切遲杜威 (CHD) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Second Quarter 2018 Earnings Conference Call. Before we begin, I have been asked to remind you on this call that 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 filings.

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

Good morning, everyone. Thanks for joining us today. I'll begin with a few comments on the quarter and then I'll turn the call over to Rick Dierker, our CFO. When Rick is finished, I will conclude with some final comments and then we'll open up the call for questions.

The Q2 was an outstanding quarter for our company. Organic sales growth was 4.4%, which exceeded our outlook of 3%. This performance was a clear standout in comparison to our peers. Earnings per share was $0.49, which exceeded our outlook by $0.03. Our reported sales growth was 14.5%, which reflects strong organic growth and prior year acquisitions.

Sales growth is clearly a powerful earnings lever in an environment with rising input costs. In the U.S., organic sales grew 5% with 6.2% volume growth. Our categories are growing and our market shares are healthy. 11 of our 15 categories grew during the quarter. Nine categories have grown for at least 3 consecutive quarters. Beyond category growth, our share results are solid, with 7 out of 11 power brands growing or maintaining share.

As we have said in the past, we have low exposure to private label, about 12% share on a weighted average basis. We're having success in the online class of trade. Global consumer online sales continue to grow, and we expect it to exceed 6% of sales in 2018.

And finally, I'd like to give you a perspective on the promotional environment. 8 of our 11 power brands had a lower percentage of products sold on promotion in Q2 compared to Q2 2017 and still we grew. And this is the second quarter that we've seen this and we don't expect that to change in the second half.

Our international consumer business delivered 6.8% organic growth. As you know, international has emerged as a growth driver for our company for the past 4 years. International markets are a bright spot for Church & Dwight, unlike many of our peers. The investments that we have made in new leadership, regional hubs and our brand focus continue to pay off. Our algorithm is 6% annual organic growth for the international business, and we expect to meet or beat that number in 2018.

Turning to Specialty Products. Q2 was another challenging quarter for us with a 5% decline in organic sales. This reflects lower demand for animal productivity products from our dairy customers who are being hurt by low milk prices. There is a silver lining though. The acquisitions that we've made over the past couple of years, which got us into the poultry business, have reduced our dependence on the dairy economy. So we continue to have confidence in our long-term algorithm of 5% organic sales growth for this business.

Now let's go back to the U.S. business for a minute to call out the drivers of our outstanding organic sales growth in the quarter. Our laundry brands reached an all-time high, 18.8% share of liquid laundry in the quarter, led by OxiClean. [Oxi liquid laundry] had its highest-ever share of 1.9%. ARM & HAMMER unit dose grew consumption 28%. And consistent with my earlier comment, the amount of detergent sold on promotion in the category was down 500 basis points sequentially from Q1 and down 70 basis points year-over-year.

VITAFUSION vitamins turned in a strong quarter with 6.2% consumption growth on the strength of increased distribution and velocity. BATISTE continued to gain share with 36% consumption growth in the dry shampoo category and the category grew 33% in the quarter. BATISTE is the #1 dry shampoo for the 10th consecutive quarter and continues to be the #1 dry shampoo in the world.

TOPPIK and VIVISCAL turned in a strong quarter with 16% consumption growth. These outstanding hair care brands are growing because they deliver results to consumers with thinning hair.

Turning to innovation. Innovation continues to be a big driver of our success. We have new products shipping in several categories, all of which have been performing well. In fact, sales of our new products are ahead of our 2018 plan. We launched ARM & HAMMER CLUMP & SEAL lightweight unscented cat litter with guaranteed 7-day odor control, which builds on the success of our CLUMP & SEAL franchise.

We expanded our ODOR BLASTERS laundry platform, leveraging technology that helps eliminate tough odors. We introduced new VITAFUSION and LI'L CRITTERS probiotics gummy vitamins, which support digestive health. TROJAN has launched Nirvana, which is an assortment of sensation condoms in an exclusive package design. BATISTE continues to expand distribution with 3 unique fragrances, leveraging our #1 share position.

And finally, Waterpik. Waterpik launched a really cool product this year, the Water Flosser, to restore whiteness while flossing. Waterpik has been in the Church & Dwight family for a year now. The business is performing extremely well, and we continue to expect high single-digit sales growth in 2018. We are looking at Waterpik as a global opportunity. The power of the combination of Waterpik and Church & Dwight is evident. We are laying the groundworks to sustain a strong growth rate in the future, particularly in international markets where household penetration is much lower than in the U.S.

So to conclude, we had a strong second quarter. We had a strong first half. We continue to outperform the market because we have brands consumers love. We have right strategies to grow, and our company is a friend of the environment, which important to us and our consumers, and our people make Church & Dwight a great place to work.

Next up is Rick to give you details on the second quarter and the outlook for Q3 and the full year.

