Church & Dwight Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2022

There are 14 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Church and Dwight Second Quarter 2022 Earnings Conference 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 subject to risks on uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Matt Farrell, Chief Financial Officer of Church and Dwight.

Operator

Please go ahead, sir.

Speaker 1

Actually, I got promoted as CEO about 7 years ago. But anyway, good morning, everyone. Thanks for joining us today. We've got a lot to talk about. I'll begin with a review of the Q2 results.

Speaker 1

And then I'll turn the call over to Rick Durker, our CFO. And when Rick's done, we'll open the call for questions. So Q2 was a solid quarter for us. Reported revenue was up 4.2%. Organic sales grew 3.4% and this was in line with our 3% to 4% outlook.

Speaker 1

The adjusted EPS was $0.76 Now this was $0.06 higher than our outlook, but that was due to lower marketing. We grew consumption in 11 of our 17 categories in which we compete, and in some cases, on top of big consumption gains last year. Fill rates have improved to 90% in June and we expect to get back to historical levels by the end of the year. Regarding brand performance, we experienced double digit consumption growth in 6 of our 17 categories and I'll name them for you: Arm and Hammer scent boosters, Arm and Hammer baking soda, Arm and Hammer clumping litter, Batiste dry shampoo, Zicam Zinc Supplements And thorough breath mouthwash. And we gained share on 8 of our 14 power brands.

Speaker 1

So that's a good story. Our shares are healthy. In Q2, online sales as a percentage of total sales was 16%. Our online sales increased 15% year over year and we continue to expect online sales for the full year to be up be above 15% as a percentage of sales. Since early 2021, we have announced price increases to combat inflation.

Speaker 1

And through mid-twenty 22, we have already announced price increase to cover 80% of our global portfolio and we did a second round of price increases in laundry and litter that just hit the shelves. But at the same time, cost inflation continues to climb. So since we spoke to you in April, we are now expecting 15,000,000 of new incremental cost inflation. So the cumulative incremental cost inflation is $135,000,000 since we gave our initial full year outlook way back in February. Now the incremental $50,000,000 of inflation combined with currency headwinds caused us to lower our full year EPS outlook.

Speaker 1

We now expect 6% operating income growth offset by a much higher year over year tax rate. Now I'm going to comment on each business. First up is U. S. Consumer Business, which grew organic sales by 2.4%.

Speaker 1

Looking at market shares, as I said before, we had good numbers as 8 of our 14 power brands gained share. Looking ahead, we expect even further improvement in our market share to make sure that our fill rates will improve and promotional and marketing spend increases in the back half. Let's look at a few of the important categories. Let's start with laundry. The trade down to value detergent has begun.

Speaker 1

To give you some numbers. For example, during Q2, the liquid laundry category grew 7%, but value laundry detergent Grew 11%, while premium laundry grew 4%. In litter, the category grew 12%. Both our black box, which is premium, And our yellow box, which is value, had double digit consumption growth in Q2. The dry shampoo category was up 18% in Q2, while BATISTE consumption was up 43%, our growth would have been higher if not for our difficulty in securing aerosol cans and actuators.

Speaker 1

Over in gummy vitamins, the sequential quarterly growth of the category is slowing down. For the last three quarters, the category growth rate has been 16%, 10% and most recently 5%. We expect the category growth to turn negative in Q3 simply because we are lapping the consumption spike from the Delta variant in last year's Q3. And we continue to struggle with fill rates, which is hampering our ability to grow. Our most recent acquisitions are performing well.

Speaker 1

Thoroughbred, which we acquired in December 2021, had a great quarter with 33% consumption growth. Thorough breath grew share 3.1 points to 16.4 percent of the alcohol free mouthwash category. Thorough breath is the number 2 non alcohol mouthwash and is solidly the number 4 brand in total mouthwash. Zicam is our other recent acquisition. Zicam also delivered strong results this quarter.

Speaker 1

You may recall we acquired Zicam in December of 2020. We were hurt in year 1 of our ownership due to masking and social distancing. Zicam cold remedy consumption was up 55% in Q2 and is the number one brand in the cold shortening segment with a 75% share. Now looking ahead to the rest of the year, the regular flu season in the U. S.

Speaker 1

Is projected to be more severe than recent years based on what the Southern Hemisphere is experiencing right now. Next up is international. Despite significant disruptions, our international business delivered organic growth of 6.5% in Q2, primarily driven by BATISTE in Europe, vitamins and BATISTE in Canada and growth across the gMG business, which is our export business. In April, when we spoke to you, we expected flattish growth in Q2 and a continuation of the supply chain woes we experienced in Q1, such as fill level issues and delivery issues. Those actually proved to be less disruptive in the quarter than we anticipated.

Speaker 1

However, fill levels and delivery issues will continue to weigh on our Global Markets Group in the near term. Next up is specialty products. Our Specialty Products business delivered a strong quarter with 6.3% organic growth, driven by both higher price and volume. Now, I want to spend a couple of minutes discussing our more discretionary brands since they are having an impact on our full year revenue outlook. We see lower consumption for water flossers in the U.

