Church & Dwight Co Inc

NYSE:CHD

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen and welcome to the Church & Dwight Second Quarter 2020 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 risk and uncertainties and other factors that are described in detail in the company’s SEC filings.

I would now like to introduce your host for today’s call, Mr. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir.

[Matt Farrell, Chief Executive Officer]

Good morning, everyone. Thanks for joining us today. I’ll begin with a discussion of the impact of COVID-19, followed by a review of the Q2.

Now, I’ll turn the call over to Rick Dierker, our CFO and when Rick is finished we’ll open the call up for questions.

I'd like to give you a sense for how Church & Dwight has reacted to the pandemic. The virus disrupted just about everything. Consumer behavior, retailer operations, our supply chain and how we work. We pivoted every aspect of our business to meet the new challenges. Initially, we had a daily huddle at 8:00 a.m. seven days a week to address employee safety, production levels, co-packer operations and shipment and patterns. Today, we meet five days a week. We increased our communications with retailers and changed our marketing messages. We moved people to focus on the online class of trade to create and upload new content. To speed up our reaction time, we created new data feeds of POS data and retailer in stock levels. We added more co-packers to our supply chain network. We conduct weekly surveys of our consumers. And all of our efforts are paying off. The agility and resilience of the Church & Dwight team shows up in our results.

Our priorities continue to be employee safety, meeting the needs of consumers and retailers, helping the communities where we live and ensuring the strength of our brands. Our plant, warehouse and laboratory employees have done an exceptional job in keeping safe, which has contributed to our ability to operate our supply chain. The rest of our employees are working remotely and doing a super job running the company.

We have been supporting our communities through monetary and product donations, including the contribution of personal protective equipment. In June, we began producing hand sanitizer in our U.K. plant for both donations and employee usage.

With respect to consumers and retailers, we are taking steps to increase both short and long-term manufacturing capacity, and we continue to work closely with suppliers and retail partners to keep pace with increased demand. A good example is our installation in Q2 of a new liquid laundry line in our New York plant, which was quite a feat given the obstacles presented by COVID. And as I mentioned before, we've added more co-packers to ensure steady supply for other categories.

Now let's talk about the results. Q2 was an exceptional quarter. Reported sales growth was 10.6%. Gross margin expanded by 220 basis points, and adjusted earnings per share was $0.77. The revenue, gross margin, earnings and operating cash flow were all significantly higher than Q2 last year, driven by the increase -- by a significant increase in demand for many of our products.

Organic sales grew 8.4%, driven by higher consumption, restocking of retailer inventories and lower couponing. Our exceptional first half is a testament to the diverse set of categories that we compete in and the strength of our brands.

Regarding e-commerce, even more consumers have moved online. Our online sales increased by 75% in Q2, as all retailer.coms have grown. We began the year targeting 9% online sales. In Q1, 10% of our sales were online. In Q2, it was 13%, and we expect second half online sales to be equally strong.

We continue to conduct research on the purchasing habits of U.S. consumers. Of the categories that we are following, there is continued consumer worry about the ability to leave the house and concern that stores and websites will run out. Consumers report that they are consolidating shopping trips and continue to stockpile to ensure that they have enough product for a couple of weeks at a time.

Similar to last quarter, I now want to talk about consumption and shipments. Year-to-date shipment and consumption patterns are back in balance for our brands in the 15 categories that we compete. We do have some additional opportunities in gummy vitamins and ARM & HAMMER baking soda as shipments are still well behind consumption.

In Q2, we saw a double-digit consumption growth in gummy vitamins, women's hair removal, cleaners and baking soda. On the other hand, restrictions on consumer mobility drove double-digit consumption declines for WATERPIK, TROJAN condoms and BATISTE shampoo. People are just not socializing due to government restrictions under mobility, which has a big effect on some personal care categories.

July consumption for the U.S. business is tracking to be over 10%, led by our gummy vitamin brands, OXICLEAN additives and baking. One-third of our July consumption growth is attributed to our gummy business. In July, and I think this is important, only two of our 15 brands, and that would be BATISTE and TROJAN, showed negative consumption. In contrast, in the month of May, eight of our 15 key product lines showed negative consumption. So consumption is trending positively.

Now shipments. July shipments for the U.S. business are tracking to be up high single-digits. Shipments of gummy vitamins, OXICLEAN additives, baking soda and WATERPIK are all up double-digit in July. Our gummy vitamins have been on fire. Consumption for May, June and July has been averaging up over 40%. And there is an increased consumer focus on wellness, and it is likely that we will reach a permanently higher level of consumption.

We are looking at third parties to supplement our existing capacity right now. You may recall that we announced our exit from private label early in Q1, and that turned out to be a timely decision because it helped free up capacity for our brands. Regarding our laundry and litter businesses, consumption is recovering.

You will recall that there was massive pantry loading in laundry and litter in the month of March. The laundry pantry loading appears to be absorbed as our consumption improved from being down, low single-digits in the quarter to up approximately 10% in July year-over-year. Similarly, ARM & HAMMER litter improved from negative consumption in Q2 to up approximately 5% in July. So our two big categories are recovering nicely.