Thank you, Matt, and good morning, everybody. I will start with EPS. Second quarter adjusted EPS was $0.49 per share compared to an adjusted $0.41 in 2017, up 19.5%. The $0.49 was better than our $0.46 outlook. The $0.03 beat versus our outlook is made up of $0.03 from a stronger top line, a $0.02 drag on the margin due to an oral care withdrawal, and then $0.02 from a lower tax rate.

Reported revenues were up 14.5% to over $1 billion. Organic sales were up 4.4%, exceeding our Q2 outlook of approximately 3%. The organic sales beat was driven by our domestic and international consumer business. We're extremely pleased with our strong volume growth domestically of 6.2%. As expected, our negative price mix continues to move in the right direction, as I mentioned last quarter. We expect that improvement to continue as we move through the year. And for the second half, we expect that to be flat to positive.

Now let's review the segments. First, Consumer Domestic. Their organic sales increased by 5%, primarily due to ARM & HAMMER liquid and unit dose laundry detergent, BATISTE dry shampoo, VIVISCAL and TOPPIK hair care brands, VITAFUSION and LI'L CRITTERS gummy vitamins and XTRA laundry detergent. International organic growth was up 6.8%, driven largely by OxiClean, BATISTE and ARM & HAMMER liquid laundry detergent and the export business, ARM & HAMMER liquid laundry detergent and clumping cat litter and BATISTE in Canada and OxiClean Ultra Gel and NAIR in Mexico. For our Specialty Products division, organic sales declined 5% due to lower volume, offset a bit by pricing.

Turning now to gross margin. Our second quarter gross margin was 44.3%, 140 basis point decrease from a year ago. This includes a onetime 70 basis point impact from a voluntary recall and an FDA-mandated withdrawal associated with certain oral care products. Other drivers were a 120 basis point drag for higher commodities, a 40 basis point drag from higher transportation costs, partially offset by our productivity program of 80 basis points and acquisitions of 10 basis points.

Moving now to marketing. Marketing was up $5.5 million year-over-year. The good news is we didn't cut any marketing. Even excluding acquisitions, our spending was up slightly. As a percentage of revenue, marketing was 13.3%. Compared to Q1, marketing increased 340 basis points. For SG&A, Q2 SG&A increased 110 basis points year-over-year. Higher SG&A primarily due to acquisitions, including intangible amortization, and higher IT and R&D investment spending.

Now to operating profit. The operating margin for the quarter was 16.9%. Other expense all-in was $18.4 million, primarily driven by incremental interest expense and higher debt levels related to acquisitions.

Next is income tax. Our effective rate for the quarter was 21.7% on an adjusted basis compared to 37.6% in 2017. We now expect the full year rate to be approximately 23%.

And now to cash. We had a strong cash flow quarter. For the first 6 months of 2018, net cash from operating activities was $322 million, an increase of $73 million from the prior year due to higher cash earnings and a smaller increase in working capital. Excluding prior year payments totaling $25 million for the U.K. pension plan settlement and higher-than-normal deferred comp payments, cash from ops would have increased $48 million.

So in conclusion, the second quarter highlights are 4.4% organic sales growth and adjusted EPS growth of 19.5%.

Now turning to the third quarter outlook. We expect Q3 organic sales growth of approximately 3%. We expect third quarter earnings per share of approximately $0.53, a 2% reported increase year-over-year or an 8% increase on an adjusted basis. We expect marketing to be up in Q3 despite the acquisition mix impact I've spoken about.

And now turning to the full year. To summarize our thinking, we now expect organic sales to be 3.5%, reported sales growth to exceed 9%, which offsets the headwinds we discussed on gross margin. Full year gross margin will now be 120 basis points down, reflecting the full year impact of the oral care charges as well as higher logistics costs.

As a recap, our full year gross margin bridge is made up of 130 basis points drag due to transportation and commodities, a 25 basis point drag for the oral care issues, a positive 35 basis points of price volume mix, driven largely by volume, and our full year marketing as a percent of sales will be 11.5%, reflecting the lower spend rates for recent acquisitions. In other words, absent acquisitions, our marketing spend rate will be 12%, which again means our marketing dollars are up year-over-year.

We are raising our EPS outlook to be $2.26 to $2.28 per share or adjusted EPS growth of 17% to 18% despite the incremental headwinds from margin and currency, this continues to be top tier among the entire industry. And finally, turning to cash, we're raising our expectations for cash from ops to $690 million.

And with that, I'll turn it back over to Matt for a few more comments on pricing.

Yes. Before we open up the line for questions, I just want to take a minute to talk about pricings because I know it's on everybody's minds. So gross margin pressure has been felt across many industries over the past 12 months. We certainly have had our share of commodity and logistic cost increases, and we have shared with you our actions to contain those costs: continuous improvement programs, hedging, promotional efficiencies, just to name a few.

