect flawless to grow sales, 15% annually or higher and contribute to our long term growth both domestically and internationally in conclusion, we had a terrific quarter feeling really good about the rest of the year, we're on track to exceed our evergreen business model in 2019.
Next up is Rick to give you details on the second quarter the outlook for Q3 and the approved full year.
Thank you, Matt and good morning, everybody, we'll start with EPS second quarter. Adjusted EPS was 57 cents per share compared to 49 cents in 2018.
Up 16.3%.
The 57 cents exceeded our outlook of 52 cents largely due to the better topline improved gross margin.
A shift of marketing and lower tax.
Q2 reported EPS is 55 cents, we have three adjustments to get to adjusted EPS first is related to the sale of our consumer business in Brazil.
This was a $7 million or three cents charge that was largely noncash second we had favorability of approximately 7 million or two cents in relation to reducing the earn out for our passport acquisition within our SPD business.
We are still happy with our entry into the food safety business and the diversification that it offers our SPD division.
Lastly, as we mentioned last quarter, we booked an earn out adjustment for the flawless business largely based in the past of time. These fall this earn out adjustments will continue quarterly.
Reported revenue was up 5%.
Organic sales were up 4.9% exceeding our Q2 outlook of approximately 3.5%.
Q2 was the fifth consecutive quarter of greater than 4% organic growth in the fourth consecutive quarter of positive price and product mix.
Now, let's review the segments.
First consumer domestic organic sales increased by 5% as positive price and mix drove a 5.9% increase this was slightly offset by negative volume of 2.9% due to lower oxiclean laundry laundry promotional spending and the expected volume declines associated with announced price increases.
Growth was led by Harman Hammer liquid Harman Hammer clumping cat litter water Pik oral care products Oxiclean stain fighters.
For SPD Division organic sales declined 5.4% and all the demand for our products continue to grow in the poultry industry demand in the dairy industry continues to be a challenge.
Turning now to gross margin, our second quarter gross margin was 44.6%.
30 basis point increase from a year ago due to price increases the impact of acquisitions and productivity programs.
Partially offset by higher commodity and manufacturing costs.
This performance once again exceeded our expectations.
And we now expect full year gross margin to be up 80 basis points. This represents a 30 basis point increase to our previous gross margin outlook and is attributable to more favorable forecast on commodities as well as the impact of acquisitions.
On the commodity side. One example is the recent gross margin forecast changes ethylene.
Three months ago, we would have expected the back half of 19 to be up over 20% compared to 2018.
The latest information that we have indicates that prices will now be flat to down year over year.
Keep in mind that we are largely hedged on most of our key commodities.
Moving now to marketing marketing was down 7.3 million year over year marketing expense as a percent of sales decreased to 130 basis points to 12%.
Weve shifted some spend to the second half.
We are raising our full year expectations for marketing as a percent of sales to be flat with 2018.
An increase of 20 basis points since our assets our last outlook.
For SGN, a Q2 reported SG net increased 120 basis points year over year as teenage point of sale. The percent of sales would have been flat excluding the impact from the flawless acquisition as well as the previously discussed one time items, such as Brazil, and the earn out adjustments.
Adjusted net operating profit.
Operating margin for the quarter was 17.8%.
Represent a 90 basis point increase over Q2 2018.
Other expense all win was $17.1 million.
And for income tax our effective rate for the quarter was 18.7% compared to 21.7 2018, a decrease of 300 basis points, primarily driven by a higher number of stock options exercised.
And now to cash for the first half of 2019 net cash from operating activities was $351 million at 28.5 million increase from the prior year driven by higher cash earnings.
One metric to note is our cash earnings are up 15% year to date versus a year ago.
The organic outlook for the divisions or 3.5% for domestic 7.5% for international and down slightly for SPD.
We now expect reported sales growth of approximately 6%.
We now expect full year gross margin to be up 80 basis points and we continue to expect full year operating margin increased 50 basis points.
We now expect 2019, adjusted EPS of $2.47 per share or adjusted EPS growth of 9%.
