切遲杜威 (CHD) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. Second-quarter 2005 Church & Dwight earnings conference call. Before we begin I have been asked to remind you that in this presentation the Company's management may make forward-looking statements regarding, among other things, the Company's financial objectives and forecast. 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. Jim Craigie, President and Chief Executive Officer of the Company. Please go ahead, sir.

Good morning, everyone. It's always a pleasure to talk to you, particularly when we have good results to report. I'm going to provide a brief overview of our second-quarter and year-to-date results, and then turn the call over to Zvi Eiref, our Chief Financial Officer. Zvi will provide you with specific details of the total Company's financial results. When Zvi is finished, I will then provide some further information on the factors driving organic sales growth in our key business segments. Then finally I will provide some earnings guidance before we open the call to field questions from you. You should also know that Bob Davies, our Chairman, is here with us today to provide his perspective and answer any questions at the end.

Overall, Church & Dwight delivered solid second-quarter 2005 results. Here are the key highlights. Our net sales increased 29.6% in the second quarter versus year-ago. However, that excludes the buy-in of the other half of Armkel, which did not happen until June 2004. When you exclude onetime impacts, primarily the buy-in of the other half of Armkel for the first five months of 2004, and other minor onetime impacts such as foreign exchange gains and any difference in the number of days in the quarter, our organic net sales growth rate was approximately 4.7% in the second quarter and 4.4% in the total first half.

This solid organic growth rate is slightly above our previously stated organic target of 3% to 4% and the organic growth rate that we achieved in 2004. Please keep in mind that our Company has a long, successful history of organic growth. However in 2001 to 2003, when we were focused on the integration of three major acquisitions, we were only able to achieve 1% to 2% annual organic revenue growth. In 2004 we completed the integration of those acquisitions and focused our attention back on organic growth.

This renewed focus enabled us to reignite the organic growth to an average of 4% that year, behind innovative new products, supported by increased marketing spending. We're going to continue that successful formula in 2005, as demonstrated by the 4.4% organic growth achieved in the first half. I will now turn the call over to Zvi Eiref, our Chief Financial Officer, who will provide you with more specific details on the second-quarter and year-to-date financial results.

Thank you, Jim, and good morning. I have some comments on this morning's press release. To begin with, earnings per share. For the quarter we reported $0.51; that is up $0.21 from last year's $0.30. Last year's results included $0.11 of charges related to the acquisition of the remaining 50% of Armkel that we did not own on May 28, 2004. If you exclude that, those charges, the real comparison is between $0.51 this year and an adjusted $0.41 last year, an increase of $0.10 or 24%.

For the six months EPS is $1.07. That is up $0.31 on last year's $0.76. Excluding the acquisition-related charges of $0.11 I just described, EPS is up $0.20 or 23% over last year's adjusted $0.87. Now you may ask what the effect of Armkel was. In other words, what would the earnings effect have been if we had owned and consolidated the Armkel, 100% of Armkel, in the same period last year? And we also carried the buy-out debt during that period. The answer is that the other 50% of Armkel would have contributed $0.01 to last year's second quarter and $0.07 to the first quarter, for a total of $0.08. That still leaves $0.12, if you like, of the total of 20% increase that I just described. It still leaves $0.12 or 12% increase, if you like, from running the business.

Now let's look at the income statement. Internally, we look at our combined results including Armkel for both this year and last year. These internal statements are attached as exhibits at the back of the release, and I suggest we look at those exhibits rather than the GAAP statements for the time being. I will come back to the GAAP statements later.

On this internal basis, including affiliates, Q2 sales were 456.2 million? That is 24.4 million or 5.7% above last year's reported; or 4.7% higher adjusted for foreign exchange. We provide some commentary in the release; and just to sum up, the strong growers in the quarter were liquid laundry, cat litter, condoms, pregnancy kits, and specialty chemicals. Deodorants were flat, toothpaste was slightly lower, and laundry detergent powder continued to be significantly lower than last year. International sales excluding FX were flat due to some weakness in the European markets.

Gross margin was 39%, down 60 basis points as reported, or 110 basis points after adding back last year's inventory charge and adjusting for a slightly different sales mix. This is after the pricing, promotion efficiency, and cost-reduction actions we have implemented so far. Without these actions, our margin deficit would be well over 200 basis points.