Speaker 1

S. As consumers trade down to lower price water flossers. Also the WATERPIK Asia Pacific flosser consumption has and is expected to decline as a result of lockdowns. Similarly, there is a lower demand for water pick shower heads and this is due to less do it yourself projects. A lot of those got completed during COVID times.

Speaker 1

Waterpik is a discretionary purchase and we continue to invest in demand driving activities such as lunch and learns to drive household penetration of flossers. It's fair to say gum health has not gone away And still only 16% of the U. S. Population flosses every day. Now this is a business that has averaged high single digit growth to top line, since we acquired them in 2017 and we're confident that the long term growth prospects for WATERPIK are sound.

Speaker 1

The other discretionary brand we have is FLAWLESS. We're experiencing lower consumption, but that is largely due to the absence of our new products in this fast moving beauty category, China lockdowns have impacted our manufacturing and the new product launches that were planned for the first half Have been delayed until the end of 2022. Now, I want to spend a few minutes on the health of the consumer, private label trends, innovation and our ability to supply. Innovation is at a multi decade high and interest rates are rising to tamp down inflation. And while wages have risen, households are getting squeezed and the consumers are making choices to make their dollars go further.

Speaker 1

Now think back to April during our Q1 call, to call that the strengthening value detergent segment. In the latest 4 weeks ended July 17, value liquid laundry detergent category is up 8%, deep value is up 1% and premium is down 1%. So We think the trade down is happening. Here's another early indicator of trade down, this time in oral care. We had one major retailer point to the strength of manual toothbrush, which has held up well for them in contrast to declines in rechargeable and power toothbrushes.

Speaker 1

This trend impacts both WATERPIK and Spin brush and here are a few numbers to illustrate the trend. The flosser category was down 7% in Q2 and battery operated toothbrushes, The category was down 4% also in Q2. So we're keeping an eye on these and other trends. It's important to point out that 40% of our portfolio is value and we expect to perform well in a difficult economic environment. Our largest businesses, detergent and vitamins are value products And in Litter, our orange box is also valued.

Speaker 1

So we feel well positioned for what may be coming. Now regarding private label, Private label shares are stable in the 5 categories where we have meaningful exposure to store brands. As you saw in the release, we have a strong lineup of innovation across our personal care and household categories. I want to highlight the early success of ARM and HAMMER baby laundry detergent, Which has already achieved a 10% share of the baby launching category at Walmart. The other product I'd like to highlight is Trojan Raw, which is the thinnest condom now on the market, which is already the number 6 out of 400 SKUs sold at Amazon.

Speaker 1

Also want to mention our recent launch of a new lightweight litter that we call Hardball. We expect over time this will enable us to get our fair share of the lightweight litter category. For the cat owners on the call today, we named it Hardball because of the hard ultra compact clumps. It's quite a unique consumer experience. Now regarding ability to supply, you may recall we hit bottom in Q1 with the omicron resurgence when we saw our fill rates dip The overall Q2 fill rates improved to 89%, although recovery in our high margin personal care side of the business is still lagging.

Speaker 1

We're on track to be near historical fill levels by the end of the year and the good news is July continues to show improvement. We have confidence in our revised full year outlook for several reasons, improving fill rates, trade down to value, healthy new product innovation and consumption strength in our recent acquisitions. Regarding support, we have key promotional events lined up in the second half and 2 thirds of our full year advertising spend is concentrated in the second half. In closing, we expect our portfolio of brands to do well both in good and bad times and we continue to hunt for new TSR accretive acquisitions. Next up is Rick to give you more details on Q2.

Speaker 2

To. Thank you, Matt, and good morning, everybody. We'll start with EPS. 2nd quarter adjusted EPS was $0.76 flat to prior year. The $0.76 was better than our $0.70 outlook, primarily due to continued strong consumer demand and lower marketing spend, due to below normal fill rates in our Personal Care business.

Speaker 2

The market impact was about $0.04 on the quarter. Good news is our overall fill rate continued to show improvement and hit 89% for Q2. Reported revenue was up 4.2%, Reflecting a 1% drag from currency, organic sales were up 3.4% in line with our outlook. Matt reviewed the top line for the segment, so I'll go right to gross margin for the company. Our 2nd quarter gross margin was 41.2%, a 220 basis point decrease from a year ago.

Speaker 2

Let me walk you through the Q2 bridge. Gross margin was impacted by 600 basis points of higher manufacturing costs, primarily related to commodity inflation, distribution and labor, as well as a 10 basis point drag from currency. These costs were offset by a positive 270 basis point impact from pricevolume mix, positive 20 basis points from acquisitions and a positive 100 basis points from productivity. Moving to marketing, marketing was down $14,000,000 year over year. To Marketing expense as a percentage of net sales was 7.8%, and we expect 2 thirds of advertising to be concentrated in the second half as case fill improves.