The upper end of the range of our previous 79% outlook similar to prior years to the extent that the business outperforms. This guidance, we will look to reinvest the earnings to continue our momentum.
And with that Matt and I would be happy to take any questions.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your telephone keypad.
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Once again Thats Star one for question Star one.
And our first question comes from the line of Kevin Grundy from Jefferies. You may begin.
Hey, good morning, guys, congrats on the quarter Hey, Kevin.
Hey.
Let's start on on pricing.
So obviously very good right now in HPC and commodity outlook, Rick as you mentioned is more favorable.
Matt curious how you assess risk on a couple of fronts number one the competitors start to become more promotional.
On price and then to also potentially that retailers see this come up this excuse me moderation commodity costs and conversations begin to open up around the potential for more trade investments for manufacturers and then I've a follow up.
Okay.
Here's the way I would think about it Kevin.
We've had the only for four years less quarters of higher prices being in effect and the price increases were justified by cost increases that has accumulated over many years for many CPG companies include including us.
But you know big Big commodities always get the headlines, but there are other input costs that don't necessarily follow the same trend. So it depends on the product category that you're in so I'd I'd caution against single pulp and paper may be down or maybe resins abating and that's a that's a barometer for with respect to all the costs that justify the price increases.
Got it got it also keep in mind, a retailers are making more money now to start making more penny profit as result of the price increases so to the extent that there is a gross profit help because it would appear that some input costs might be abating I wouldn't expect a everybody be jumped to reinvesting in price so much IX.
They'd be much much more.
Reasonable [laughter] Fest and innovation because healthy categories compete on innovation.
A sense that changes how will we will respond to it.
Okay. All right. Thanks, Thanks, Matt one one follow up and then I'll pass it on a laundry so sort of a two part question one on liquid and one on unit dose so.
Promo levels are down and you guys have talked about the opportunity to take down promo levels. It looks like you kind of following that course, but at the same time market share has started to slow here a little bit maybe speak a little bit how you're trying to strike that right balance between taking promo promo levels down essentially getting a de facto price increase.
With with market share objectives, and then the second part just unit dose, where you're also pulling back on promotion and Matt I guess for years, you've talked about the opportunity to potentially get quote unquote your fair share.
And the category given the company slow start going back six or seven years ago, but that hasn't really played out at least perhaps it at the pace maybe that the company would have hoped why don't you think we've seen more rapid market share gains in unit dose from from arm and hammer with with PNG still sitting there at 80% market share then I'll pass it on thanks.
Yeah, well the unit dose category continues to grow it's around 17, 18% right now.
I would say that the unit dose growth has been exceptional for arm <unk> hammer and weve grown double digits virtually every quarter since it launched.
Unit dose grew 16.
Per cent so.
So we expect that continue in the second half and that that is our plan right now of course, if that changes we can react quickly.
And with that I would just add Kevin and even with that pullback Harman Hammer continues to gain share right really the the pullback on oxi laundry is this where maybe there are some share declined yeah. We already have a share is a 11% or the laundry category and now were up 80 bips in the second quarter. So that's that's pretty significant.
Okay. Thanks, guys. Good luck.
And our next question comes from the line of Rupesh Parikh from Oppenheimer you may begin.
Good morning, and thanks for taking my question and also congrats on a nice quarter.
So as we look at pricing. So if we look at the volume price trade off that you saw during the quarter were in line with your expectations.
Yes, It was I mean for the company.
We talked about.
4.8% price mix and volume was relatively flat for the domestic business. It was 5.9% positive price mix and volume was down.
0.9% and if you strip out the the.
The rapid pullback on oxi laundry.
Going would have been positive so Q2, probably looks a lot like the full year. The next few quarters in my mind.
Okay, Great and then from a category perspective, it sounds like you're right you actually had more categories that that grew this quarter.
So as you look your daughter, what was a blended category growth in the area to compete versus maybe the prior quarters.
Okay, Great and then my final question on the flawless acquisition now that you've owned it a few months any surprises, thus far and what you're seeing in the business.