As you see in the release, we have additional pricing, cost reduction, and operational improvement programs in the pipeline. For modeling purposes you should assume that most of these major programs kick in during the fourth quarter rather than third quarter, and that there will probably be some onetime costs associated with some of these programs. So while we are doing a lot of spadework in the second half, I would not expect to see much improvement in gross margin this year. But I would expect to see a significant improvement in early 2006, assuming no significant change in commodity prices.

Continuing down the internal income statement, Q2 marketing is slightly higher and Q2 SG&A slightly lower than last year. Again for modeling purposes, you should assume that there will be significant introductory spending on the Elexa launch, which Jim will describe in a minute, including major display, sampling, and PR activity in Q3. Combined operating profit of 63.6 million is 20% over last year as reported, and 12% higher adjusted for the acquisition-related inventory charge.

Now let's look at the six-months results, again on an internal basis. Six months' combined sales were 889.8 million, 4.4% up both as reported and on an organic basis. The six-months operating income was 133.3; that is 8.6% up as reported, and 5% up adjusted for last year's inventory charge. Operating margin for the six months is 15.0% versus last year's 14.4% as reported, or 14.9% adjusted for inventory charge. So despite the lower gross margin our operating margin is actually slightly higher than last year.

Now let's go back to the GAAP income statement, which only includes Armkel as a 50% affiliate for the first five months of 2004. Here you see the combined effect of the growth in internal operating profit which I have just described plus the benefit of owning 100% of Armkel for the entire first half of 2005. Q2 GAAP operating income increased to 59.8 million, up 18.4 million over last year; and six-months operating income increased to 127.0 million, up 47.1% above last year.

Below the operating line, earnings from affiliates is down, of course, because of the consolidation of Armkel. Interest expense is down for the quarter, but that is because of an $8 million deferred financing charge related to last year's acquisition, which was part of the $0.11 of acquisition charges I mentioned at the beginning of this presentation. It is down for the quarter, but up for the six months, again due to the debt incurred to acquire Armkel. The tax rate is slightly higher than last year, because we now book foreign taxes in the tax line rather than the income from affiliates line. Those are foreign taxes related to the Armkel business.

Finally, some balance sheet comments. Both Accounts Receivable of 205 million and inventories of 158 million are virtually flat with last year, which is positive when you consider that combined sales growth was 5.7% for the quarter. For those of you who track our working capital from the beginning of the year rather than the same period last year, there is some seasonality in the business, especially in Europe. So working capital cycles up in the first half and then cycles down again in the second half.

Net debt is 662 million. That is down 151 million from last year and 52 million from the 2004 year-end. For seasonal reasons, cash flow tends to be stronger in the second half than the first half. EBITDA for the half is estimated at 156 million. Just as a side note on cash flow, net debt at midyear was $35 million higher than it was two years ago; that is in mid 2003. Since then we acquired Uni oral care business for 110 million and the remaining Armkel 50% interest for 250 million; that is a total of 360 million. So over a two-year period we virtually paid off the Unilever and Armkel buy-out debt.

So summing up, strong Q2 EPS growth, up 24%; that is adjusted for last year's acquisition charges. That comes from a combination of higher sales, lower SG&A spending, debt reduction, and full ownership of Armkel, all of those benefits -- all those positives -- partially offset by lower gross margin. With that, back to Jim.

Thank you, Zvi. I would now like to provide you with specific details on some of our key categories to give you a better sense of what is driving the Company's results. Please note that when I mention consumption, I'm talking about all channel consumption, which includes the traditional food and drug channels as measured by IRI; our initial retail consumption results in Wal-Mart; and our actual sales results in other sales channels not measured by IRI, such as the Dollar Stores and Clubs. These non IRI measured channels are growing faster than the measured channels. They represent almost 40% of the Company's total consumption and even greater than that on some of our specific brands. Thus, when you see an IRI or Nielsen share in consumption result, it is often a misleading indicator of the actual total consumption occurring at some of our categories and brands.

Okay, let's first talk about the laundry category, our largest revenue contributor, which consists of liquid and power detergents and fabric softeners. Our laundry sales grew almost double digits in the second quarter, driven by the liquid laundry detergent business, particularly the Arm & Hammer brand. Looking forward we believe that our laundry business is well positioned to continue to achieve solid sales and consumption growth in future quarters, driven by new products, increased distribution, and improved packaging.