In the water flosser category, WATERPIK is starting to recover from the steep decline in April, when consumption was down 55%. Q2 consumption was down significantly due to retailer closures, deprioritization of water flossers by some retailers and closure of dental offices.

Remember that dental professionals are an important source of water flosser recommendations, which influences first-time buyers.

The most recent surveys indicate that 95% of dental offices are now open, although most are at a reduced capacity. The good news is, monthly consumption of WATERPIK -- water flossers is now positive. Although, our lunch 'n learn activity continues to be significantly curtailed, we intend to address this with incremental advertising in the second half.

The FLAWLESS brand has had strong consumption growth in May, June and July, due to reduced consumer access to salons. The launch of our new full-body device, NU RAZOR, was perfectly timed. FLAWLESS is one of our brands that could benefit from the at-home grooming trend, and we tend to strongly support FLAWLESS with advertising in the second half.

Now private label. Private label shares is something we track closely. As you know, our exposure to private label is limited to five categories, and the private label shares were generally unchanged in Q2, and it was also true in Q1. Because of the virus, consumer trends are emerging, which affect our business, including a focus on cleaning, personal wellness and new grooming routines. These consumer trends may endure over the long term, and if they do, we believe we are well positioned.

Now, international. Our international business came through with slightly positive organic growth in the quarter, driven by strong growth in our GMG business, that stands for Global Markets Group. In particular, China and Asia Pacific turned in a remarkably strong performance in the second quarter. And in July, our GMG business is off to a strong start. And we're seeing strong POS recovery in Canada and Europe as well is starting to recover.

Our Specialty Products business has had three straight quarters of organic growth, and we expect continued organic growth for our Specialty Products in the second half.

Now turning to new products. Innovative new products will continue to attract consumers, even in this economy. In Q2, we launched a new ARM & HAMMER laundry detergent called CLEAN & SIMPLE, which has only six ingredients plus water and this compares to 15 to 30 ingredients for the typical liquid detergent, and has the cleaning power comparable to our best-selling consumer favorite, which is ARM & HAMMER with OXICLEAN. However, because of retailer stocking issues in the second quarter, we eliminated advertising, trade and couponing support that we had planned, and we’ve pushed it to the second half.

We're excited to report today that we have another big product launch this year. The second launch is in the Clumping Litter category. This month we began shipping AbsorbX, which is a revolutionary new ARM & HAMMER lightweight litter made from desert dry materials. It absorbs wetness in seconds to trap and seal orders fast. AbsorbX is 15% lighter than our existing lightweight, and it's 55% lighter than our regular Clumping Litter.

We have a significant amount of advertising, trade and couponing plan for the second half to get behind this exciting new launch. And by the way, here's a fun fact, our friends at Clorox just posted to their website a new litter variant called Ultra Absorb. And we'll take that as a complement. Imitation is the greatest form of flattery.

Now let's turn to the outlook. We had an exceptional first half, and we were running well ahead of our original full year EPS outlook. We reinstated our EPS outlook with 13% growth, which is far above our evergreen target of 8% annual EPS growth.

As in prior years, when we find ourselves in this position, we use the opportunity to invest in our future, which we intend to do in the second half. And you may recall that just last year, we had had this exact same opportunity to invest, and our EPS was down 4% in Q4 2019 as a result. This year, we just got to a similar point much earlier. Rick will provide some details on those investments when I turn the call over to Rick. It's important to note that we continue to take the long view in running Church & Dwight.

Now in conclusion, there are lots of reasons to have confidence in Church & Dwight. The great thing about our company is we are positioned to do well in both good and bad economic times. The categories in which we play are largely essential to consumers. We have a balance of value and premium products. Our power brands are number one and number two in their categories, and we have low exposure to private label.

We're coming off one of the best first half we've ever had and are entering this downturn in a position of strength and with a strong balance sheet. And with a strong balance sheet, we continue to be open to acquire in a TSR accretive businesses. And finally, we have the resources, common sense and the ambition to ensure that our brands perform well in the future.

And next up is Rick to give you details on the second quarter.

[Rick Dierker, Chief Financial Officer]

Thank you, Matt, and good morning, everybody. We'll start with EPS. Second quarter adjusted EPS, which excludes an acquisition-related earn-out adjustment, grew 35% to $0.77 compared to $0.57 in 2019. The EPS increase was largely driven by higher sales due to continued high consumer demand for our products and higher gross margins.

As we discussed in previous calls, the quarterly earn-out adjustment will continue until the conclusion of the earnout period. Reported revenue was up 10.6%, reflecting a significant increase in consumer demand for our products due to COVID. Organic sales were up 8.4%, driven by a volume increase of 4.9% and positive product mix and pricing of 3. 5%. Organic sales growth was driven by higher consumption, lower couponing and recovery of retailer and stock levels.

Now let's review the segments. First, Consumer Domestic. Organic sales increased by 10.7% due to higher volume and positive price mix. We typically try to break down the organic growth for you. 6% is consumption growth, reflecting strong, tracked and untracked in e-commerce growth, 1% from lower couponing, and then approximately 3.5% from improving retail and stock levels.