Yeah, only good surprises.
[laughter] really this is a it's a terrific business, we expected 15 plus percent that sales growth, we should easily exceed that target in 2019.
Okay, great. Thank you alright rupesh.
And our next question comes from the line of Jason English from Goldman Sachs. You may begin.
Hi, Good morning, everyone. This is actually Cody on for Jason. This morning. Thank you for taking our questions just wanted to stick on flawless for a little bit.
On our math flawless boosted net sales by $7.4 million in the quarter, but was only there for about two months, suggesting it's full quarter sales or approximately 10 million. This came in below our expectations. How does this compare with the performance a year ago and relative to your expectations and then also what's the normal seasonality for this business remember, we didnt own it a year ago, a number one number two we generally do not comment on specific brand sales factory sales so within a quarter.
I can tell you that they hit our number that we expected in Q2, and we're very optimistic about the full year as they continue to gain more traditional retail distribution and the only thing I would add is there is a little bit of seasonality. The business is probably a little bit stronger in the back half of the year, but like Matt said it hit the numbers that we were expecting right on and we think there's a lot of momentum behind that business.
Okay, great. Thank you very much and then also just as far as the stock buyback you didn't buy any stock this quarter last year, you only repurchase stock in the first quarter of 18 actually dealt with integrating acquisitions, you still have roughly 400 million and authorization and your leverage stands at just two times, how should we think about capital allocation priorities for the balance of the year. Thank you.
Yeah, well back when we announced the acquisition for flawless, we said I know number one capital allocation priorities M&A far and away right and that's what we've been doing this we're going to continue to do and at the time, We said we would not do Oh the buyback that we previously thought we might do so we are we are effectively done with the buyback for this year as we continue to manage our.
Debt to EBITDA ratios and just have a dry powder for future acquisitions.
Thank you and our next question comes from the line of Steve Powers from Deutsche Bank, You may begin.
Great. Thanks.
Good morning.
Well I guess I guess the question for me just to start is if you step back.
And look across the peer set. This this has been a a good quarter and a good year.
More or less across the board.
Not to take anything away from your results have been your results have been great. Your outlook seems upbeat and that's fantastic, but I guess as you step back the question for me is.
Why do you think this is the year that that things are finally falling into place across the industry. After years of big brand struggling to get price protect margin and fend off competition.
Are there specific drivers that you would call out and do you see it as sustainable or is this is this is a sweet spot we're going through here.
Well you got to keep in mind that the there's been a lot of price increases across many many categories and CPG.
And I think there was probably a lot of fear for many years as to whether or not that price is actually could be raised and that they would stick.
But you know the fact that that the companies have raised prices, but it does suggest that maybe we won't wait as long next time.
Before the next round of price increases happened as long as there are cost justified, but I don't have I don't have any a magical answer as to why I you know it it kind of work. This year I think one thing that helps is that the economy is strong.
You got a strong consumer that's the time to do it we'd have a far different result, I expect if we were in a in a much weaker economy.
Yep, Okay, and so I guess the follow on to that as you look out over the next couple of quarters.
Maybe two questions on on on on the makeup of organic growth.
Yeah, I guess in the quarter do you have a sense for how much of the price mix that you're seeing right. Now is is pure price versus more trade up of mix.
And as you look out over the next couple of quarters, how do you expect those drivers the but the balance of price versus volume and mix to to shake out and maybe rebalance of it.
Yeah no. Thanks for the question, Steve I know price mix like we said for for the company was 4.8% that's largely price right. I mean, that's a we don't really parse it out between price and mix, but largely price.
And like I said previously maybe to replenish we believe that trend to continue for the balance of the year and for Q2 for domestic it was positive 5.9 for price mix and volume was down.
The point and so we think that trend going to continue as well and we'll lap that early next year.
[laughter] sorry.
Okay. So just on litter the trends there seeing still broadly positive I guess just in the syndicated data you're starting to see some deceleration and some some share trend.