For example, our Arm & Hammer liquid laundry detergent is benefiting from the recent launch of our new product which combines detergent and fabric softener technologies. We were the first value-tier brand to offer this new technology, which has achieved strong appeal among consumers in the higher-priced laundry tier. Our sales in this new product our second only to Tide's similar line extension, despite the launch of competing products by other brands in all price tiers.

I would also like to comment for a minute on our pricing strategy in liquid laundry. As many of you know the laundry category has been impacted by higher oil prices more than any other category in our business, since the product and packaging are partially made from oil-based ingredients and the product is heavy, so it's impacted by the higher cost of transportation. As oil and other ingredients have increased in price over the past year, we have been aggressively working on a broad range of cost reduction initiatives to offset these higher costs.

In addition to these cost-reduction initiatives, the Company has already announced selective price increases and pack size changes for about 20% of our laundry detergent line, many of which took place in the second quarter. In addition the Company expects to take similar actions covering the majority of its laundry line during the second half. The totality of all these actions involving price increases, pack size changes, and cost-reduction initiatives are expected to fully recover the margin impact of the higher oil prices in our laundry business in 2006, assuming no further significant increase in commodity prices.

We believe these actions that we're taking to recover the higher cost will maintain our competitiveness in the value-tier laundry category where our brands compete. We're well aware of pricing actions that have been taken by competitors in the mid and high-priced tiers of the laundry category. We're not about to automatically follow pricing actions by our competitors in the higher-price segments when we feel we can offset our higher costs through a combination of cost reduction, pricing, and pack size actions that will enable us to maintain our momentum in the growing value tier of the liquid laundry detergent segment. I should also remind you that our liquid laundry detergent brands have been steadily gaining share and sales for several years at the expense of the higher priced competitors.

Finally, we are also taking actions in our weaker powdered laundry and fabric softener business segments that are expected to improve their sales and consumption trends in future quarters. So in summary, we're taking a broad range of actions to recover the cost increases, to maintain our competitiveness in the growing value tier, and to continue the growth of our laundry detergent business.

The next category I will talk about is our deodorization and cleaners business. This category consists of our Arm & Hammer baking soda, carpet deodorizers, clumping cat litter, and various cleaner brands like Brillo and Scrub Free. Overall this category grew sales in both the second quarter and first six months, driven primarily by our clumping cat litter business. Our new Multi-Cat kitty litter product released in Q3 of last year is the most powerful odor-absorbing cat litter in the market. It is our latest in a long line of innovative cat litter products; and while launched late in 2004, it continues to drive strong sales growth in our cat litter business in 2005, in combination with increased marketing support.

By the way, cat litter is a great example of the differences between IRI reported share results and the actual share trends across all channels. In this category of clumping cat litter, IRI shows our Q2 share just about equal to year-ago, while our total all-channel sales are up double-digit due to these strong sales in the non IRI measured channels.

We have also launched other new products in this category. In particular, in the carpet deodorizer segment, we have just launched a unique new product called Allergen Reducer which we believe will reinvigorate growth in this segment.

The next category I am going to talk about is family planning. This category consists of our condom and home diagnostics business. These two businesses continue to achieve strong total sales and consumption growth in the mid to high single digits, driven by new products with superior marketing programs. On condoms we've driven steady sales growth over the past two years by launching innovative higher-margin new products, such as Twisted Pleasure and the Warm Sensations line. We're continuing this successful formula in 2005, (technical difficulty) behind the launch of another Warm Sensation product and a new Mint Tickle product designed to extend protection for oral sex.

In addition, in June we launched a new highly engaging advertising campaign called "Make a Difference" that is designed to increase demand for condoms via an increased emphasis on the health risks of unprotected sex. This is the first condom advertising campaign since 1991 to be shown on prime-time national television starting after 10 PM. The risks addressed by this campaign are significant, when you consider the fact that over 19 million people are infected with STDs each year, yet people only use condoms in 25% of the times when they have sex with someone that they can't be sure of their sexual health history. Our new ad campaign will hopefully change consumer behavior by enlightening them about the risks in a compelling manner.