Speaker 2

For SG and A, Q2 adjusted SG and A decreased 10 basis points year over year. Other expense all in was $15,100,000 a $3,700,000 increase resulting from higher average debt outstanding. And for income tax, our effective rate for the quarter was 24.1% compared to 24% a year ago and that of cash. For the 1st 6 months of 2022, cash from operating activities decreased 10% to $310,000,000 due to lower cash earnings and higher working capital, driven by higher inventory levels. We expect inventory to get back in line by year end.

Speaker 2

And as of June 30, cash on hand was $640,000,000 Looking ahead to Q3, we expect reported sales growth of approximately 2% to 4%, organic sales growth of approximately 1% to 3% and gross margin contraction. Sequentially, we are decelerating from Q2 as our VMS business comps the COVID surge from a year ago and we see a tightening in the consumer for our discretionary products such as Waterpik and FLAWLESS. Those two reasons coupled with the inventory issues we've all heard from retailers compressed Q3 growth. Adjusted EPS is expected to be $0.55 per share, a 19% decrease from last year's adjusted Q3 EPS. This is largely due to higher SG and A, which is normalized levels of incentive comp versus year ago, to plus higher marketing and promotional support.

Speaker 2

We expect higher EPS in Q4 to offset the Q3 declines, driven by acceleration of organic growth to in the absence of prior year one time investments. And now to the full year. We now expect the full year outlook for reported sales growth to be approximately 4% to 6%, reflecting an incremental drag from currency of 1%. We now expect organic sales growth to be approximately 3% to 4%. As you read in the release, we now expect an incremental $135,000,000 of cost inflation for the year, which is $50,000,000 higher than our April outlook.

Speaker 2

On the longer time horizon, we continue to plan on offsetting inflation with incremental pricing, laundry compaction and productivity. We continue to anticipate full year reported gross margin to be down versus 2021 as inflation is partially offset by pricing and productivity. We continue to expect gross margin to improve sequentially in Q3 and increase year over year in Q4. Marketing spend is now expected to be lower in 2022, driven by the lower spend in the first half of the year. We now expect full year adjusted EPS to be flat to 2021 due to incremental inflation and currency headwinds.

Speaker 2

We continue to expect the full year tax rate to be 23%. We expect cash from operations for the full year to be approximately $900,000,000 down from $920,000,000 and our full year CapEx plan is now approximately 180,000,000 as we continue to expand manufacturing capacity. In closing, we continue to perform in a volatile environment. Our share performance improved again in Q2 and we expect further market share gains in the second half as we invest in our brands and supply chain fill levels improve. And with that, Matt and I would be happy to take any questions.

Operator

Question comes from the line of Kevin Grundy from Jefferies. Your question please.

Speaker 3

Great. Thanks. Good morning everyone. 2 for me if I could, Matt. So I think you've probably been a little bit more cautious on the consumer probably earlier than maybe some of your peers.

Speaker 3

I think everyone got off Proctor's call this morning. They're calling for a category slowdown as well. So without asking you to be redundant, Matt, you called out some of your more discretionary categories, you're also calling it out in laundry. Maybe you could just talk about the scope and the exposure within your product portfolio in terms of where you expect to see further trade down and outside of what you called out, maybe talk about the change in category growth rates underlying your guidance For the year and then I have a follow-up. Thanks.

Speaker 1

It's a pretty broad question, Kevin. As far as the categories go. Let's start with discretionary. So I did mention that both the Water Flossers and FLAWLESS were both struggling due to trade down. Trade down for WATERPIK, but also the absence of new products But if you think about our portfolio, 90% of our portfolio are just our everyday essentials, Only 10% that's related to discretionary products.

Speaker 1

So we so although we spend a lot of time talking about the discretionary products and because they do have had an impact on our full year call. It's not the whole story. I mentioned that we had growth in 11 out of our 17 categories that we're in. And we do expect that to continue in the second half. There are a few categories I call that besides the WATERPIK and FLAWLESS like Spinbrush, for example.

Speaker 1

Battery rapid was down a little bit. As far as others, NARE is another one that was soft in the quarter, depilatories and also Orajel. But everywhere else, those categories you saw growth. So give me a follow-up.

Speaker 3

Okay. Yes. My follow-up is probably for Rick. Just in terms of the EPS outlook, the environment is clearly challenging, costs have gotten worse, FX Not as big a headwind for you guys, but nevertheless still a headwind. Talk about the constraints on the pricing front And then historically, Church is well thought of and run pretty lean, but other levers to pull here in terms of productivity to Offset some of the cost headwinds and then I can pass it on.

Speaker 3

Thank you.

Speaker 2

Yes, sure Kevin. So From an EPS perspective, we've announced our 2nd round of pricing as an example for laundry and litter. That'll be a tailwind. Our personal care fill levels returning from low 60s back to normal will be a tailwind. Promotional support because we didn't have the fill levels in the first half of the year to do promotions like we normally would do, is in the back half.