Overall, growth was led by ARM & HAMMER liquid laundry detergent, VITAFUSION and L’IL CRITTERS gummy vitamins, ARM & HAMMER clumping cat litter and baking soda and OXICLEAN stain fighters.

Consumer International delivered 0.6% organic growth due to positive price and product mix offset by lower volume. Growth was driven by BATISTE dry shampoo, FEMFRESH feminine hygiene portfolio and ARM & HAMMER liquid laundry detergents in the Global Markets Group business, partially offset by Europe and Mexico, domestic market declines. Of note, Asia Pacific had strong performance in the quarter. For our SPD business, organic sales increased 3% due to higher volume, offset by lower pricing. And demand for our products continues to grow in the poultry industry.

Turning now to gross margin. Our second quarter gross margin was 46.8%, a 220 basis point increase from a year ago due to a reduction in trade, couponing and improved productivity. In terms of the gross margin bridge versus year ago, positive price volume and mix contributed 220 basis points. Productivity added 140 basis points, offset by higher manufacturing costs of 110 basis points was driven by 110 basis points related to COVID supply chain costs and then improved commodity costs were offset by higher manufacturing costs.

Finally, a drag of 20 basis points from the prior year policy accounting impact and a 10 basis point drag from FX is how we get to 220 up for the quarter.

Moving now to marketing. Marketing was down $6.8 million year-over-year. Marketing expense as a percentage of net sales decreased to 180 basis points to 10.2%. Due to retailer out of stocks, marketing spend was significantly reduced and shifted to the back half to support new products.

For SG&A, Q2 adjusted SG&A increased 30 basis points year-over-year, primarily due to higher incentive comp, intangible costs related to acquisitions and investments in R&D. And for net operating profit, the adjusted operating margin for the quarter was 21.5%.

Other expense all-in was $14.7 million, a slight decline due to lower interest expense resulting from lower interest rates. And for income tax, our effective rate for the quarter was 19.6% compared to 18.7% in 2019, an increase of 90 basis points, primarily driven by lower stock option exercises.

And now turning to cash. For the first six months of 2020, cash from operating activities increased 70% to $599 million due to higher cash earnings and a decrease in working capital. This includes deferring an $81 million income tax payment in line with the CARES Act. Within the quarter, we fully repaid the revolving credit line that was accessed in Q1 during the early days of COVID.

As of June 30th, cash on hand was $452 million. Our full year CapEx plan has gone from $80 million to $100 million as we begin to expand manufacturing and distribution capacity, primarily focused on laundry, litter and vitamins.

And now turning to the outlook. Company is now reinstating the 2020 outlook, given we have half the year behind us and strong sales growth in July. However, due to quarterly volatility in retailer orders and consumer consumption, we will only provide a full year outlook. We now expect approximately 9% to 10% full year 2020 sales growth and approximately 7% to 8% organic sales growth.

Adjusted EPS growth is expected to be 13% above the high end of our original 7% to 9% outlook. This implies a front-end loaded year and flat EPS in the second half as the company has shifted promotional and advertising dollars from the first half to the second half in support of new products.

Turning to gross margin. The first half gross margin expanded 150 basis points. We expect that second half will contract by a similar amount. Half of it is simply the year-over-year impact of acquisition accounting. The balance reflects incremental COVID costs as well as WATERPIK tariffs, new product support that Matt mentioned, incremental manufacturing and distribution capacity investments. And so net, that means we'll be slightly below our original full year margin outlook.

As you heard from Matt, we intend to make incremental investments in the back half of 2020. Some examples here include a new third-party logistics provider, outside storage to handle surge inventories, preliminary engineering on capacity decisions. VMS outsourcing costs, as well as other investments around automation, consumer research and analytics.

Lastly, consistent with how we've been managing throughout the crisis, our outlook may continue to adapt, and we may continue to defer trade couponing and advertising even into next year, depending on consumption, the resurgence of COVID-19 or supply constraints.

And with that, Matt and I would be happy to take any questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Bill Chapell with SunTrust. Your line is open.

[Bill Chapell, SunTrust]

Thanks. Good morning. Congratulations.

[Matt Farrell, Chief Executive Officer]

Hey. Thanks, Bill.

[Bill Chapell, SunTrust]

I guess, first, just on those last kind of commentary, Rick, the way you accrue for advertising and marketing means that even though you've, kind of, postpone stuff from first half to second half, it doesn't really – didn't really affect the quarterly accrual. Is that correct? And then I guess, if you make the decision to push it to next year, would that then create a reversal or something as we look to model for the back half?

[Rick Dierker, Chief Financial Officer]

And let me try to simplify it, Bill. The advertising matches when we spend the money, right? It matches -- when we're trying to launch the product. So spend in the Q1 and Q2 for the -- for new product launches was actually deferred. So we didn't spend it. We said consumption was so strong. So in Q3 and Q4, that spending for the litter and laundry innovations that Matt went through will be spent. And so it's just – actually, the dollars will go out in Q3 and Q4.