Degradation, there with with Nestle in private label that the beneficiaries is there anything anything that you would call. It in that category that the that is shifting that you're you're on watch for.
Yeah, I got a comment I mean, Rick Brown will chime in too, but if you look at the.
Category in the second quarter grew 8.9%.
Cat litter right now and you know within the category isn't that promotional him into category actually reduced show sold on deal by 50 basis points year over year. It is true that private label picked up 90 bips in the quarter to a 10.8. So you know so there's definitely some strength in private label, but but historically you know private label has been around 9% to 11% of the categories I wouldn't say that that wouldn't necessarily be alarming with private label at 10.8.
Yes, I would just add Steve <unk>, you should expect our litter business to slow a little bit in the second half remember the competition raise price earlier than we did and so we got a little bit of only benefit early in the second half. So on a stack basis were still strong, but it's just we're comping a higher volume growth number.
Yes, okay perfect. Thanks, guys.
Okay.
Thank you.
And our next question comes will come from the line of Steve Strycula from you, Yes, you may begin.
Hi, good morning.
Hey, Steve.
So a really solid quarter on organic sales for the consumer business. How do we think about Threeq you in the back half why does it step down a little bit lower the two year stack aren't materially different.
Maybe the first part of my question is there anything sequentially.
Decelerating.
Not really we've talked about it a the two year stack is a little different right. The first half.
Of this year is about 4.7% if you average it and that implies a 3.2 in the back half, which is down 150 basis points to 50 Bips is just because the second half of 18 was so strong four and a half versus four in the first half of 18. So 50, that's 150 is.
It's really just a comps and then another hundred Bips is what we've been talking about that went through in detail just lower promotional spending in general both trade and couponing.
Okay.
And then Rick in the past quarters, you've given us a nice like put and take for the various gross margin components would you mind kind of just rattling that all fairly quickly first yeah. No problem. So for the quarter right were up 30 basis points price volume mix was really strong plus 230 basis points productivity again strong plus 130 basis points.
Acquisition impacts plus 40 basis points, and then inflation minus 370 basis points that inflation number includes commodities includes other manufacturing and includes tariffs that includes the fact that we had a prior year.
A onetime benefit with LIFO change of accounting and other other stuff so lot in that number but thats the detail.
Okay any close out on that strategic question for you.
On specialty products, and which has performed maybe a the way I'd like year to date, but taking the long term view why is this a synergistic business with your consumer arm, which is really doing quite well right now how integrated is it into your core operations and why is it core for the long term. Thanks, Yeah, it's integrated into our core operations, because we have we've centralized our supply chain, meaning that baking soda that's produced.
By our plants has a destination to really go into the consumer side of the business or to the especially chemical side of the business, where you have bulk sodium bicarbonate. So it it is fully integrated joint separate plans for each of the businesses.
The reason why we like this business long term is number one is these these products are labeled Harman hammer and Harman Hammer has a has a fabulous name within the animal productivity industry, particularly in dairy and one of the things I mentioned in my remarks upfront is that if you look at the animal productivity business, which represents two thirds of specialty products. The the nondairy business is growing double digits. This year.
The 9 billion and he got to see people, so I think being a getting into cattle swine and poultry was a good move for the company. So long term we feel good about it.
[noise].
Thank you and our next question comes from the line of Joe Altobello from Raymond James You May begin.
So first question on personal care.
Sales there do seem to be sluggish I think it's more of the same really awesome of which seem to be structural in some of your categories, but it was below what we were expecting white house wallets.
For a portion of the quarter. So what do you think it's been around some of these personal care categories that have been slow to really respond.
Oh, good growers for US you know for us is going to be another one because that's going to help our overall numbers going forward.
I'll definitely as you point out have some structural issues for example in condoms condom category.
The kids category declining birth rates alternatives for contraception beyond economists being you deep dive frames plan b.
And then we have a couple other categories that are struggling for a little Critters for example, which is a.
Children's gummy vitamins to struggle because of just intense competition a lot of competition in there.
And then it's been brush and its been brushes had some struggles as well.