Speaker 2

That's a tailwind. We think trade down is a tailwind in general. Laundry, Matt quoted some numbers on there about how well the value Category is starting to grow in just that segment. So we think we're well positioned that for all those reasons for EPS. We also mentioned Q3 is down big, but Q4 is up big and Q4 is also lapping some of those investments and one timers that we had talked about previously.

Speaker 2

So that's on the EPS side. On productivity, Now we talked last quarter, I think Lauren had asked the question about productivity phasing and that's so true because early on in this year and even late last year, It's hard to break into to get line time to go do qualification to do any productivity type efforts. And so we said it last quarter is still true. It's going to continue to build to the here and as we have back at the right capacity and fill levels, then we'll have more and more time to devote to Protivia at our plants.

Speaker 3

Okay. Very good. Thank you, guys. Good luck. Hey, Kevin.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Rupesh Parikh from Oppenheimer. Your question please.

Speaker 4

Good morning. Thanks for taking my question. So I guess I just want to go back to the gummy vitamin category. So you guys talked about slowing category growth. So curious what's driving that lower category growth?

Speaker 4

And then secondarily, you mentioned that your fill rate is still being challenged. When do you expect your fill rate to get back to where you'd like it to be?

Speaker 1

We expect the fill rate to be back where it should be, which is in the mid to high 90s by the end of the year, Rupesh. The household is ahead of personal care right now. Of course, personal care is our high margin stuff. So that's the one we're focused on the most right now.

Speaker 2

Yes. Just to give you an example on that Rupesh, right, we were in the low 60s on fill rate for personal care within the portfolio in Q2. We had 74% in the month July, so we can we have visibility into rapidly improving that number.

Speaker 1

Yes. And as far as vitamins go, if you keep in mind, You've grown off a really gigantic base the last couple of years with growth in 2020 2021. So although the growth rate is slowing down, it's because of the comps year over year, but last year Q3 was just a huge spike for the in the quarter because of the delta variant, Q3 of last year. So consequently, that's a really tough comp. And so consequently, we expect it to go negative year over year.

Speaker 2

Yes. As an example, Rupesh, Q3 last year, the category grew 33%, the rest of the quarters grew 19% Q1, Q2 and Q4. So it's just It's more of a comp issue than I do. Yes.

Speaker 4

Okay. That's helpful. And then just on the cost side, obviously cost pressures continue. Just based on your visibility right now, like any sense the cost pressures could be peaking and maybe if you look forward to next year, some of these pressures could roll over. And then just more color on the risks that you see to your cost outlook for the balance of the year?

Speaker 2

Yes. I'll leave you with 2 thoughts really. On the cost side, We do think there'll be inflation next year. We think that inflation will only come down as demand comes down. And so if we enter into a recession, we think that demand will start to slow, in general for the macro economy.

Speaker 2

So we're Now usually we would be, I don't know, maybe 50% hedged from a commodity perspective for next year by now. We're not hedging at all as an example. Hopefully that gives you some context.

Speaker 4

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Chris Carey from Wells Fargo, your question please.

Speaker 5

Hi, good morning everyone.

Speaker 1

Hello, Chris.

Speaker 5

Hi. I'm just maybe we could talk a bit more about the phasing for the year, Q3 versus Q4. I'm specifically trying to understand really the snapback that you're expecting in Q4 and what's driving that and perhaps within that you can comment on whether there are specific volume headwinds you expect to to prove in Q4 versus Q3, do you have specific promotional plans in Q3, which will not reoccur in Q4? Is this really a call on the consumer trading down and that benefit accruing to you? So, just trying to get some incremental context and really confident on that recovery that you're expecting now in

Operator

the Q4 relative to the Q3. And I have a follow-up.

Speaker 1

Yes. Okay. Well, there are a lot of factors So for example, the fill level improvement, we're leaving money on the table in several categories. So we do think that once that gets fixed, particularly on the personal care side, that we're going to benefit from that and that's more back end loaded Q4 Thank you, Q3. It is true that we've got both trade and advertising in place for Q3 and Q4.

Speaker 1

We do think as the economy, the recession or what some people call a recession deepens that that the trade down will continue and accelerate. So that's an element of it as well. So I mean, you're calling out the right levers With respect to the second half.

Speaker 2

Yes, let me give you some numbers to go with that. So our guide for Q3 organically 1% to 3%, which implies a 5% plus number in Q4. And so as Matt said, personal care fill levels are fully back, Promotional support is there. We think trade down is accelerating as well in Q4. So all those reasons we think organically We're doing better.

Speaker 2

That helps EPS as well, of course. But we also have some higher inflation expectations in Q3, higher SG and A As we had some one time catch up year ago for incentive comp was a lot lower a year ago and then we have higher tax in Q3 as well. So We believe both organically and from an EPS perspective, we have an inflection going from Q3 to Q4.

