Church & Dwight - Earnings Call - Q2 2020

Transcript

Speaker 1

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Second Quarter 2020 Earnings Conference Call. Before we begin, I've 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 and uncertainties and other factors that are described in detail in the company's SEC filing. 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.

Speaker 0

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 results. 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 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 York plant, which was quite a feat given the obstacles presented by COVID. 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.

Revenue, gross margin, earnings, and operating cash flow were all significantly higher than Q2 last year, driven by the 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 dot-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 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 Dry Shampoo.

People are just not socializing due to government restrictions on their 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 soda. 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, 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. 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%. 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. 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. 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 and 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, New 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 are 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. We are 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 from 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 15-30 ingredients for the typical liquid detergent.

It has a 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 have pushed it to the second half. We are 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 odors fast. AbsorbX is 15% lighter than our existing lightweight, and it is 55% lighter than our regular clumping litter. We have a significant amount of advertising, trade, and couponing planned for the second half to get behind this exciting new launch. By the way, here is 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 compliment. 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. Now, you may recall that just last year, we 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 when 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 or number two in their categories, and we have low exposure to private label. We're coming off one of the best first halves we've ever had and are entering this downturn in a position of strength and with a strong balance sheet.

With a strong balance sheet, we continue to be open to acquiring TSR accretive businesses. Finally, we have the resources, the common sense, and the ambition to ensure that our brands perform well in the future. Next up is Rick to give you details on the second quarter. 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 earn-out 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 in-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 their organic growth for you. 6% is consumption growth, reflecting strong tracked and untracked and e-commerce growth. 1% from lower couponing, and then approximately 3.5% from improving retail in-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, Femme Fresh feminine hygiene portfolio, and ARM & HAMMER liquid laundry detergent 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 FPD 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 a gross margin bridge versus a 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, which 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 Flawless 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 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 and tangible costs related to acquisitions and investments in R&D and IT.

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. 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. 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 30, 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. 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%-10% full-year 2020 sales growth and approximately 7%-8% organic sales growth. Adjusted EPS growth is expected to be 13% above the high end of our original 7%-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. 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, a resurgence of COVID-19, or supply constraints. With that, Matt and I would be happy to take any questions. Thank you. To ask a question, press the star, then the one key on your touch-tone telephone. To withdraw your question from the queue, press the pound key. Our first question comes from Bill Chappell with SunTrust. Your line is open. Thanks. Good morning. Congratulations. Hey, thanks, Bill. 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 postponed stuff from first half to second half, it didn't really affect the quarterly accrual. Is that correct?

I guess if you make the decision to push it to next year, would that then create a reverse fold or something as we look to model for the back half? No, 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. Spend in Q1 and Q2 for new product launches was actually deferred, so we didn't spend it. We said consumption was so strong. In Q3 and Q4, that spending for the litter and laundry innovations that Matt went through will be spent. It is just actually the dollars will go out in Q3 and Q4. Got it. Just from a I understand you're not seeing much pressure from trading on a 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's hitting so well, it's not really affecting? It's tough to tell at this point. Yeah. Hey, 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. As far as disposable income goes, that's been propping up consumers. It could be more likely that to happen in the second half. When you talk about shares, I mean, Arm & Hammer liquid laundry was up 80 basis points in the quarter to 13.9%.

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 shelves wiped out. Depending on whether or not you had product on shelf dictated whether or not the consumer picked up your product. I think the important thing to think about is that retailer in-stock levels have normalized. 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. Got it. You are seeing promotional level kind of normalize in July? No, I'm saying we expect it to happen in the second half. Okay, great. Thanks so much. Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Your line is open.

Good morning, and thanks for taking my question. Also, congrats on a great quarter. Thanks, Rupesh. I guess to start out, first on Flawless, at least during our checks, we definitely saw out-of-stocks on Flawless at some of the retailers. Just curious where you are from an out-of-stock perspective. 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 originally envisioned when you made the acquisition? If you measure back on track by how did the sales look in Q2 year over year, we were actually up. In spite of the fact that you had all these store closures, the people buying product online has helped us significantly. Yeah, and Rupesh, it's Rick, just to give you context, remember, Flawless was down about 20% in Q1.

It's positive in Q2, which is great. Out-of-stocks, you're exactly right. When you have strong consumption like we've seen, above and beyond what we expected, then 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. Okay, great. I guess one more question. As you look at some of the trends that you're seeing related to COVID, obviously cleaning's strong, vitamins are strong. Are there new opportunities you guys see for Church & Dwight down the road just related to some of the trends you're seeing right now in your business and from a consumer perspective? Gummies is an obvious one to the extent that new product launches in gummies, I think, will be well received not only this year but next year.