Raising price is the other side of the equation. That's been top of mind this earnings season. So as you know, many CPG companies have already announced their intentions to take pricing to help offset their cost increases. We have reviewed our categories to determine if list price increases are cost justified and would deliver positive financial results for both our company and for our retailers.

And like our competitors, we have determined that in certain categories, pricing actions are necessary to help offset our cost increases. We are in the process of discussing those decisions with our retailers right now. We will not be going into specific details in this call in order to allow time for discussions with our retail partners to take place. But we will report back with details in early November.

We'll now open the line for your questions.

(Operator Instructions) Our first question comes from Kevin Grundy from Jefferies.

Matt, I wanted to start on sort of state of union with the laundry category. Your results were great. Specifically around Henkel and the strategy there, where it seems like they're really leaning in Persil and little else, where you see (inaudible) on some of their other key brands really under quite a bit (inaudible) and declining year-over-year. And I'm not sure if (inaudible) specifically on sort of a key competitor strategy, but given your price point, your positioning with ARM & HAMMER in the category, it would seem fair to say that the way their strategy is going really opens up quite a long runway for you to continue to source market share. So if you want to comment on that, number one. And then number two, as you guys look at the data, is it fair to say that some of the strength in ARM & HAMMER that you think it's coming from some of those brands that I just mentioned? Then I have a follow-up.

Yes. While it's difficult for me to comment on Henkel's strategy, but if you look at where the money is being spent, there's a significant amount of products sold on deal for Persil in the high end as the same for Tide. So those guys are slugging it out at the high end of the category, and obviously, you have to pay for that. So you could say that they're shifting some of the spend from their deep value brands, which would be Purex and Sun, and shifting it to Persil. I can't comment on whether or not that's going to continue. We have -- we both -- XTRA and ARM & HAMMER both grew consumption in the second quarter. In fact, all 3 brands were up. So I would agree with you that ARM & HAMMER has a lot of runway for many years to come. It has been the banner brand for this company. It's a $1 billion brand. If you add all the categories, it's the only advertised value brand. So it's -- we have so many things going for us that suggest that the train is going to keep on running in the future. And OxiClean, we're encouraged by as well because it had its all-time high share, 1.9%, in the quarter. As you know, we've been trying to make inroads there into more of the premium end of the category. And XTRA, you remember XTRA last quarter stopped its slide, so it grew consumption last quarter and this quarter. So all 3 brands are clicking right now. So we feel real good about the laundry category.

And Matt, just we'll stick with that and then I'll pass it on, but a couple other questions in laundry. How do you feel about pricing -- frontline pricing? The category's benefiting from some favorable mix for the reasons you just talked about with Henkel leaning in on Persil. What's your view on pricing? We've obviously had episodic price wars over the years in the category. That doesn't seem to be the case now. If you can just comment on that and maybe the outlook for the balance of the year. And then also early observations on Tide Simply and Proctor's introduction there in unit dose, then I'll pass it on.

Yes. Well, look, when it comes to activity and pricing, it's really a broader issue. So it all goes back to pressure on gross margins. So cost increases have been seen for raw impacting inputs pretty broadly. And you got a tightening labor market so wages can also be a contributing factor. So you get a lot of things going against you and everybody's dealing with this. And productivity gains have been outrun by cost increases and that's why you're seeing people reaching for pricing finally. And the commodity pressure has led to 2 quarters of year-over-year decline in the amounts sold on deal. I don't think that's coincidental. That -- I think that will likely continue. And I think the need for profits will likely result in greater reluctance to even deal back price increases once people implement them.

And Kevin, this is Rick. I think one thing that we said last quarter, and I want to repeat it again this quarter, is our negative price mix trend in the domestic business, right, in Q1, it was down 1.70%. In Q2, it was down 1.20%. We expect that to be flat to positive in the second half because some of those promotions don't get repeated or some of the coupons don't get repeated, not just in laundry, but in general, in this environment, we expect that to happen.

And back to your question on the launch of Tide Simply unit dose. So the unit dose category grew 4.3% in the quarter. I think it's the fourth consecutive quarter that unit dose as a category has grown less than 5%. And if the short answer as to how we're doing is the ARM & HAMMER unit dose grew 28% in the quarter. So I would say that the Simply Tide launch has not slowed down our growth.

Our next question comes from Bonnie Herzog from Wells Fargo.

I had a question on your strong Consumer Domestic organic sales. I guess, I'm wondering why there's such a big disconnect between your very strong results in the quarter and then the weaker Nielsen scanner data. Was the difference mainly driven by non-tracked channels or were there timing impacts from your shipments? And then going forward, how should we think about the contribution from non-tracked business? And then maybe finally, could you characterize the overall health of your inventory levels at retail?