[Bill Chappell]

Got it. And then just from -- I understand you're not seeing much pressure from trade down to private label, do you think you're seeing a whole lot of benefit from consumers trading down to your value part of your portfolio, or is it really just things are hitting so well and the premium side is hitting so well, it's not really affect -- and it's tough to tell at this point?

[Matt Farrell, Chief Executive Officer]

Yes Bill, it's Matt. It's hard to tell right now because, as you know, those $600 weekly checks have been helping quite a bit. So as far as disposable income goes, so that's been propping up consumers. It could be more likely that to happen in the second half. But when you talk about shares, I mean, ARM & HAMMER liquid laundry was up 80 bps in the quarter to 13.9%.

But I think it's too early to make a lot of judgments about share movements, particularly looking at the second quarter because you had a few months there where you had the shelves wiped out. And depending on whether or not that you had product on shelf, dictate whether or not consumer picked up your product. So I think the important thing to think about is that, retailer in-stock levels have normalized. And so now that you have normalized in-stock levels, you can expect promotional activity to start normalizing as well because that was all eliminated from the second quarter.

[Bill Chappell]

Got it. So you are seeing promotional levels kind of normalize in July?

[Matt Farrell, Chief Executive Officer]

No, I am saying, we expect it to happen in second half.

[Bill Chappell]

Okay. Great. Thanks so much.

[Operator]

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Your line is open.

[Rupesh Parikh, Oppenheimer]

Good morning and thanks for taking my question. Also congrats on a great quarter.

[Matt Farrell, Chief Executive Officer]

Thanks. It’s a pleasure.

[Rupesh Parikh, Oppenheimer]

So I guess to start off, first on FLAWLESS, at least during our check, we definitely saw out of stocks on FLAWLESS at some of the retailers. So just curious where you are from an out-of-stock perspective? And then as you look at FLAWLESS, obviously, it's now been a few quarters since you bought the asset. Would you say, it's now back on track as you guys are really envisioned when you made the acquisition?

[Matt Farrell, Chief Executive Officer]

Yes. Well, if you measure back on track by -- how sales look in Q2 year-over-year, we were actually up. So in spite of the fact that you had all these store closures, the people buying product online has helped us significantly.

[Rick Dierker, Chief Financial Officer]

Yes. And Rupesh, this is Rick. Just to the context. Remember, FLAWLESS was down about 20% in Q1. It's positive in Q2, which is great. Out of stocks are exactly right, when you have strong consumption like we've seen, above and beyond what we expected and we have out of stocks, and we're in the high 80s, -- mid to high 80s at retail when you do the blended average, and we expect that to improve by the end of August.

[Rupesh Parikh, Oppenheimer]

Okay. Great. And then I guess one more question. So as you look at some of the trends that you're seeing related to COVID, obviously cleaning strong, vitamins are strong. Like are there new opportunities you guys see perception right down the road just related to some of the trends you're seeing right now, in your business and from a consumer perspective?

[Matt Farrell, Chief Executive Officer]

Well, gummy's is an obvious one. To the extent that new product launches and gummies, I think, will be well received not only this year, but next year. I think cleaners, is, just probably an area we have an opportunity to expand. We're going to expand opportunity to expand. We're going to expand capacity there.

We can improve our claims. So antibacterial claims, which we haven't had a lot of those on our products. We can now introduce. That takes a little bit of time to do that because you have to get it registered with the appropriate government agencies. But that's one that could help us, and that would be for OXICLEAN as well as Kaboom Cleaners and a few others.

[Rupesh Parikh, Oppenheimer]

Okay. Great. Thank you.

[Matt Farrell, Chief Executive Officer]

Okay.

Operator: Thank you. Our next question comes from Nik Modi with RBC. Your line is open.

[Nik Modi, RBC]

Yeah. Good morning everyone. I was …

[Matt Farrell, Chief Executive Officer]

Hi Nik.

[Nik Modi, RBC]

…hey, I was hoping you can just opine on direct-to-consumer, not necessarily going through, third party but obviously, the shift online is going to be permanent. A lot of new consumers coming online some of the older demographic, how do you think about philosophically, third-party e-commerce versus direct-to-consumer?

And I know it's a very expensive proposition, but it seems like this is something that might need to be done broadly across the consumer space. So, I just wanted to get your thoughts around that. And how you think about that from a kind of build in-house or from a kind of build in-house or from a kind of build in-house or potentially do it through M&A? Thanks.

[Matt Farrell, Chief Executive Officer]

Yeah. Hi. Direct-to-consumer is a difficult path for any one particular brand to follow. Generally, to be successful there, I think you really have to have a great deal of uniqueness. And oftentimes, a high ring, in order to afford a direct-to-consumer website.

So consequently, it would appear that the larger -- the dedicated retailer.coms, whether it's Amazon or walmart.com, commscope.com. That seems to be the destination for most brands, unless there is some uniqueness that can justify direct-to-consumer.

[Nik Modi, RBC]

Got it. And then, just from an innovation standpoint, obviously, you're talking about some new products hitting the shelves. How are resets looking? I mean, is this -- are you going to -- are your biggest retailers actually going to reset on time, in the fall, or is this something that's going to be a little bit off time?