Speaker 5

Okay. Thank you. Then the quick follow-up would just be, in Q2, pricemix was below our expectations, perhaps a bit below your expectations going into the quarter. I'd be curious your thoughts there. Despite what we're seeing as pretty strong pricing in consumption data.

Speaker 5

And so can you maybe provide some context on why that's happening? Did promotional activity to accelerate heavier than you were expecting in the quarter and now that's flowing into the back half of the year and perhaps that's why the organic is getting called down in addition to volume. Were there specific mix impacts that were a bit worse than you had been expecting? So really what I'm trying to get a sense of is the Q2 price mix key drivers and just how that's really informing your back half expectations? Thanks.

Speaker 2

Yes. It's pretty straightforward, Chris. No change really to our pricing aspect of it. That's all going well. We threw out another round of laundry and litter That's going well, early days.

Speaker 2

We'll continue to evaluate whether we need to do incremental pricing as cost inflation happens. But Q1 to Q2, we decelerated from a price volume price mix perspective from 7.8 in Q1 to 6.2. That entire deceleration is negative mix from WATERPIK. And what do I mean by that? I mean, consumers Trading down from a higher price unit to a lower price unit.

Speaker 2

So that's the entire delta right there. It inflects positively again in Q3 and Q4 for the company because of the next round of laundry and litter price increases.

Speaker 5

Okay. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Olivia Tong from Raymond James. Your question please.

Speaker 6

Great. Thanks. First, I just want to follow-up on that and ask you to talk a little bit about your pricemix expectations from here. Given that you called out your 2 highest price per unit categories as sort of seeing the deceleration, how you think about that, going in just overall for this slowdown period, the macro slowdown period, how you're thinking about price mix? And then just broadly, if you could just comment about what you're seeing in terms of elasticities of demand, private label, as private label starts coming back, how that's impacting your view on trade down?

Speaker 6

It sounds like you're expecting some benefit from trade down, but do you see any risk that the lower end of your consumer base could potentially trade down as well? Thanks.

Speaker 2

Yes, I'll take the price mix a question. So first half, volume would be down 4% and price mix was up 7%, and that's how we got first half Result of around 3%. We think the second half is down 3% on volume. That's really a slowdown on the discretionary stuff Waterpik shower heads, for example, are flawless, and offset by the value trade down and whatnot. Price mix on the other hand is pretty consistent, 7% in the first half, 7% in the second half.

Speaker 2

And that's what I said before to Chris was really lower mix on WATERPIK as the trade down happens there 4 is a negative, but then the positive is higher price on laundry and litter.

Speaker 1

Yes. And your question about the private label, as I said in my opening remarks, So there's 5 categories, where we compete with private label and those private label shares have been largely stable. Well, the one that's moved up a little bit is litter. It's moved up about 1%, it's now 11.9%, but we haven't been interacting With private label in that category as opposed to some of our competitors. So that's why we feel confident that that private label is at least in the near term next 6 months, we don't expect that it's going to be a big issue for us.

Speaker 1

Does that help you, Olivia?

Speaker 6

Yes, that's perfect. Thanks.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Bill Chappell from Truist. Your question please.

Speaker 7

Thanks. Good morning. A couple of just specific, I guess, housekeeping type things. One on kind of the cost environment and your hedges. Historically, I thought you did some hedging on diesel costs.

Speaker 7

So didn't know with the run up of energy prices, the potential kind of come back of energy prices, if you're locked in more or have some a potential where that could be a relief in the back half. And then the second one just on currency and FX exposure. Can you just remind us versus the euro, the peso, etcetera, kind of what your exposure is and what we should be looking for? Thanks.

Speaker 2

Yes. So I'll take the commodity one first. I think I said earlier, we have very limited hedges out for 20 20 3. We entered this year and I'd say we're about 80% hedged. Most of the cost inflation that we're talking about is Primarily raw material and pack and that's coming through incremental discussions with 3rd party manufacturer It just takes a while for it to go through the supply chain.

Speaker 2

Our outlook this time versus last time is minimal on commodities, I would say. Of course, yes, diesel is up and but that is hedged to some degree and ethylene is up and that is hedged to some degree. So That's on the commodity side. On currency, a couple of comments on currency. For us, we're not that exposed to currency.

Speaker 2

We just called out the 1% drag on the top line, 1% drag on the bottom line. We don't, Of course, hedging in translation transactionally, we hedge about 80% of our transactional exposures, whether that's the euro or the Canadian dollar.

Speaker 1

Great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Andrea DeCheza from JPMorgan. Your question please.

Speaker 8

Good morning and thank you. I was hoping if you can comment on the mix impacts on gross margin you may see with VMS going negative in Q3 and possibly Q4. I'm assuming that's a headwind. I just want to confirm. And also, are you seeing a down trade of that category from your brands into private label?

Speaker 8

And I do remember you got away from some of the contracts in private label. So I was just double checking If it happens, this down trade, as you mentioned in some categories like laundry, that helps you. In this case, you may not Be helped if you are no longer making private label for some of these customers. Just want to clarify.