You have a new entrant in their cold quip, which is something we're going to have to have to be dealing with.
But do they will add up so this quarter personal care was up 1% and I would just add on to that Joe It's Rick I would say that.
1% was maybe depressed a little bit right. We had some price increases that got announced early in the year and so whether its Trojan orajel. Some retailers did buy in a couple of weeks into Q1, So Q2 looks a little bit lower but by and large I think what method is absolutely correct.
Got it Okay, and just secondly, you got to mention it earlier, but we do seem to be an eye toward a territory or in some of these categories is really on the on the wholesale side on the household side on pricing and promo levels. This has not been an industry that has always been disciplined on promotion to say, the least and I understand it's early but it seems like you guys are thinking about 2020 promo levels to look a lot like what they are looking like in 2019 at this point.
No. We were we're only looking at a couple of quarters ahead, Joe. So we know we haven't made any commentary on what we expect to happen in the future but.
Considering how how hard people.
Our financing increase their profits year over year.
I I don't expect that that's going to turn around at least in the next six months.
Okay. Thank you guys.
Thank you and our next question comes from the line of Bonnie Herzog from Wells Fargo. You may begin. Thanks. Thank you good morning.
I am actually have a question on your marketing expense in the quarter I'd like to hear more about why the lower spend happening in Q2, and actually Q1 with a lowest well you guys did touch on mesh site does this in any way suggests your pipeline of innovation with delayed also based on your full year guidance, which I think is for flat marketing spend as a percentage of sales. It think Josh your second half spend will really need to ramp by maybe as much as 16% to about 12.5% as a percentage of sales and that would be up from about I guess under 11% in the first half I just really wanted to understand if that is realistic. Thanks, yeah. No. Thanks, Bonnie just to give you. Some color on Q2, right. We said Q2 marketing spend was down 130 basis points part of that was just the flawless accounting impact if you strip out the flawless impact right remember all this is just going to net sales and their dollar spend in marketing is happening in the marketing line that was worth 30 Bips, though.
Really down 100, I'd say, we expected to be down 100, right we knew that.
The retailer resets shifted for litter and for additives as an example of the back half of the year. So we didn't go into detail on our outlook by quarter and we don't really tend to do that I would just tell you to give you some confidence that yes marketing spend to be up pretty big in the back half of the F 30, or 40 bips in the third quarter and the balance will be in the fourth quarter, Yeah, just something to add to that we've got a couple of our new products. There are the resets are happening for some major retailers in the second half.
They would be oxiclean dark protect and also compensated or cloud control, which is a cat litter.
So right now we have a low HCV. So we're not going to turn on the on the advertising until second half.
And then maybe on the same topic Sito looking forward do you expect your spend or marketing spend levels to say.
You know kind of where they've been trending they've been inching up over the years is is that how we should think about this over the medium and long term well. We've said right. We're at right. This range, whether it's 11 711 511 nine this range has been really good for US right and you can see that in the share results you can see that in the category growth results. So we think we're in a sweet spot.
Okay, and then if I may I, just wanted to circle back to something you mentioned, which is M&A you briefly touched on it. So I was hoping you guys could give us a sense as.
To how strong your appetite is right now for acquisitions.
Especially after you just completed the solid acquisition and then you you mentioned you're kind of building the dry powder. So do you have enough then and how do you view the current competitive environment for M&A.
Yeah, well look we you know we are acquisition platform over a serial acquirer and we continue to be active despite the of the false acquisition I'm recalling take you through what are what our leverage ratio is right now and acquisitions is the number one destination for our cash flow and as many if you know we have a very disciplined process. We have acquisition criteria and we will step up for opportunities that meet our criteria just kind of illustrate how.
How important it is sort of business model, we've done 18 acquisitions since the year 2000, So we actually have no restraints right now with respect to do on our next acquisition, but Rick can chime in on that yeah. I mean, our leverage ratio is going to be sub two times by the end of 2019, so plenty of room I think the way we structure the fall the steel did nothing but help that and as Matt said we.