Yes, I'll start with the last one first. It's Rick, Bonnie. But we track distributed consumption data all the time. We feel like that's very healthy, it's right in line where it should be. So we don't think that's an issue. Your first question is really, "Hey, help bridge the organic growth of the domestic division of around 5% back to what we would call the Nielsen tracked growth, which is around 2%." So that's about 300 basis points. About 200 basis points is on-track channels, whether that's e-commerce. E-commerce for us is growing 30% to 40%, which is really strong. As Matt said in his prepared remarks, we expect for a company for the consumer business to be in excess of 6% on sales and then other non-tracked partners as well. And then -- so that's around 200 basis points of that 300 basis points gap and another 100 basis points is just slower couponing, right? As we talked about before, we're lapping. For example, we've launched a major litter innovation last year for trial. Some of the couponing's come down in laundry as well. So the disconnect is really just from a net sales perspective.

And then just maybe a quick follow-on to that because as I look over the last 3 quarters, it was more in line. So just thinking through the strength that you're seeing in online, was there a huge step-up this quarter for your business? Because you didn't really see that kind of spread in the last few quarters relative to the tracked channels. So just trying to think through how your online business has been performing.

Yes. I would just tell you that typically, the untracked stuff's just lumpy. Online in general is lumpy. So I think anybody who gives you a forecast on trying to bridge organic growth to what reported or Nielsen information [is], is asking for trouble. It's just too lumpy to do that accurately. I would tell you there's always going to be a disconnect, and then some quarters, it's going to be larger than others.

Okay. And then just maybe one final question from me on your Q3 EPS growth guidance. It seems a little light versus what you just printed and then what's implied for Q4. You called out stepped-up marketing spend. So I'm curious, how much is maybe being pulled forward from Q4? And if so, why? And then also you're expecting commodity and freight headwinds. Are you expecting that to moderate by the time we get to Q4?

Yes, a couple -- 2 good questions. The first one on just the timing. Remember, first half of the year, on average, we're about 20% EPS growth. In Q3, we were calling 8% EPS growth. Behind that is we have a step-up investment in marketing. We've moved some marketing from Q4, as an example, into Q3. So we're up, on a dollar basis, about $8 million to $10 million of marketing year-over-year in Q3, which is about another $0.03. And if you just kind of add that back, then you're really up around 14% adjusted in the third quarter.

Yes. And something else just to keep in mind. We've seen this phenomenon before. Sometimes, we have a front-end loaded year. And the way we manage the business is to deliver on the EPS call that we gave in February. So to the extent that we're out running that, we're going to be able to spend it back.

Yes. And then in terms of your other question on distribution or commodities. In general, we gave you the full year outlook from gross margin and I did a bridge for you, about 130 basis points year-over-year for the full year. That's pretty consistent in the second half as logistics costs have come through. And I think you heard from Kimberly as an example, but pulp prices are up and diesel prices remain high.

Our next question comes from Bill Chappell from SunTrust.

I guess, first one maybe just a little more color on Waterpik a year later and just kind of where that growth is coming from. And then I would assume this is the one business that could be affected by tariffs, so maybe kind of any commentary on what you see on margins, pricing there.

Yes. Well, I guess you know, the business has been -- was growing well in 2017, and it's grown high single digits this year. And the formula is that 60% of the purchases are based on a hygienist's or a dentist's recommendation and that continues. I mean, one thing we've done is we've expanded the number of hygienists that we have calling on dentists in the United States with great success. That would be one element. The second element is international. There's just huge opportunity internationally, and we're beginning to establish, in a small way, the hygienist program in other countries. And that's going to bear fruit for us for years. With respect to the tariff, it's kind of a global comment. It's -- the tariff -- with respect to China, the current thinking is the exposures are mainly batteries and electronics but it's not anything that's material right now. The new layers of tariffs could impact the broad range of products materials, but it's something that we'll just be monitoring closely in the coming months. But so far, the stuff that is in place wouldn't have a material effect on us. And just while we're on the topic of tariffs, I know some people are -- got some interest in Canada. And Canada -- with Canada's retaliatory tariffs were a larger issue for some of our competitors because it's a very broad list of categories, including things like shaving products, automatic dishwashing, products for deodorizing rooms, skincare products. For us, it had minimal impact, essentially on deodorizing products. So like Fridge Fresh would be one that would be caught up on, I think, 10% tariff. But really, Canadian retaliatory tariffs and Chinese retaliatory tariffs are immaterial right now.

Got it. And then just going back to Waterpik real quick, you say it's -- 2/3 of the growth is coming domestic and then 1/3 of that is coming in the international expansion. Is that the right way to think about it?

I still think it's more skewed towards the domestic business than international.

Okay. And then just the other question. Back on laundry, I actually was kind of surprised by Oxi's market share and kind of resurgence. Anything more -- I mean, is that sustainable? Is there something that you're replacing? It seemed to be -- I wouldn't say left for dead, but it'd been very quiet on Oxi detergent for quite some time.