Speaker 1

Andrew, this is Matt. Just with respect to private label, Private label shares in vitamins are stable. So we're not seeing growth in private label. The only one Only of the 5 categories we compete, it's only litter that had an uptick.

Speaker 2

And you're right. We walked away from Private label manufacturing for vitamins a couple of years ago and we have no plans to get back into that. On gross margin mix, There's not much of a mix impact on vitamins, whether it grows or it declines from a revenue perspective. Just to talk about gross margin In aggregate, right, in Q1, we were down 190. In Q2, we said it was going to look a lot like Q1 and it did down 220.

Speaker 2

Q3, we're going to improve from a little bit from Q2, but it's not going to be the same improvement that we had thought previously. And then in Q4, we think we're going to inflect positive. And it's the same reasons why we talked about last time, personal care fill levels, Productivity builds, round 2 of pricing and gross margin in Q4 last year was one of our lower quarters. So I know you didn't ask the detail on gross margin, Andrea, but I thought that would be helpful in context.

Speaker 8

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

Operator

Thank you. One moment for our next question. And our next question comes from the line of Kamil Gajuwala from Credit Suisse. Your question please.

Speaker 9

Hi guys. A quick question on inventory, to make sure we heard it correctly. So, inventories are I guess, inventories you need to work through a little bit. So should we assume that your results are going to lag what we see in terms of consumption for a little while. And then can you also maybe talk about what inventories look like at retail for particularly for WATERPIK and some of the discretionary items as discretionary items at retail series of other categories seem to to be quite high.

Speaker 2

Yes, I think you saw in the release we said we had to get back in line by year end. And really, WATERPIK wasn't really because of consumption per se, it was more because we were trying to get ahead of the Chinese lockdown that happened. So we built up supply. And so yes, it takes a couple of quarters to work through that, especially as consumption comes in a little bit. But We think we'll be in a good spot by end of the year on that one.

Speaker 2

Similar answer on FLAWLESS, we

Speaker 10

think we're going to be in

Speaker 2

And then at retail, I think in stock levels are good, Especially for our household business, I think where we're still struggling is our personal care as our fill levels are lower than we like, but we think that we're going to recover pretty quick in the back Yes.

Speaker 1

And you asked about the Waterpik as well on inventory at the on shelf or at the retailers. I think we kind of remind everybody is that Waterpik, about half to half that flosser business is online. And so there isn't a lot of inventory that's really carried by the online class of trade. So we don't see it as an issue there with respect to Waterpik inventories for softness in sales because of high inventories in the channel.

Speaker 9

Okay, got it. And then following up on Olivia's question a little bit. I know you mentioned many, many times private label share has been flat, but if we can maybe just talk about that consumer and the value part of your portfolio and just from a consumption perspective, not trading down or trading up, I know you look to benefit from trading down, but are you seeing any Just in terms of consumption, just with that consumer, isolating it to that consumer.

Speaker 2

Are you specifically talking about vitamins? No,

Speaker 9

no, no. I'm sorry. I'm talking about the 40% of your portfolio that would be considered value. I'm just curious what you're seeing in terms of that consumer. I know you're not seeing trading down, but maybe they're consuming less buying, less clearing their pantries.

Speaker 9

Curious what you're seeing.

Speaker 1

Well, if you think about value detergent, some of the numbers that I quoted just like in the last before we period ended July 17th is that value laundry detergent is up 11% And deep value is up 1 and premium is a minus 1. So we would say and by the way, there isn't a lot of private label In the laundry category, liquid laundry detergent, it's generally mid tier, so it's higher priced than our brands. So that's not an issue when it comes to that category. In litter, the category grew like 11%, 12% in In the quarter, we grew even faster and it wasn't just our premium brand, our black box, Kump and Seal, But our yellow box, which is the value, grew double digit as well. There is a litter private label, but as I said earlier, it's Ticked up 1% to 11.9%, but we haven't interacted as much with the private label as some of our peers.

Speaker 1

The other big category would be vitamins where it's stable. And just a few other ones just to mention, so you have baking soda And also oral analgesics, which is Orajel. And again, the private label shares are pretty stable right now. Thank you.

Speaker 11

Okay.

Operator

One moment for our next question. And our next question comes from the line of Steven Powis from Deutsche Bank. Your question please.

Speaker 2

Hey, guys. Good morning.

Speaker 10

I just want to start going back to vitamins. I think your call in the 3rd quarter is pretty clear, where do you think that category goes your business goes beyond 3Q, number 1? And then as you think about the fill rate improving in vitamins, is that more to be a function of your capacity improving or is it actually the category kind of comes back to you and alleviates the pressure through declines.

Speaker 2

Yes. Hey, Steve, it's Rick. I think the back half of the category will be under pressure As it was elevated and really all of Q3 for the delta spike last year and a little bit in Q4. So that's our Now remember, if you take a big step back, the category has more than doubled over the last 2 or 3 years. So again, we're really happy with the vitamin category.