[Matt Farrell, Chief Executive Officer]

Yeah. With some resets, we're delayed. There was a lot of disruption in the second quarter, just because rather than reset the shelves, the retailers directed the store personnel, just to get product on the shelves. So you saw some of that, the shelves. So you saw some of that, particularly in the laundry category, but I do think it's all going to catch up by the end of the third quarter.

[Nik Modi, RBC]

Great. I pass it on. Thank a lot guys.

Operator: Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is open.

[Kevin Grundy, Jefferies]

Great. Thanks. Good morning guys. Congrats on the strong results, and I hope you're both doing well. Matt, if I'd like to pick up on the prior question, just on some of the big trends we're seeing, but hopefully sort of tied into your longer-term thinking and implications for the company's top line growth relative to the 3% that you've targeted for a very long-time.

So the focus on cleaning and health and wellness and retailer focus on core SKUs. So fabric care, baking soda, vitamins, all should be structurally higher demand. And it seems like this will have a longer tail to it. Things probably go from bad to worse than half for TROJAN.

But it seems like, church should be a net beneficiary when you go to the portfolio in total, you should see higher demand. So how are you thinking about category demand longer-term as the organization is making decisions with respect to capacity and investment and potential implications relative to your longer-term outlook of 3% top line growth? And then I have a follow-up.

[Matt Farrell, Chief Executive Officer]

Well, we won't be quoting any numbers today, Kevin. But you've heard us say that we're looking to expand capacity for laundry and litter, and we're trying to debottleneck our plants for baking soda. And we've stood up some – a whole bunch of co-packers to help us on the cleaning side.

So you're right. When you look at this year, you see categories that are down double-digits like Dry Shampoo, WATERPIK, water flossers and condoms. But at some point, those are going to come back, right? And – but we see vitamins is going to be at – expected that to be a permanently higher plateau.

I think the longer behavior goes on – the behavior goes on the more likely it gets embedded in the consumer. So it would suggest that vitamins would be higher going forward. The cleaners would be higher going forward. That's just not as big a business for us, but it's a place we're going to invest now because we can see the opportunity with the anti back claims

Baking Soda, baking soda, since people have at home have – it's been rediscovered. In fact, we're up double-digits in baking soda month-after-month. We got to debottleneck our plants. That could also be a permanently high consumption level. So it's kind of a rollercoaster year depending on what category you're looking at. But the best case would be all these categories normalize. And then we got a handful of categories that are permanently higher consumption level, which bodes well for the long-term outlook for the company.

[Kevin Grundy, Jefferies]

Got it. That makes sense. And if I could just squeeze in one follow-up. Matt, I wanted to ask you about the market share opportunity in the laundry category because I’ve been a bit puzzled by one of your key competitors' strategy, not referring to the one in Cincinnati and their willingness to see market share almost across the portfolio seemingly with the exception of its most premium brand.

So while I wouldn't expect you to comment on any competitor strategy, laundry or otherwise, perhaps talk about the market share opportunity both in the value end and mid-tier of the U.S. laundry category. And then your expectations here, do we see any sort of change in posture? What do you guys have in your guidance with respect to any significant ramp in trade spending in that category perhaps in the back half of the year?

[Matt Farrell, Chief Executive Officer]

Well, laundry is our biggest category, and we've got great brands, and we like our prospects going forward. So we have ARM & HAMMER, we have OXICLEAN. You know we're exiting OXICLEAN, so we announced that earlier this year.

XTRA, XTRA has over time, slowly been taking share from one those other competitors that you mentioned. And although share is down for XTRA, we expected it to be down because we exited drug earlier this year. You may recall, we announced that. But going forward, we think that we're in a great place. We think we have a stronger brand. And we are the opening price point. We're deep value detergent. So we think going into this recession, we feel like we're well positioned.

And ARM & HAMMER, I said this before, we have an unfair competitive advantage. ARM & HAMMER is a over $1 billion brand. It's an advertised value detergent. And that is not true for the other variants or the other brands in the value tier. So over time, we continue to win, and we also innovate.

So you saw on our new innovation this year with ARM & HAMMER, CLEAN & SIMPLE. Simply fix. So the ARM & HAMMER, just sum take page out of Brita's book. Over the past year, the number of households that are buying ARM & HAMMER has increased about 3%. And so the brand gets stronger all the time. It's our biggest brand. So I think ARM & HAMMER detergent is in great shape. And I think Extra is well-positioned as the opening price point deep value, and particularly going into this recession, we think we're well-positioned long-term.

[Kevin Grundy, Jefferies]

Excellent. Thanks, Matt. Good luck, guys.

[Matt Farrell, Chief Executive Officer]

Okay. Thanks, Kevin.

[Operator]

Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is open.

[Lauren Lieberman, Barclays]

Great. Thanks. Good morning.

[Matt Farrell, Chief Executive Officer]

Hey, Lauren.

[Lauren Lieberman, Barclays]

I was hoping, I guess. Thank you. Two things. One was just a follow-up on the discretionary we talked a bit about the promotional environment. But I guess, without talking about competitors, I'm just curious why, like why do we think the promotional environment ticks back up? Is it big brand driven? Is it retailer driven? So just curious on why that's the right assumption looking ahead?