Yes. Well, look, Bill, we're still fighting an uphill battle there because we have formidable competitors there in both Tide and Persil. So we're still trying to make sure we have a sustainable beachhead going forward. And it has been, use the word lumpy, been a bit of a seesaw. You're up 1.9% 1 quarter, you're down 1 point -- you [shed] 1.5% the next quarter. So we're still trying to break through there and we do that through both coupons, digital coupons, et cetera. So I wouldn't say that we're declaring victory right now.

Our next question comes from Steve Powers from Deutsche Bank.

So more on pricing if I could. So I know you said that 8 of 11 categories this quarter showed a lower percentage of products sold on deal versus '17. And Rick, I think you even called out lower couponing in the quarter, which is great. But how do we reconcile that with your overall price mix still being negative in the Consumer Domestic segment despite lapping some extremely intense promotions in the year-ago period? That just -- to me, it doesn't all tie together and it's very surprising. So what's the missing variable? Is it that the breadth of promotion may be down but the depth is still up or is something else going on that I'm missing?

Yes. No, it's a good question. I think I want you to ask that same question next quarter, Steve. I think a lot of the heavier promotion we had was actually in Q3, not as much in Q2. So that's why we're expecting, as we go through the second half, to have positive price mix and a flat to positive price mix in the second half.

Okay. But I mean -- okay, your price mix was negative 6% last year. It's pretty intense. You had some big launches, no? In Q2?

Yes. No, you're right. We had plus 6% on volume, minus 6% on negative price mix, but that was also -- it wasn't all promotional spending. That was also, I think I talked about it last year, our household business was growing very fast. Our personal care business was actually in decline, right? So there are other attributes besides just spending promotional dollars.

Okay. I mean, that's fair. But I guess, I just want to press a little bit more and just -- and test it in the context of what we heard from P&G a few days ago. Because on the one hand -- and others. But on the one hand, their intention to raise pricing in a couple of categories, tissues, diapers, got a lot of attention and I think has prompted a lot of optimism, and I appreciate your optimism with respect to kind of net pricing going forward. But at the same time, if I look at what they actually did, they spent a whole lot more than expected in the quarter on couponing and trade investments and essentially signaled that pricing would remain negative for them through the duration of the calendar year. And I just -- it doesn't -- it just -- it seems like there's a disconnect between what we're seeing in the quarter and that optimism and I just want to test where your optimism is coming from in that context.

Yes. I have 1 or 2 comments, then maybe Matt has something to add, too. But in general, we just went through with Kevin Grundy's question about how a lot of the spending in laundry between Tide and Persil is happening in the premium end, right? In general, it's encouraging to say sequentially from Q1 to Q2 amount sold on deal's down by almost 500 basis points. So yes, they might be up, but the category was down. Even sequentially, Procter, as an example, was down 770 basis points sequentially on amount sold on deal from Q1 to Q2. In a world where commodities are rising, labor is rising, I think that promotional spending will come in line.

Yes, the only thing I would add to that, Steve, is we've been jumping around here between Kimberly and paper products and back to Tide and detergent. I think when you're looking at a company, you have to look at what are the categories that we're in. We're in 15 categories. So on a weighted average basis, our categories have been growing close to 3% for several quarters now. And that's what makes it so buoyant for us. And Rick's right in that you can look at how -- what the laundry war is going on in the premium end, but it's not going on in the value end.

Okay. All right. I will look forward to a positive number in Q3.

Our next question comes from Rupesh Parikh from Oppenheimer.

So I have 2 housekeeping, I guess, questions to start. So first, is it possible to get the blended category growth rates in the U.S.? And then with your full year guidance for this year, do you at all incorporate any pricing benefits that you expect to take?

What was the second one?

For your guidance this year, full year guidance, do you -- have you built in any pricing benefits for some of the pricing actions you're hoping to take down the road?

Yes, we would make no commentary on pricing just yet and what categories were, what retailers or what impact that may have.

Yes, more than happy to answer that, Rupesh, next quarter when you ask it.

You had another housekeeping.

Yes, the blended -- yes, I was hoping to get the blended category growth rates in the U.S., if you look at all your categories.

Yes. Well, I mentioned earlier that in general, the weighted average rate has been approximately 3% for the last 4 quarters, specifically 2.7% weighted growth in Q2.

Okay, great. And then in the Specialty Products business, clearly, the dairy side has been challenged lately. So what gives you confidence that you can get back up to that 5% type growth longer term?