Our our busy looking for the next deal.
What's the environment like right now you guys has it changed dramatically since last year for instance.
I think the the best way to respond to that is that generally anything thats for sale.
Particularly in the US where we are aware of and that's simply because were regarded as as a buyer.
So a lot of people like to get us in the process.
But I would say, it's it's no different than it was a year ago.
Hi, Thank you.
Thank you and our next question comes from the line of Bill Chappell from Suntrust You may begin.
Thanks, Good morning.
Hey, Bill you just just a follow up on a couple of your comments on the innovation pipeline being delayed maybe some idea where that was and where you would expect to kind of a lift in terms of products and as with the second half from those innovations.
Yeah, No I'd mentioned, though is oxiclean dark protect.
So that's the.
Our new additive for dark clothing, and the other one was compensated cloud control. So is your cat litter. So those those are the two where we have low.
HCV right now so distribution and we expect with some of the major resets in the second half that's going to pick up quite a bit.
And is it safe to say the cat litter would be at the bigger of the innovations where it seems more marketing dollars I mean, oxy seems a little bit smaller yeah, I think thats fair to be more labor being the bigger for us right.
And then what are you seeing in terms of the outlook I mean, it seems that you and your competitors are all benefiting from pricing and not a lot of it being dealt back.
Is the expectation can you can there be another round of pricing as we move into 2020. You know are you starting to see some deal backs as we move into the fall or you know is it it seems much more rational that has been in years past.
Yeah, I think again I remind everybody is gonna mime so's, it's only been four or less quarters of higher prices. So its.
Sounds like we've been living under this new price umbrella and remember all those all those price increases were cost justified so.
I do think sometime in the future I think that the muscle that was really maybe atrophied are dormant for many years for CPG companies. Maybe now has a spring to life. So people may be more likely to go forward with cause of cost justified price increases, but the requirement is still there for cost justification without that you won't have price increases and remember you can't go to the retailer say those were the forecast says first suspect commodity you have to go say this is what happened right. So even if ethane prices are expected to go up 20% in 2020.
You got to wait till that actually happens to have that conversation.
Got it and just any further thoughts I know that on on laundry, there's there's certainly a lot of competition.
Conversation about PNG, but in terms of the other competitor trying to get the ankles comments of trying to be more aggressive.
If you're seeing that more at the high end on the personal or if that's.
If there if you feel like that might be more on the low end southern and mid tier type price products.
Well, yes, if you just look at.
Q2 is a indication.
As I said earlier that the value section both tide simply pure exit some roll down sold on deal year over year. The same is true for personal use it.
Pullback on sold on deal in the second quarter, that's Uh huh.
Trade promotions going on what how much did it on a coupon and Chris could come out of transferred over there, but that would suggest that there's been pulled back on.
Price on the other side of the coin is that at least purex came back into the market with a unit dose this year, having been absent for many years. So much rather see people can compete on innovation and there will be a good example of it.
Got it thank you.
Thank you and our next question comes from the line of Olivia Tong from Bank of America, you may begin.
Great. Thank you.
I was wondering since you work with the team at water pick if you could provide a bit more color on that business just.
Sort of opportunity ahead.
Beyond just a higher penetration of consumer.
Your potential to expand into other adjacent categories as well, but that brands. Thanks.
Yes, no water Pik is a wonderful business. This business has been around since the 19 sixties and the people out here. It is 190 people up in Fort Collins, Colorado.
Our experts and waterjet technology, so they invented.
The water Pik in fact back in the Sixty's kind of a fun fact.
Lyndon Johnson I gave with water picks as a tidbit foreign dignitaries as a sign of.
American ingenuity and innovation, so a fun fact for you Olivia but this this is a business that really started to take off three years ago, maybe four years ago. As a result of instituting a a lunch and learn learn program and really communicating to dentists and high Janice in the United States by the benefits of water Pik. We then turned around a recommended it to consumers.
So there's a lot of runway ahead for this business. We look at battery operated toothbrushes, what's the household penetration in the Fortys, 40%.