In our home diagnostics business we continue to achieve strong sales and consumption growth. We have strengthened our number two brand position behind superior technology and increased marketing support of our pregnancy kit business. We have also recently launched a new ovulation product that will enable women to better time their ovulation cycle to increase their chance of getting pregnant.

Next I would like to talk about our skincare business which consists of our depilatories and underarm deodorants. Our depilatories business achieved solid sales growth in the first six months of this year, driven primarily by new products and improved marketing programs. The new products included a Nair bladeless shaving kit, which was supported by a new advertising campaign entitled, "the less you wear, the more you need Nair."

On our underarm deodorant business, consisting of our Arrid and Arm & Hammer Ultramax brands, we have been experiencing declining sales and consumption trends in this category for a while, as a result of fierce competition and unsuccessful marketing initiatives by us in 2004. I'm pleased to report that second quarter deodorant sales were equal to a year ago, behind the launch of the entire Arrid productline and increased marketing support. We also revamped the marketing strategies on the Arm & Hammer Ultramax brand. We expect that these new initiatives will continue to improve the sales and consumption results of the underarm deodorant business in coming quarters, although we admit that this category is extremely competitive and we're a small player in it.

Next I would like to say a few words about our oral care business. As you recall this business segment consists of our Arm & Hammer Dental Care brand and the four brands acquired in the 2003 acquisition of Unilever's domestic oral care business. The Unilever brands -- namely Mentadent, Close-Up, Aim, and Pepsodent -- were in long-term decline when we bought them. We have taken aggressive actions over the past year to improve the products, the packaging, advertising, and merchandising of these brands.

While their consumption trends continue to be below year-ago, I am pleased to report that we have stopped the bleeding, as shown by the fact that the total net sales of the four Unilever brands were only slightly below year-ago in the first six months. The key difference between the flat net sales and lower consumption is due to the fact that we eliminated unprofitable trade deals that were driving last year's consumption, so leading to lower net sales since we account for trade promotions above the net sales line. We believe that the elimination of these unprofitable deals, including buy one get one free offers, is in the best long-term interest of these brands.

We also launched an appealing new form of Mentadent called Replenishing White, which releverages the Company's proprietary Liquid Calcium technology that restores enamel luster. This new product and a new advertising campaign have driven positive sales growth for Mentadent in the first and second quarters. In total, we remain concerned about the increased competitive activity of this category, but we are encouraged by the progress being made in our oral care business.

Let me switch gears now and talk about the future. While we're pleased with the solid second quarter and year-to-date results, we are never satisfied. We are well aware that the accretive power of our recent acquisitions and the significant efforts to improve the cost structure of the Company can produce more benefit than we've taken to the bottom line. We are using this benefit to deal with a variety of issues and opportunities.

In terms of dealing with issues, we've been able to absorb a significant percentage of the increase in the cost of raw material and packaging, and still deliver positive earnings growth. More importantly, we are using the benefit of the accretive acquisitions to increase our R&D and marketing spending over the course of this year, to design and launch innovative new products that will continue to fuel our organic growth and improve the long-term health of the business.

On that front, I am proud to finally announce some details around a major new product initiative that we've been telling you about for a while that we would launch in the second half of this year. This initiative represents a second step in our Company's efforts to stop the sexually transmitted disease crisis in the U.S. Crisis is a proper categorization of this issue, when you consider the following facts. Over 65 million Americans currently have an incurable STD. Over 19 more million more people are infected with STDs each year. Other than abstinence, condoms are the only effective means to help reduce the transmission of STDs. And yet as I said earlier, people only use condoms in 25% of the times when they have sex with someone that they cannot be sure of their sexual history.

Our first step toward trying to stop the spread of STDs was through the new Trojan ad campaign that I mentioned earlier, which heightens consumers' awareness about the health risks of unprotected sex. Our new initiative is based on consumer research which revealed the following. Women are 60% were likely to get an STD than men, yet women purchase only one-third of condoms sold, because they're very inhibited about buying condoms and other sexual health products.

So our initiative involves a new premium line of unique sexual health products under the Trojan brand that are designed from a woman's perspective. The new line, called Elexa, includes condoms and other sexual health products that are designed to provide women with the freedom to pursue a healthy and fulfilling sex life on their own terms. Importantly, this new productline will be located in the feminine care aisle of the store, separate from the current Trojan products. This new store location will enable women to overcome their inhibitions about buying sexual health products by putting them in an aisle of the store shopped primarily by women.