I think cleaners is probably an area. We have an 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. That is one that could help us, and that would be for OxiClean as well as Kaboom cleaners and a few others. Okay, great. Thank you. Okay. Thank you. Our next question comes from Nick Modi with RBC. Your line is open. Yeah, good morning, everyone. Matt, 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? 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. Just wanted to get your thoughts around that and how you think about that from a kind of build-in-house or potentially do it through M&A. Thanks. Yeah. 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. Consequently, it would appear that the larger dedicated retailer.coms, whether it's Amazon or Walmart, Walmart.com, Costco.com, that seems to be the destination for most brands unless there is some uniqueness that can justify direct-to-consumer. Got it.

Just from an innovation standpoint, obviously, you're talking about some new products hitting the shelves. How are resets looking? I mean, 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-timed? 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. 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. Great. I'll pass it on. Thanks a lot, guys. Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is open. Great. Thanks. Good morning, guys.

Congrats on the strong results, and I hope you're both doing well. Hey, Matt, I'd like to pick up on the prior question just on some of the big trends we're seeing, but hopefully sort of tie it 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. The focus on cleaning and health and wellness and retailer focus on core SKUs, so fabric care, baking soda, vitamins, all should see structurally higher demand. It seems like this will have a longer tail to it. Things probably go from bad to worse and have for Trojan, but it seems like Church should be a net beneficiary. When you go through the portfolio in total, you should see higher demand.

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? I have a follow-up. We will not be quoting any numbers today, Kevin, but you have heard us say that we are looking to expand capacity for laundry and litter, and we are trying to debottleneck our plants for baking soda. We have stood up a whole bunch of co-packers to help us on the cleaning side. You are right. When you look at this year, you see categories that are down double digits like dry shampoo, Waterpik, water flossers, and condoms. At some point, those are going to come back, right? We see vitamins is going to be expected to be a permanently higher plateau.

I think the longer behavior goes on, new behavior goes on, the more likely it gets embedded in the consumer. It would suggest that vitamins would be higher going forward, that cleaners would be higher going forward. That is just not as big a business for us, but it is a place we are going to invest now because we can see the opportunity with anti-back claims. Baking soda, since people have been home, it has been rediscovered. In fact, we are up double digits in baking soda month after month. We have to debottleneck our plants. That could also be a permanently higher consumption level.

It is kind of a roller coaster year depending on what category you are looking at, but the best case would be all these categories normalize, and then we have a handful of categories that are at a permanently higher consumption level, which bodes well for the long-term outlook for the company. Got it. That makes sense. 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 have been a bit puzzled by one of your key competitors' strategy, not referring to the one in Cincinnati, and their willingness to cede market share almost across the portfolio, seemingly with the exception of its most premium brand.

While I would not 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? Yeah, laundry is our biggest category, and we have great brands, and we like our prospects going forward. We have ARM & HAMMER, we have XTRA, and we have OXICLEAN. We are exiting OXICLEAN, so we announced that earlier this year. XTRA has, over time, slowly been taking share from one of those other competitors that you mentioned.

Although share is down for XTRA, we expected it to be down because we exited drug early this year. You may recall we announced that. Going forward, we think we are in a great place. We think we have a stronger brand, and we are the opening price point. We are deep value detergents. We think going into this recession, we feel like we are well positioned. Arm & Hammer, I said this before, we have an unfair competitive advantage. Arm & Hammer is an over $1 billion brand. It is an advertised value detergent, and that is not true for the other variants or the other brands in the value tier. Over time, we continue to win, and we also innovate. You saw one of our new innovations this year with Arm & Hammer Clean & Simple. They were Simply Six.

The Arm & Hammer, just take a page out of Britta's book, over the past year, the number of households that are buying Arm & Hammer has increased about 3%. The brand gets stronger all the time. It is our biggest brand. I think Arm & Hammer detergent is in great shape, and I think XTRA is well positioned as the opening price point, deep value, and particularly going into this recession. We think we are well positioned long-term. Excellent. Thanks, Matt. Good luck, guys. Okay, thanks, Kevin. Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is open. Great. Thanks. Good morning. Hey, Lauren. I was hoping, I guess, two things. One was just to follow up on the discussion. We talked a bit about the promotional environment, but I guess without talking about competitors, I am just curious why.