I would have.
Powered toothbrushes and.
Waterflood reserves are more in the low twentys. So we see there's a lot of opportunity if that were our what we're gonna be shooting for a lot of opportunity to grow in the U.S. and then outside the unit as outside the U.S. is really the big opportunity.
International is only 20% of the business today.
There's no reason why the international business should far exceed the size of the U.S. business. So we just think focusing on waterflood assertion that opportunity ahead with all the science behind these waterfall losses and the greater interest now in gum health and you even see that in the toothpaste category, both Creston and Colgate home have products that are directed towards a gum health in toothpaste. So.
I don't do this there is no need really right now to say, we're going to be branching into other categories. We want to nail the opportunity that we have in front of us.
Got it Thats helpful.
Maybe if we could talk a little bit about the whole portfolio the spreading growth between household and personal care and consumer has find pretty dramatically this year.
Obviously, the pricing is disproportionately better and household but what's your view on a go forward and while we talk a lot about M&A with you guys.
What about the other side how often.
Do you do a portfolio review and assess the brands and their contribution to the total company.
Well, let me address this is Rick I would just say that.
As we as we pull back more on our household business you're going to see the.
The gap narrow between household personal care growth that should be more balanced in the back half of the year.
Yeah, and and longer term I'll have it is true that household is has been around.
Longer than and bigger than our personal care business, we have a lot of our acquisitions have been on the personal care side over time.
But were optimistic about the ability to grow long term. We are our algorithm is that we grow top line, 3% bottom line 8%.
And we think we have the portfolio that can do that so we don't have a lot of flash were steady Eddy company. So people invest in the company can bet that we're going to hit those numbers year after year after year with the portfolio that we have and we can continue to add to it and we had 12.
Brands today make up 80% of our revenues and profits.
And 12 today 20 tomorrow, we have such cash we throw off which is a flywheel. So we can continue to add good brands to the portfolio.
Thank you.
Thank you and our next question comes from the line of Andrea Teixeira from JP Morgan you may begin.
Thanks. Good morning. So my question is on the organic sales growth range.
Given that you had this 5% growth in the second quarter why are you expecting a deceleration in the third.
And related to that we have heard from some of your competitors, calling about 50 bips pull forward of inventory because of the one day delivery.
And just to match the service levels online, saying, particularly if you. If you continue to we'll fasting e-commerce as we saw we heard you say 20 728.
Do you did you call in a similar impact that you had assumed a in the quarter for your 5% 4.9 to be precise and your banking. So that is there's little doubt a and you can also can you also please update on the international also kind of showing a sequential deceleration, but obviously is still above your long term algorithm and if I can squeeze a little bit on the weakest commentary just a follow up on gross margin.
You said about 250 basis points inflation on the Cogs.
But if you if you're saying like obviously the commodity outlook is is better but you have to hedges. So are you seeing that starting to benefit to you in the fourth quarter or just next year. Thank you.
Okay, Andrea I'm going to do my best.
So it's a long list.
Uh huh.
The organic sales growth deceleration from the first half second half already touched on that it was 4.7 in the first half.
3.2 is the implied number for the back half were 4% for the full year, that's down 150 basis points 50, bips to because of how to stack. The comp first half of 2018 was a it was 4% growth and it was born out in the second half of 18.
The other 100 basis points is lower promotional spending both trade and couponing.
We did not call out anything on retailer inventory run into ecommerce, we never call out anything about about retailer inventory I would tell you if anything we could have gone the other way and said there was a little bit of a pre buy in Q1 for for condoms and so that that impacted us negatively in Q2, but by and large I'd say, you're right ecommerce is going to one day shipping is there a small impact may be but we would never called that out or call. It material.
Number three is international.
Again, you're saying, there's a deceleration.
I would tell you that.
Yeah, maybe a slight deceleration, but again, we just raised our outlook for the full year to 7.5% right. So I think it's up on the margin I think those guys have proven time and time again, they're delivering in excess of the evergreen model or our outlook that we have for that business.