And then the second thing was just the -- I got a little bit confused honestly when you were talking at the beginning about shipments versus consumption and that year-to-date, I think, you said we're now in balance. But then said for baking soda and vitamins, you were still running behind. So just to clarify, that means there is other categories that are running ahead, and that's what the total company comes out even and if that's the case, which of those categories? Thanks.

[Matt Farrell, Chief Executive Officer]

Yes. It wasn't really an aggregate. We said, category by category, if you look at shipments and consumption, they seem to be tracking each other. We just said it for a couple of them, there's still more demand than we can fill. That's all. So we can sell every case of gummies that we can make, and it's the same is true for baking soda. That's sort of what I meant.

[Lauren Lieberman, Barclays]

Okay, great. And then with promotional? Yes.

[Rick Dierker, Chief Financial Officer]

Promotional….

[Matt Farrell, Chief Executive Officer]

Yes. As for promotion environment, if you just look at what happened in Q2 is like everybody just eliminated their promotions and coupons. Look at the laundry category, last year, it was around 36%, and it's sold on deal. And then in Q2 this year, it's 19%. And similarly, if you look at litter, the last year was 20% and this year's second quarter was 12%. So just this huge declines in the amount sold on deal. Because you didn't have to, right? If you had all this pantry loading that was going on. Difficulty in restocking shelves. So it just made no sense and it wasn’t just the brands so the retailers saw that as well. So now as you kind of look ahead with -- so sort of, reverse is true. So you have those categories or in stocks are back up into the high 90s. If you looked in Q2, they were in the 80s. So once you get to high 90s, you said, okay, things are back in stock. And then we say, okay, people going to start competing on the same basis as they did pre-COVID.

And I think a simple way to think about it is you got 11% unemployment. And if -- who knows what's going to happen with this is going to be another wave of stimulus will be $600, $400, $200, when will that hit? And so I think the second half dynamics will be different than the first half. So we have to wait and see, and see if things do return to normal levels. But it would seem that the fundamentals that you need to have in place would be there. I got high unemployment if you don't have a stimulus package. You don't have panic buying, your in stocks are back. So that's why I'm saying, hey, there could be an expectation for the second half.

[Lauren Lieberman, Barclays]

Okay. That’s great. Thanks very much.

[Matt Farrell, Chief Executive Officer]

Okay.

[Operator]

Our next question comes from Steve Powers with Deutsche Bank. Your line is open.

[Steve Powers, Deutsche Bank]

Thanks. Sort of, I guess, sort of on that same promotional topic, just on the balance of back half investment, it just – it feels like a lot is going above the line into couponing and trade as you've been talking about. And then with some of the other capabilities investments that you mentioned, Rick upfront, I think that implies higher SG&A also. But maybe you could just tease that out for me.

And I guess the net of that is how much is left for pure A&P investment? And do you expect the A&P line to finish in that 11.5%, 12% kind of sweet spot range, or are we going to slip below that this year in favor of the other investments?

[Rick Dierker, Chief Financial Officer]

Yes. Thanks Steve, it's Rick. I'll take the investment question. Largely, it's a broad-based investment and it's hitting a couple of different lines in the P&L, but Matt's comment was right. We're back to – our assumption is normal trade and couponing levels. The shift in the first half is really just around new products. So the trade and couponing to support new products, those two launches that we talked about.

We'll have incremental investments around capacity. I'll walk through those examples. That hits largely margin as an example. We did mention in my comments that we have some tariffs for WATERPIK that got reinstated. That will hit margin. Some of the investments will hit SG&A, like the R&D or IT investments, analytics. If I'm thinking about marketing for the full year, then you add the 11.5% to 12% range is still a sweet spot for us, but wouldn't really go into any more detail than that.

[Matt Farrell, Chief Executive Officer]

Yes. Just to add to that, Steve. We – for marketing, remember we have those two big launches, CLEAN & SIMPLE, a lot of support moved to the second half. And then we've got the ABSORBx, really cool new cat litter. And then remember, lunch and learns, where we can't really do those at the -- at dental offices. So we're going to be ramping up the advertising for WATERPIK.

And FLAWLESS is a young brand as well, so we're building equity. Heard us say that we're up year-over-year in Q2. So we don't put some money behind FLAWLESS as well. So we've got good destinations for the dough in the second half.

[Steve Powers, Deutsche Bank]

Okay. All right, great. And if I could on international, I think that segment had a pretty wild up and down quarter. So could you just – I guess, from where we are now, July forward, just give us a little bit more on the latest outlook there and how much of the volatility you think is behind you? And now more of a steady state, or are you still poised – still brace for more volatility as we go into the balance of the year?

[Matt Farrell, Chief Executive Officer]

Yes. No, you're right. The second quarter was wicked for international. The GMG business, which is our business where we ship product to over 80 countries did extremely well. But our country has really suffered. But we do think that Q2 is likely the bottom of the cycle. We should start to see improvement in the improvement in the improvement in the global markets as the lockdowns start to ease up.