Well, it has been a cyclical business historically. We do have some things right now that are exacerbating the situation with what our government is doing. So we have retaliatory tariffs being imposed on cheese by Mexico. Mexico is the largest export market for U.S. cheese. There's retaliatory tariffs by China on whey protein. It's another derivative of dairy industry. And China is the largest export market for U.S. whey protein. So these duties are slowing the exports of U.S. products, and the prices of all dairy products are expected to be soft as a result. So we get storm clouds right now, so I do think that's going to clear at some point. What gives us confidence long term is the fact that we've now made 3 acquisitions that have got us into other species, meaning cattle and pork. And we do think that over time, that's going to even out. And because those 3 acquisitions were in prebiotics, probiotics and also food safety, we think there's a lot of runway there in that because we've put those 3 businesses together. And we can now go to food producers and offer control of bacteria, both pre-harvest and post-harvest. We think we got a big runway, but we do have to even it out. We got to get more balance between dairy and the other species in the future. But we're confident we're going to get there, Rupesh.

Our next question comes from Olivia Tong from Bank of America.

First, just a point of clarification actually on price mix on international. Because that was a pretty big change relative to Q1, the down 1.4% versus a plus 5% in Q1. And the things you cited last quarter, they don't seem like things would whip around that much. So was there any rollback on the pricing in Mexico or a big step change in the mix of products? Or if you could just give a little bit more color on that dynamic between Q1 and Q2.

Sure. Olivia, it's Rick. In general, it was 2 things. Everything we said last quarter is still true, right, going direct to the German subsidy helped in a positive way on price mix, for example. But it was overshadowed by a couple of things. We have heavier trade promotion in the U.K. and Australia. We have good volume growth there, too, but just heavier trade promotion in those 2 countries. And then in Mexico, we also have our household business growing very quickly. And so that also hurt the mix impact a little bit. And so in general, for the balance of the year, we expect to look actually a lot like Q2, high volume growth and a little bit of price mix.

Got it. And then just in terms of the second half organic sales growth. Obviously, it implies if you're going to get to 3.5% for the year for growth to decelerate, obviously, you don't want to get too far ahead of your skis, but what are some of the key factors driving a potential slowdown in second half growth versus the first half? Because you seemed to downplay the benefits from Henkel's challenges. You obviously feel quite bullish about laundry. Would assume that you expect price mix to improve based on comments that you said -- cited earlier. So just trying to understand whether that's just healthy the conservatism or something that you see coming down the road.

Yes. I think you need to take a step up a little bit, Olivia. It's more we think we have momentum going into the second half at or exceeding our first half. And the way we look at that is we just look at it on a 2-year stack basis. And really, if you remember, domestic growth in the first half of the year, last year was really low. In the second half, it was stronger. So on a stack basis, the first half of the year is 6.2%, for example, and we expect to exceed that, 6.3%, 6.4%, in the back half of the year. So again, it's just looking at it on a 2-year basis. So it's more of a comp story.

Our next question comes from Joe Altobello from Raymond James.

Just want to go back to pricing, not surprisingly. In terms of the pricing that you're contemplating, I know that you don't want to get very specific here. But is that mostly U.S. or will there be an international component to it? Given the move in the dollar, I would think that, that might make that a little bit more challenging.

Well, look, the -- here's what I can say. I mean, this is -- internationally, we have raised price already in 2018 in emerging markets. That would be places like Mexico and Brazil as well as our Latin export markets. And that's both for household and for personal care products. So that's one thing I can tell you that's been in place in 2018. I wouldn't make any comments about 2019 or even second half changes for international. But look, the U.S. is 80% of our business, right? So obviously, it's going to be a pretty important lever to effect price increases in the U.S. But no comment on percentages or categories.

Okay, okay. And in terms of whether you guys are leading or following, I imagine most of these categories will be situations where you're following somebody else? Or could you be leading in categories like condoms, for example?

No. You know what, we're starting to play 20 questions. So no. Good try, Joe. But I think we really don't want to comment any further that. We really want to give ourselves a chance to have our conversations with retailers.

Okay, okay. Just one last one, this is a little bit easier, I think. Are you guys surprised you haven't seen more competition and more new entrants in the dry shampoo category, given how fast it's growing?

No. Actually, there have been some new entrants. So for example, J&J showed up with OGX, right, OGX dry shampoo. And I know in Germany, Nivea has got a dry shampoo that they launched. So yes, I mean, it's attracting a lot of attention but the category in the U.S. grew 33%. Our brand grew 36%. This is even with the new entrants.

So taking share despite that, obviously?

Yes, yes, right, right, right. So it's a fabulous brand. It just really delivers a great consumer experience and I think that's the reason why we continue to grow.

Our next question comes from Lauren Lieberman from Barclays.

We've covered a lot already, but I was curious, one point, Rick, you said earlier that the -- that online sales were going to be and have been pretty lumpy. And I was just curious why. Like, I can certainly understand on-track channel sales being lumpy, whether it's club or whatever else, but I just -- I would think online would be sort of steady rate of demand. So if you could just explain a little bit why that would be the case just as far as my understanding.