And then the fourth one was commodities the fourth one Uh huh.
I think.
You're right I said in Q2 that there was about 370 basis points of inflation slash manufacturing cost increases.
We that's a big bucket and there there's a big bucket of commodities, but there's also a big bucket of tariffs and really not I'm, having some prior year. One time benefits. There's also incentive comp in that number and labor increases, but as we move through the year.
If we were up 20 basis points in Q1 up 30 basis points in gross margin in Q2.
It implies that we're going to be up 135 basis points in the second half that means we're going to accelerate from where we're at a by 100 basis points. This largely because commodities are coming down but other manufacturing cost are coming down as well. So I hope that gets a little more clarity.
Okay. That's helpful. Thank you.
Thank you and our next question comes from the line of Mark asked for Chen from Stifel. You may begin.
Thanks, Good morning, everybody wanted to ask you the expectations for the material increase in marketing spend in the back half of the year I don't want to get into guidance or thoughts on next year, but directionally when you've done. This historically, how do you think about kind of the flow through impact to the business. It would certainly seem like given innovation cadence given to spend it.
There's got to be some kind of benefits, maybe just directionally that said without looking at the specific numbers or guided yet is there any way to kind of think about things as we head into the first half of next year.
Yeah, we have an evergreen business model as you know and so as I mentioned that earlier response to Olivia.
Meaning the organic growth of 3% and our earnings per share growth of 8% and that that says that we're going to get a.
No 25 basis points of gross margin expansion.
Annually.
And but generally that the.
The marketing is not a contributor to the to the operating margin expansion long term.
We generally as Rick said earlier, our were around a 11 seven limb five you know.
11, nine were in kind of a sweet spot. So if someone were to ask us what do you think your marketing spend as a percent of sales is going to be next year to year. After year. After that we'd say probably be between 11, and a half and 12% that's been working for us.
As far as where we put the money you know we got lots of choices. We've got we're in lots of categories and we have full tilt 12 power brands. So we're always focused on on brand health and no. One thinks I I I don't have Rick Rick mentioned, it but you know to the extent that we do have more flexibility in the second half we do intend to reinvest not just in marketing brand house, but also in R&D for innovation is lot lots of areas to go marketing R&D analytics automation.
Sustainability, you didn't even cyber security. So we've got lots of places, we'd like to put more money.
In the in the second half of the year should that materialize, but you know we have a you know I made reference to the fact, we're in exceed our evergreen business model. This year and that's important too is that so how we drive the company long term, how we drive total shareholder return.
Yes, Thanks, I guess I was more thinking about the impact on on on revenue growth in terms of how the flow through of the market incremental marketing spend.
Good luck. So maybe if you have any sort of color on that and I just wanted to ask.
An unrelated question on international just trying to figure out how the new markets in distribution, especially in southeast Asia, China have gone so far.
Maybe if you could talk a bit about brand acceptance kind of what you've seen so far in brands are gaining the most traction or how the distributors are selling the product that would be helpful too.
Yeah.
Just a one liner in the marketing spend when we spend incremental marketing it just bullet proof.
Our evergreen model, so we hit or hopefully beat our evergreen model for organic revenue because of incremental investments on marketing yeah. That's what we that's we hope for and to some degree that we expect.
Yeah as far as the China and Southeast Asia, we're off to a really good start with Shanghai, Jon why that's a CPG company public company that we signed on with a year ago.
And the the categories that we entered China with are baking soda toothpaste dry shampoo.
And fem, Hy Fem hygiene and by and large so the acceptance is good.
To call outs in particular in in Southeast Asia, and also in China would be a.
Our water fosters and gummy vitamins, so they seem to be really a hit with the Chinese and the southeast Asian consumer. So we think the strategy is working we got we got I think China and southeast Asia can be a big part of our story going forward.
Thank you.
And I'm showing no further questions at this time I'd like to turn the call over to Matt for closing remarks, Okay. All right folks. So we had a terrific quarter and I look forward to talking to everybody at the end of the third quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program Emile a disconnect everyone have a great day.