Asia should stay solid, and that was surprisingly strong in the second quarter. And we expect Europe, which had steep double-digit declines in Q2. It's got creamed. We expect that to be more low single-digit declines in Q2. And our July performance, by the way, is in line with what I just said. So we had that 0.6% organic growth for international for Q2. So we would expect that the organic will improve sequentially from here in Q3 and then in Q4.

[Steve Powers, Deutsche Bank]

Okay. Perfect. Thank you.

[Matt Farrell, Chief Executive Officer]

Okay.

[Operator]

Thank you. Our next question comes from Olivia Tong with Bank of America. Your line is open.

[Olivia Tong, Bank of America]

Thank you. Just wanted to talk a little bit more about your expectations in the second half, given that July strength was pretty impressive. So can you just talk a little bit about what you think is restocking versus continued demand a little bit? You gave some numbers there. On your -- on the second half, like what's your base case assumption? Because your estimate seems to suggest a big consumptions could potentially accelerate from here. If you've mostly caught up to demand and you're going to the quarter pretty clean from that perspective. And I look at it, just compared to other competitors who have their full year guide. Yours is for organic sales that really isn't looking for much deceleration relative to your first half versus some of your peers? Thanks.

[Matt Farrell, Chief Executive Officer]

Well, we saw -- July consumption, as I said, for the U.S. business was over 10%. And if you think to what was the organic growth in the second quarter for the U.S., it was 10% plus. So, okay, that's somewhat consistent with what we saw in the second quarter. Remember, the elements of that 10% in the second quarter were largely -- well, three pieces. One was the restocking and some was consumption and some was the lower couponing. You're making the assumption that included in that 10% is restocking. There's less of that in July than there was in the second quarter.

[Rick Dierker, Chief Financial Officer]

Just to add to that, Olivia, it's Rick is you said in the second quarter, 6% was consumption. One was couponing and 3.5% was shipments. Matt said in his comments, shipments and consumption are pretty in balance year-to-date. So that would imply that very little incremental shipments for retailers above and beyond what their in-stock levels are is happening from a July go-forward basis. So it's all consumption.

[Olivia Tong, Bank of America]

Right. Maybe I can clarify that a little bit. So you guys had domestic in...

[Rick Dierker, Chief Financial Officer]

You're looking for a bigger number, right, Andrea?

[Olivia Tong, Bank of America]

No, well, you said domestic consumption plus 6, right? And then you're looking for full year organic

[Rick Dierker, Chief Financial Officer]

Sorry Olivia.

[Olivia Tong, Bank of America]

…7 to 8. So I'm just trying to understand relative to the consumption that you saw in July, the organic sales is for a little bit better than that. So I'm just kind of trying to understand what your underlying thought is in terms of...

[Rick Dierker, Chief Financial Officer]

Well, our implied back half, if you take the midpoint, the implied back half for organic is around 6%. So we feel like that's really strong. We're not going to get into the quarters per se because we said all the volatility and variability is difficult to parse out quarters. We're just trying to give you a sense, more so than most people do for the early trends in the quarter, for Q3, and that's what we're quoting in July. Not really going to get into the cadence or sequence of each quarter on organic growth or what we think. But in general, the back half is still strong, because consumption is still strong.

[Matt Farrell, Chief Executive Officer]

Yes. Yes. Olivia, we had a better handle on that, we probably would have called Q3, but we don't. We're not really -- there's still a lot of moving parts, but we thought seven months into the year, we thought we had – we could comfortably call what we think the full year is going to be.

[Olivia Tong, Bank of America]

Thanks. That's helpful. And then just, if I could pivot to e-commerce. Could you talk about your penetration in commerce? And obviously, you've learned a lot in the last few months, how that's influencing your growth strategy on e-comm from here?

[Matt Farrell, Chief Executive Officer]

Well, people that didn’t buy online are now discovering online. So we’ve had a big pickup and we think we’ve benefited from all the work we’ve done over the past couple of year to put ourselves online. The web pages, the creative content, the storytelling, et cetera.

FLAWLESS certainly benefited from online, since solons were closed and people move there and discovered FLAWLESS. WATERPIK also benefited as well. The WATERPIK crush because of bricks and mortar, people who were buying water flossers were not going to brick-and-mortar and we're turning to online.

But I think longer term, because this has been such a focus for the company. We're going to – we benefited greatly. We think that the second half will be at least 13%, online sales percentage of our total sales or higher. So I just -- I think it’s a credit to our marketing and sales organization to where we are, and we're positioned to -- as people move to this class of trade. We don't expect to lose any sales. In fact, we may pick up more.

[Olivia Tong, Bank of America]

Thanks very much.

[Operator]

Thank you. Our next question goes from Joe Altobello with Raymond James. Your line is open.

[Joe Altobello, Raymond James]

Thanks. Hey, guys. Good morning. Just want to go back to your answer to Steve's question regarding the slowdown internationally relative to the U.S. And, Matt, it seems like you kind of alluded to the difference being consumer -- the difference in consumer mobility and lockdowns, international markets. But I'm curious, is that it, or is there some difference in the nature of the categories or your distribution channels in some of these markets as well that's causing that or cause that?