Why do we think the promotional environment ticks back up? Is it big brand driven? Is it retailer driven? Just curious on why that's the right assumption looking ahead. The second thing was just I got a little bit confused, honestly, when you were talking in 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. Just to clarify, does that mean there's other categories that are running ahead? That's what the total company comes out even, and if that's the case, which of those categories? Thanks. Yeah, 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 that 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 the same is true for baking soda. That's sort of what I meant. Okay. Great. And then the promotional? Yeah. Oh, yeah, yeah. As far as the promotional environment, if you just look at what happened in Q2, everybody just eliminated their promotions and coupons. The laundry category last year was around 36%, and it sold on deal. In Q2 this year, it's 19%. Similarly, if you look at litter, last year was 20%, and this year's headquarters was 12%. Just huge declines in the amount sold on deal because you did not have to, right?

If you had all this pantry loading that was going on, difficulty in restocking shelves, it just made no sense. It was not just the brands that saw it; the retailers saw that as well. Now, as you kind of look ahead, the reverse is true. You have those categories that are in stocks are back up into the high 90%. If you looked in Q2, they were in the 80%. Once you get to high 90%, you are saying, "Okay, things are back in stock." Then you say, "Okay, are people going to start competing on the same basis as they did pre-COVID?" I think a simple way to think about it is you got 11% unemployment, and who knows what is going to happen with this? This is going to be another wave of stimulus.

Will it be $600, $400, $200? When will that hit? I think the second half dynamics will be different than the first half. We have to wait and see and see if things do return to normal levels. It would seem that the fundamentals that you'd need to have in place would be there. You get high unemployment. If you don't have a stimulus package, you don't have panic buying. Your in-stocks are back. That's why I'm saying, "Hey, that could be an expectation for the second half." Okay. That's great. Thanks very much. Okay. Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is open. Thanks.

I guess sort of on that same promotional topic, just on the balance of back half investment, it feels like a lot is going above the line into couponing and trade as you've been talking about. 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. I guess the net of that is how much is left for pure A&P investment? 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? Yeah. Hey, 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. 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 walked 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'll 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 yeah, the 11.5%-12% range is still a sweet spot for us, but wouldn't really go into any more detail than that. Yeah. Just to add to that, Steve, for marketing, remember we have those two big launches. We have Clean & Simple.

All that support moved to the second half. Then we have the AbsorbX, that really cool new cat litter. Remember, lunch and learns where we cannot really do those at dental offices. We are going to be amping up the advertising for Waterpik. Flawless is a young brand as well, so we are building equity. I heard us say that we were up year over year in Q2. We are going to put some money behind Flawless as well. We have good destinations for the dough in the second half. Okay. All right. Great. If I could on international, I think that segment had a pretty wild up and down quarter.

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 we're in more of a steady state or are you still braced for more volatility as we go into the balance of the year? Yeah. 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. Our countries really suffered. We do think that Q2 is likely the bottom of the cycle. We should start to see 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.

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. Our July performance, by the way, is in line with what I just said. We had that 0.6% organic growth for international for Q2. We would expect that the organic will improve sequentially from here in Q3 and then in Q4. Okay. Perfect. Thank you. Okay. Thank you. Our next question comes from Olivia Tong with Bank of America. Your line is open. Great. Thank you. I just want to talk a little bit more about your expectations in the second half, given that July strength was pretty impressive. 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 the second half, what's your base case assumption? Because your estimates seem to suggest you think consumption could potentially accelerate from here if you've mostly caught up to demand and you're going into the quarter pretty clean from that perspective. I look at it and just compared to other competitors who have reinstated 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. We saw July consumption, as I said, for the U.S. business was over 10%. If you think to what was your organic growth in the second quarter for the U.S., it was 10% plus. That is 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. Just to add to that, Olivia, it's Rick. He said in the second quarter, 6% was consumption. One was couponing. 3.5 was shipments. Matt said in his comments, shipments and consumption are pretty in balance year to date. 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. It's all consumption. Right. Maybe I can clarify that a little bit. You guys said domestic consumption. You're looking for a bigger number, right, Andrew? No, you said domestic consumption plus 6, right? Then you're looking for your organic 7-8.

I'm just trying to understand relative to the consumption that you saw in July, your organic sales is for a little bit better than that. I'm just kind of trying to understand what your underlying thought is in terms of. Our implied back half, if you take the midpoint, the implied back half for organic is around 6%. 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 July. Now we're going to get into the cadence or sequence of each quarter on organic growth or what we think.