Yes. So Lauren, this is Matt. You may remember at CAGNY, we talked about this at one point where we woke up one Monday morning and none of our litter products were being offered. Amazon decided that they weren't making enough margin on that so there were gonzo. So the online retailers do control the shelf, and they can -- with the stroke -- keystroke, they could pretty much take you off. We have been making some adjustments in some of our categories as far as what SKUs we offer online. In some cases, we say, you know what, we're a little bit too broad and we pare back. So if we say -- let's say we had 40 SKUs in one particular category and we said, hey, we're going down to 10, you can have a loss of online sales for that particular category and the inverse is true as well. So it's a shift from the online -- from the bricks-and-mortar to online, but it doesn't all -- it's a little choppy at times.

Our next question comes from Jonathan Feeney from Consumer Edge.

A question for Matthew and a question for Rick. Matthew, where -- obviously, with the price and value dynamics, where do you think, in terms of household penetration size of the category, unit dose in laundry peaks and maybe both for yourself and for the category? You've referenced the slower growth in unit dose over the past few quarters. Just curious your thoughts on that. And for Rick, what dynamics are allowing for the better cash flow realization, particularly seems like better payables performance so far this year?

Yes, I'd say this. When unit dose was first launched, I think a lot of people looked to Europe and say, "Okay, there's more prevalence of unit dose in Europe and that comes in different forms and including tablets." And said, "Well, hey, there's one country that 30% of the laundry detergent is unit dose." The other analogy is dishwashing detergent in the U.S., it's 30% and higher percentage of product is unit dose. So that was sort of the going-in expectation. But it has plateaued for the last 4 quarters. It's in 17 and been, what, 17.4, 17.6, maybe at 17.8 right now. And what we have found over time is that when unit dose was first launched, there was a decline in the liquid laundry detergent category. And the reason for that was because overdosing really stopped with the use of unit dose. But then the growth restarted and liquid laundry has been growing alongside a unit dose for several years now. So I don't have a crystal ball but it's not obvious that there's a path to 30%.

And then to follow on your second question, just what's leading to our great cash flow generation. I think even the raise that we just talked about, the incremental $10 million, typically, it's half cash earnings and half of that's working capital. Over the long term, we've done a phenomenal job in working capital, talked many times about how we've gone from 52 days to in the 20s on our cash conversion cycle. And that has been led, we're top tier in inventory. We're right in line with everybody else on DSO or receivables, and then we still have some room to improve on payables and so that does continue. So hopefully, that gives you a flavor for it.

Our next question comes from Andrea Teixeira from JPMorgan.

So my questions are like just 2 clarifications. First, on the pricing as it relates to guidance. Should we see reducing couponing in the third quarter as (inaudible) and list pricing more into the (inaudible) quarter? And also, are you expecting to increase prices on the private labels that you manufacture as well or this is mostly on the branded products? And second on the taxes. Your new guidance is around 23%, if I understood it correctly from your prepared remarks, for the year. So that still implies, because your taxes were so low in the first half of the year, so that still implies about 24% on the second half. So if that is the case, are you expecting really like this whole pricing situation and lapping a lot of the components you mentioned before and also with increased marketing spending into the third quarter, and then that's going to ease off so your operating results really are going to have to be very strong in the fourth quarter for you to meet the guidance?

Okay. Part one, let me try to take those in order. First of all, on pricing, we said we're not going to comment anymore on pricing. So we're not going to comment on private label, on branded, on list price. Come back next quarter and we'll go through any impact that may or may not have on the outlook. You asked about couponing. When I said positive -- flat to positive price mix on the organic line for the Consumer Domestic business in the back half, yes, its promotions are lower and couponing is lower year-over-year. That's a fair comment to make. On the tax outlook, yes, it implies a 23% for the year, implies a 24% rate in the back half. We had a lower than 24% rate in the front half largely because of option exercises. And that number is volatile and that moves around and it's difficult to forecast. But in general, we said approximately 23% now for the full year. And then you did allude as well to marketing shifts. I talked about that in Q3, higher marketing spend in Q3 coming out of Q4. Operating results are going to be just as solid as they were in the first half in the second half. So we -- you should see our confidence in our guidance because we raised our outlook.

Your next question comes from Jason English from Goldman Sachs.

I wanted to come back. I have 2 questions, one on price and one on gross margin, imagine another price question. But I want to come back and just re-ask Steve Powers' question because I thought it was a good one. You're lapping some promotions. You've got a 100 basis point benefit from couponing in price this quarter. Personal care is now mixing higher, 8 of 11 brands, power brands' promos down. Why is price negative? I still don't understand that.