[Matt Farrell, Chief Executive Officer]

Yes. Well, you got to look at what the products we're talking about that international is selling. So international doesn't have the gummy vitamin business that we've got, doesn't have the baking soda business that we have. So if you look at the categories where we had big, big consumption, in the second quarter, you won't find them in international. So I think that's one of the big differences between the U.S. and the international results right now.

[Joe Altobello, Raymond James]

Got it. Okay. And then, secondly, curious on the M&A environment. You mentioned that you guys are very much in the market for acquisitions. How has COVID impacted? The number of sellers, the willingness of sellers, the multiples you're seeing out there?

[Matt Farrell, Chief Executive Officer]

Yes. It's a good question. I've been with this company since 2006, and there's been good times and bad times over that period. Joe, there's always something for sale. So the -- even now. So I don't expect that there'll be much of a slowdown in the number of opportunities. And just remind everybody, we're pretty fussy about what we buy. We drive to buy as you know this, the number one or number two brands. But, yes, I couldn't really comment on multiples at this point. I think people always have a big multiples in their heads when they're selling businesses.

[Rick Dierker, Chief Financial Officer]

Yeah. The good news, Joe, is our balance sheet. It's just pristine, right? We're going to be less than 1.5 times lever debt-to-EBITDA at the end of the year. And if you look at the net debt, we're just generating so much cash we're going to be closer to 1.1 times net debt to EBITDA.

[Matt Farrell, Chief Executive Officer]

Yes, that's good point.

[Joe Altobello, Raymond James]

Got it. Okay. Thank you guys. Appreciate it.

[Matt Farrell, Chief Executive Officer]

Okay, Joe.

[Operator]

Thank you. Our last question comes from Andrea Teixeira with JP Morgan. Your line is open.

[Andrea Teixeira, JPMorgan]

Thank you and good morning. So I'm hoping just to – if you can unpack the top to line drivers. And I think, Matt, you gave a bit of in this last commentary on obviously the vitamins? And then, Rick, if you can talk about the price/mix benefit for the balance of the year. And I know the bridge and engage like 220 basis points. But start with the vitamins, I think you said consumption up 40%, and you're now shipping to consumption. So I'm thinking July in that 10% that you quoted is probably in the U.S., it's probably about 300 to 400 basis points driven by vitamins. And then I understand from your commentary vitamins. And then I understand from your commentary about condoms like getting back that's becoming less negative. Is that how the way we should be thinking? And as you lap next year, I know, it will – I probably agree that, it's going to continue elevated, but that tailwind is going to go away. Is that the way we should be thinking like the 5%, 6% that included before for the balance of the year? And on the price/mix benefit of 220 basis points. So for the balance of the year, that bridge for the gross margin, that's going to either reverse to negative. Is that what you embed in your guide? Appreciate that. Sorry for that many questions.

[Matt Farrell, Chief Executive Officer]

Yeah. I think there were half a dozen in there, Andrea. I think your first one with respect to growth. Yeah, I did mention earlier that we had over 10% growth in the U.S. in Q2, and we're seeing shipments similar in the month of July. And I did say that about a-third of that is vitamin business. And it would seem that, that would continue for the remainder of the year. The pieces of the 10, I think Rick called out – would you repeat that again, Rick?

[Rick Dierker, Chief Financial Officer]

Yeah, for – it was 6% for consumption, it was 1% for lower couponing, and it was 3.5% or so for retailer and stock, retailer inventories going back up. And just to take a big step back, we also bridge typically from Nielsen. And Nielsen would have said, our consumption is 2.9%. So you can imply that it untracked channel growth of around 3%. That's how we get to 6% on track in e-commerce. So that's, again, just a reminder on that bridge.

[Matt Farrell, Chief Executive Officer]

Yeah. So I did mention that with respect to consumption that only two of our 15 categories have negative consumption in the month of July, and those would be dry shampoo and condoms. That doesn't mean everything else is flying either. I'd mention that water flosser shipments were double-digit in the month of July. The consumption is only slightly positive for water flossers.

[Rick Dierker, Chief Financial Officer]

And then in terms of gross margin, I think that's what your question is on price volume mix. In the quarter, we had positive 220 basis points. So for the first half, we've largely had positive 180 basis points for price volume mix. And in the second half, as you would expect because we’re getting to normal commercial levels, and we're supporting new products with coupon and trade. That number will decelerate. It will still be a positive contributor, but just not as much. So hopefully, that gives you a little bit of color.

[Andrea Teixeira, JPMorgan]

Appreciate that. Thank you.

[Operator]

And there are no further questions in the queue. I'd like to turn the call back to Mr. Matt Farrell for any closing remarks.

[Matt Farrell, Chief Executive Officer]

Okay. Well, hey, thanks, everybody for joining us this morning. We had a terrific first half, a great second quarter. And we do try to provide as much detail as we can to you and to investors, so they can get down to-date a view of where we are, and that's why we provide the July shipment and consumption debt as well as the consumption data for the quarter. And we'll do the same when we get to talk to you at the end of Q3, so.

[Operator]

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.