In general, the back half is still strong because consumption is still strong. Yeah. Yeah. Olivia, if we had a better handle on that, we probably would have called it Q3, but we do not. We are not really, there is still a lot of moving parts, but we thought seven months into the year, we thought we could comfortably call what we think the full year is going to be. Thanks. That is helpful. If I could pivot to e-commerce, could you talk about your penetration in e-commerce? Obviously, you have learned a lot in the last few months, how that is influencing your growth strategy on e-com from here. People that did not buy online are now discovering online. We have had a big pickup, and we think we have benefited from all the work we have done over the past couple of years to put ourselves online.

The web pages, the creative content, the storytelling, etc. Flawless certainly benefited from online since the salons were closed and people moved there and discovered Flawless. Waterpik also benefited as well. Although Waterpik got crushed because of bricks and mortar. People who were buying water flossers were not going to bricks and mortar and were turning to online. I think longer term, because this has been such a focus for the company, we benefited greatly. We think that the second half will be at least 13% online sales percentage of our total sales or higher. I think it's a credit to our marketing and sales organization to find where we are. 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. Thanks very much. Thank you.

Our next question goes from Joe Altobello with Raymond James. Your line is open. 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 seemed like you kind of alluded to the difference being 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 caused that? Yeah. You got to look at what the products we're talking about that international is selling. International does not have the gummy vitamin business that we've got. It does not have the baking soda business that we have.

If you look at the categories where we had big, big consumption in the second quarter, you won't find them in international. I think that's one of the big differences between the U.S. and the international results right now. Got it. Okay. 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? Yeah. 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. I mean, even now. I don't expect that there'll be much of a slowdown in the number of opportunities.

I just remind everybody we're pretty fussy about what we buy because we would like to buy, as you know, the number one or number two brands. Yeah, I couldn't really comment on multiples at this point. I think people always have big multiples in their heads when they're selling businesses. Yeah. The good news, Joe, is our balance sheet is just pristine, right? We're going to be less than 1.5 times levered debt to EBITDA at the end of the year. 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. Yeah. That's a good point. Got it. Okay. Thank you, guys. Appreciate it. Okay, Joe. Thank you. Our last question comes from Andrea Teixeira with J.P. Morgan. Your line is open. Thank you. Good morning.

I'm hoping just to, if you can, unpack the top line drivers. I think Matthew gave a bit of that in this last commentary on, obviously, the vitamins. Rick, if you can talk about the price-to-mix benefit for the balance of the year. I know the bridge, and you gave like 220 basis points. Starting with the vitamins, I think you said consumption up 40%, and you're now shipping to consumption. I'm thinking July, in that 10% that you quoted, it's probably in the U.S., it's probably about 300-400 basis points driven by vitamins. I understand from your commentary about condoms getting back, that's becoming less negative. Is that how the way we should be thinking?

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 you quoted before for the balance of the year? And on the price-mix benefit of 220 basis points, for the balance of the year, that bridge for the gross margin, that's going to either reverse to negative. Is that what you had in your guide? Appreciate that. Sorry for the many questions. Yeah. I think there were half a dozen in there, Andrea. I think your first one was 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.

I did say that about a third of that is vitamin business. It would seem that that would continue for the remainder of the year. Pieces of the 10, I think Rick called out. Would you repeat that again, Rick? Yeah. It was 6% for consumption, and it was 1% for lower couponing, and it was 3.5 or so for retailer in stock, retailer inventories going back up. Just to take a big step back, we also bridged typically from Nielsen. Nielsen would have said our consumption is 2.9, so you can imply that we had untracked channel growth of around 3%. That is how we get to 6% untracked in e-commerce. That is, again, just a reminder on that bridge. I did mention that with respect to consumption, only two of our 15 categories have negative consumption in the month of July.

Those would be dry shampoo and condoms. That does not mean everything else is flying either. I had mentioned that water flosser shipments were double-digit in the month of July. The consumption is only slightly positive for water flossers. In terms of gross margin, I think that is what your question is on price-volume mix. In the quarter, we had positive 220 basis points. For the first half, we have largely had positive 180 basis points for price-volume mix. In the second half, as you would expect, because we are getting to normal commercial levels and we are supporting new products with coupon and trade, that number will decelerate. It will still be a positive contributor, but just not as much. Hopefully that gives you a little bit of color. I appreciate that. Thank you. There are no further questions in the queue.

I'd like to turn the call back to Mr. Matt Farrell for any closing remarks. Okay. Hey, thanks everybody for joining us this morning. We had a terrific first half, a great second quarter. We do try to provide as much detail as we can to you and to investors so they can get a down-to-date view of where we are. That is why we provide the July shipment and consumption data as well as the consumption data for the quarter. We will do the same when we get to talk to you at the end of Q3.