Speaker 2

In terms of fill levels for vitamins, they get better every single day. We're really having 2 issues on 2 SKUs and that's really driving the issue right now and it's ingredient related and we've finally Work through alternates in the next 30 days or so, we should be back on vitamins. Yes.

Speaker 1

And Steve, the other thing just to add to what Rick said, yes, we're Super happy with the growth of the category over the last few years. But keep in mind that the other tailwind is the transition from Tilson capsules to gummies. That's going to sustain the growth of the gummy category in the future. And of course, the new ingredients and new product offerings is the other catalyst.

Speaker 10

Yes. And And you guys are value priced in the category too. Yes. Okay. So then I wanted to pivot also, a month and a half ago, we talked a good deal about how your portfolio has evolved?

Speaker 10

Yes. And you guys are value priced in the category too. Okay. So then I wanted to pivot also, a month and a half ago, we talked a good deal about how your portfolio Has evolved since 2009, and I thought you did a good job of underscoring how in fact there are still a lot of similarities today versus 2,000 And your resiliency in terms of the 40% value exposure. I was at least reassured.

Speaker 10

I guess, now I'm wondering if that was a bit of a false sense of security, just given the fact that you've added discussionary categories, and I appreciate it's only 10% of the portfolio now, but it's obviously having an impact. So I'm curious, number 1, just what your outlook is on those categories going forward and what kind of drag this may be if the economy evolves the way that it seems like you're positioning for in 2023, number 1. And number 2, I'm wondering if it changes at all how you approach incremental M and A, because a good deal of your M and A with FLAWLESS and WATERPIK has skewed to these discretionary categories of late. And just wondering if this experience changes that at all?

Speaker 1

Yes. Well, we'll start with M and A. Our 2 most recent acquisitions We're Zicam in a couple of years ago in 2020, which got us into cold shortening category and then TheraBreath, which got us into Mouthwash. So we continue to seek out Everyday Essentials. We're very happy with the Waterfik acquisition.

Speaker 1

Of course, it's discretionary. It's a longer purchase cycle. But this business grew high single digits Since we bought it in 2017 and long term, it has terrific growth prospects. So for the long term investor, this is a good brand to own. We've got a lot of opportunity outside the U.

Speaker 1

S. And yes, okay, we're going sideways right now, but Keep in mind that the change in EPS is driven by cost and currency. We've left money on the table in the first six because of our fill rates. If not for that, we'd be in far better shape, but it's water under the bridge. We do think by the end of the year, we'll have our fill rates back in line.

Speaker 1

We'll be growing from a smaller base with respect to Waterpik, but we do think that once the economy settles down again, that we will rekindle the growth of Waterpik. And as far as acquisitions go, those acquisitions, Waterpik met all of our We don't have a criteria that it's got to be that it can't be discretionary. But certainly, we are oriented towards buying everyday essential brands and you can expect that from us in the future.

Speaker 11

Okay. Thank you very much.

Speaker 5

Okay.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Lauren Lieberman from Barclays. Your question please.

Speaker 12

Great, thanks. Just wanted to ask a little bit about pricing. So I think when you spoke at recent conferences and even last quarter, you discussed that you thought, should you need incremental pricing beyond the July increases that you've mentioned, they would come more likely in the form of package size adjustments. So I was curious, A, if that's still the case? And then B, I think you'd also mentioned that those that that approach would require some CapEx investment and some lead time to deal with tooling.

Speaker 12

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

Speaker 2

Okay. Hey, Lauren. Really from a pricing perspective, you're right. We said last quarter that Primarily next year, we're focused on pack size versus pure price increases. Now of course, with new Inflation and new news, we will react accordingly and we'll see if we have to do any incremental price changes as well, right.

Speaker 2

So I'd say it'd probably be both. On CapEx, it's immaterial to CapEx outlook on change parts for like a line, for a carton or for a new mold for a bottle. So it's a handful of $1,000,000 or so. It's not that impactful.

Speaker 12

Okay. So relative to the comments previously about the CapEx, it was more about the time needed to implement rather than it being a cost?

Speaker 2

Exactly right. It's more about 6 to 12 months in order to design a mold, cut a mold, To do change parts order to change parts for a line to do a different size carton. Those are the types of things that take time.

Speaker 12

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

Operator

Thank you. One moment for our next question. And our next question comes from the line of Dara Mastinini from Morgan Stanley. Your question please.

Speaker 13

Hey guys. To So just to follow-up on that. On the incremental $50,000,000 of cost pressure, are there any plans to take incremental pricing or is it more productivity in the pack size changes? I guess I just want to understand that incremental part. Obviously, there's always some timing lag, but is there concrete plans to take incremental pricing?

Speaker 13

And if not, I guess, why not?