Yes. I mean, we have incremental trade spending in a couple of our categories, right? We have -- and that's probably, in essence, the easiest way to say it. That's why price mix is still negative in the consumer business. It's a competitive environment. Although it is getting better, I think people forget context sometimes. Back in Q3 of '17, also going back to your question, Q2 of '17, price mix was minus 630. In Q3, it was minus 490. In Q4, it's down to 130. And in Q1, we're down 170. In Q2, we're down 120. And so the curve is coming down in the right direction. We're seeing the macro stuff support that, and that's why we have confidence in the back half to continue to improve.

Very good. I appreciate that. And then quickly on gross margins. I guess, there are a few moving pieces. I could throw a few questions at you, but I'm going to try to stay focused on one. Commodities and freight, you're calling for 130 basis point headwind for the full year. I think it was 100 last quarter. You're 85% hedged. So just seeing movement on that 15%, is that right? And given the hedge position and I know if you go through your Q, you've got a lot of commodity derivatives that historically you haven't really had. Should we be concerned that as your hedges sort of roll off, you've got another step higher and inflationary pressures will roll into next year?

No, good question. Both of them are good questions. On the first one, I would say -- let me try to simplify it. Our outlook was 80 basis points of decline in margin. We've moved to 120 basis points decline in margin for the year. That's 2 pieces. 25 basis points was really because of the oral care withdrawal and about 15 basis points is logistics. And logistics, just to give a sense of what that really is, we saw some more inflation on inbound freight, as an example, that gets rolled through on material pricing. And we also are seeing -- you know that we have shipments that go from the U.S. to Canada. There is a higher spot pricing because truckers don't want to come down from Canada into the U.S. regular -- more regulatory environment with all the new labor laws and whatnot for truckers. So there's a little bit more spot pricing there than we expected. And nothing that material. So in general, commodities are still and distribution is about 130 basis points year-over-year drag. I guess that's the big picture. Your second question, Jason, can you remind me what that was?

85% hedged just of last quarter. Lots of derivative contracts in the Q that we haven't seen in the past. What's the risk of you sort of -- these rolling off into a higher cost environment into next year?

Yes, yes. Really, we -- the biggest hedge we have out there are really for, and you'll see this in the Q, are for our surfactants, our ethylene, for HDPE, for resin and for diesel. And net-net, I would say they're close to washing. I mean, it's nice to have certainty and now we're 88% hedged. And we're already hedged in 2019, in some cases, in order to, again, have predictable movements in our cost structure. But in general, I'd say those net differences aren't that material.

Your next question comes from Mark Astrachan from Stifel.

Wanted to go back to Olivia's question, just as a clarification first. So I still don't necessarily understand the back half commentary, especially as you have Waterpik hitting the organic base. So that would suggest, if you sort of back that away, that the 2-year gets somewhat worse. So I guess, are you being conservative? Are there things that you're baking in there from a geopolitical standpoint that you're expecting potentially to worsen? Maybe just a little bit of color in that context. And then just secondly, separately, the growth in the untracked channels online specifically, how should we think about the opportunity or the white space to put more product into those channels going forward, meaning sustainability of that relative to, not the overall category growth, but just incremental in terms of putting more product there on the virtual shelf? And then just what about the broad level of support or spending for brands in that channel versus tracked channels, meaning is it lower? Does -- is that rate increasing and sort of normalizing versus traditional brick-and-mortar? Any sort of help there would be useful.

Yes, I'll take a swing at the online class of trade and Rick will comment on your second half sales question. So yes, online class of trade sales grew like 40% in the quarter year-over-year. So that would include both our direct-to-consumer business as well as anything we sell in the online class of trade. Now all of that, as you know, is not incremental. So you essentially have consumers moving from one class of trade, often bricks-and-mortar, to the online class of trade. The other question about the cost associated with that, and it is more costly to serve the online class of trade because you do have to create a lot of web pages, you have to maintain them, your -- so the maintenance part of it is expensive. It can be less expensive for digital marketing because I'm sure you've heard that over the past couple of years that the number of impressions is less expensive online than actually going through televisions, for example. So it's a bit of a mix there. We had 1% of our sales were online in 2015. It was 5% 2017. We expect to easily exceed 6% this year. So it is going to continue to grow. The gross margins right now are somewhat comparable between the online class of trade and bricks-and-mortar. So it's not really hurting us from a profitability standpoint on the gross profit line, but it is more expensive to serve that class of trade from an SG&A standpoint. Hope that helps you.

And then in terms of the second half dynamic you're asking about and Olivia did as well, again, on a stacked basis, we have a strong first half and we have an even higher second half. And yes, Waterpik is the tailwind, but let's drill into the volume for a second. First half volume domestically on average was around 3.5%. And last year, volume on average was 5.5%. And so we've told you a couple of times that we don't need to spend as much on couponing, as an example, in the back half of the year because we do have all these tailwinds that we've talked about. So in general, we think the momentum is very strong and we feel good about it.

That concludes the call today. We'll be talking to you again on -- in November after the end of the third quarter. And thanks for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may disconnect, and have a wonderful day.