Speaker 2

Yes, I think right now, like we just said with Lauren, we're really focused on pack size changes and adjustments that way, which is effectively a price increase, we just think not as severe for a consumer. And then if inflation continues to go and we We need to chase the ball downhill, we'll evaluate doing incremental pricing.

Speaker 13

Okay. And then on the demand elasticity front, the volumes appear to reacting more to pricing in some of your CPG peers, but obviously some of that may be more tied to supply. So just as you guys to sort of parse through the consumer demand elasticity so far in terms of what you're seeing at retail more than your shipments. Can you give us an update on where you're coming in versus what you expected and if you've seen any sequential change recently on that front. Yes.

Speaker 2

I think you hit it on the head, Dara. In general, our comments wouldn't change from last quarter. We saw a 20% to 30% better than expected on elasticities For volume, the new laundry and litter price increases just went into effect a few weeks ago, so it's kind of too early to comment. But if there's any noise, it's usually because of fill levels, not because

Speaker 13

Okay. And then last, just in terms of price gaps, Obviously, with a lot of substantial pricing and then more in July, are there any categories where price gaps have either expanded where your premium or narrowed where you value where you think they may have gotten out of whack with competitors. I'm just wondering if you can characterize the competitive environment on the pricing front relative to the pricing that you guys have realized?

Speaker 1

Yes. Well, what I would say there is through the end of June, we were pretty happy with the elasticities. Remember, we have New price increases that are just hitting shelf in July, that will be for both laundry and for litter. So that's the one we're going to watch now over the next quarter. And as far as the promotional environment goes, there was A pullback in Q2, if you look at liquid laundry, for example, the sold on deal was around 31% And that was down 60 basis points or 70 basis points year over year.

Speaker 1

And there were some big pullbacks Brand by brand, so you look at Purex was down 500 basis points, year over year. We were down 3.40. So We pulled back because we were going through concentration. Now there's maybe pulling back as a way to modulate Price and also in litter, litter is also a category that promotions are down again year over year. Sold on deals around 11%.

Speaker 1

It's normally in the high teens. And then back to liquid laundry All right, 31% sold on deal, that's normally in the mid-30s. So the promotional environment It's been pretty tepid so far year to date. And as for our most recent price increases, we're going to kind of watch the Q3 and see how they to react with our peers.

Speaker 2

Dara, I will say that in general, we're happy with all of our price gaps. And even when we've led In a category, if you take a step back, then the category has also reacted. And so within a few months, all the price gaps are back to normal.

Speaker 13

Great. Thanks, guys.

Operator

Thank you. One moment. And our final question for today comes from the line of Jason English from Goldman Sachs. Your question please.

Speaker 11

Awesome. Thanks, folks. I guess I'm closing that. Thanks for swapping me in.

Speaker 1

Hey, Jason.

Speaker 11

I think Hey, guys. I think I heard you in your prepared remarks that you expected, maybe in the press release, but I don't know it's all jumbled in my head at this point in time. But you have an anticipation of accelerating trade down in the Q4, which categories do you expect to benefit the most from that?

Speaker 1

Well, laundry is the big one, where we expect a trade down. I'd say that's the big swinger. We've already seen it. We start to see this. Remember in Q1, what we said was that the previous several quarters that value detergent had been losing share to premium.

Speaker 1

That changed in Q1 and that kind of held share versus premium. Q2, value starts growing faster And in the latest 4 weeks, value detergent, it's like I said, is up significantly 11% versus the premium down 1%. So, we do think that that's going to accelerate. Now, that could be muted a bit with our most recent price increases and consequently, we have to see what happens with our competitors and where the timing of their price increases. But I think everything is going to be in place by the Q4, many price increases that others have been contemplating.

Speaker 1

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

Speaker 11

And P and G talked about laundry on its earnings call earlier, and they did reference modularity promotional activity tapering back, But not to get more price, but because they hit a capacity ceiling that's now been resolved. And so they suggested that they're going to start leaning back in now, more advertising, more retail merchandising. If that transpires, how much or how many of that jeopardize your outlook and your expectations for the Q4?

Speaker 1

Yes, you got to remember Tide Premium is twice the price of ARM and HAMR. So I don't think that that's as big a factor. Now, yes, it's true Tide simply is still is around that was not in place back in 2,009 In the last recession, but up until our recent price increase, we had a significant price gap With Tide simply and we'll have to see what happens with their pricing in the second half, pricing and trade.

Speaker 11

Yes, fair point on the spread there.

Speaker 1

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

Operator

Thank you. This does conclude the question and answer session of this program. I'd like to hand the program back to Matthew Farrell for any further remarks.

Speaker 1

Yes. Okay. Well, look, it's a simple story. Our reported now for the full year is 4% to 5%, Organics 3% to 4%. And we did call down the EPS from 4% to flat.

Speaker 1

Why? The 1% is currency and the rest of the 3% is cost. Shares are healthy, fill rates are improving, trade down is happening and we've got big support in place for the second half And we'll talk again with you at the end of October.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
Church & Dwight Q2 2022
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