The launch of this Elexa line will receive significant advertising, display, and other marketing support in the third and fourth quarters. Retailer reception of the Elexa line has been outstanding in all key channels. We're very proud of this major initiative, as it will encourage more women to buy condoms, which will hopefully lead to greater usage and thereby reduce the spread of STDs. For competitive reason I do not want to give any further details about this initiative until after the product begins shipments at the end of this month.

We also intend to increase our marketing support in the second half of the year on some of our other key businesses to drive future consumption and sales of some of the exciting new products that I mentioned earlier. This strategy has already proven successful by the improvement of our organic growth rate to almost 4% in total 2004 and the increase of this organic growth level to 4.4% in the first half of this year.

As we look forward, I offer you the following perspective. We feel quite cable of dealing with higher material and transportation costs, driven by the current high energy prices at levels up to $60 a barrel for oil. We are well aware of and actively addressing competitive activities in all of our core categories. We're planning to continue to tighten our belt on SG&A spending.

Let me translate this into specific guidance for the rest of this year. Previously we told you that we expect to deliver an EPS of at least $1.75 in 2005. Despite our strong first half we are going to reaffirm that guidance at this time. While we could exceed that target if we maintain the status quo, we are choosing instead to maintain the ability to deploy additional earnings power for two purposes. First, we are going to pursue an ambitious level of new product and marketing activity in the second half to drive continued strong organic growth. This includes initiatives like the launch of the new Elexa line of sexual health products. Second, we're in the process of evaluating several operational improvement programs for possible implementation in late 2005 that will drive future margin improvement.

For competitive reasons we cannot provide any further details on either the marketing or operational initiatives at this time. We will provide further details of these initiatives in future quarterly earnings calls once the programs have been implemented.

I would also like to comment that the Company is in the final stages of completing a major strategic planning process. This effort will establish our strategic and financial goals for the three-year period encompassing 2006 to 2008. While this effort is not yet completed, I can share with you the following top-line targets. First, we will target for average annual organic sales growth of at least 3% to 4%. This will be driven by improved portfolio management, in which we have reassessed the realistic growth potential of each of our categories; and we're realigning corporate resources to most efficiently drive profitable organic growth.

Second, we will target to achieve gross margin improvement of 100 basis points a year. While we will not achieve gross margin improvement in 2005 due to the unexpected and dramatic increases of the cost of oil, we have a proven track record of driving gross margin improvement. Also keep in mind that our Company's gross margin is well below our competitors. So we have room to improve as we implement best practices across our entire global supply chain. To this end we're aggressively pursuing cost actions across our entire enterprise, including manufacturing distribution costs, promotional spending efficiencies, and organizational efficiencies. We will deploy the status on these (ph) actions to both increase our gross margins by 100 basis points a year and to increase our marketing spending to drive organic growth.

We will also continue to keep a very tight rein on SG&A spending to keep its growth rate no more than equal to the rate of organic revenue growth. The combined impact of these actions is expected to drive 8% to 10% annual operating profit improvement. On top of this we will continue to aggressively manage our balance sheet to drive at least 2% EPS improvement through a combination of lower debt payments and lower taxes. In total these actions are expected to derive average annual EPS growth of 10% to 12.5% per year. This performance should continue to put our Company in the top quartile of EPS growth for consumer packaged goods companies.

I should also note that our organic goals exclude the benefit of any future acquisitions. We expect to stay active in our role as a consolidator in the consumer packaged goods industry, but we're not counting on acquisitions to deliver continued top-quartile EPS performance. That ends our presentation. I will now open the call to any questions you that may have, which Steve, Bob, and I will do our best to answer. Thank you.

(OPERATOR INSTRUCTIONS) Connie Maneaty of Prudential.

Let me ask a few questions on the Elexa line; we will see how much you can answer. What do you suppose the size of the pipeline still is in the second half? Are we looking at $10 million or 50?

More towards the lower end, Connie, just to be conservative.

How many SKUs will the line have?

I don't want to comment on SKUs. There are four separate parts of the line, one of which is condoms, and three parts in other sexual health products. I will tell you that condoms, while always the core of the line, represent in our estimation less than 50% of the sales. So I would tell you the good news is this is a major initiative that will extend the Trojan brand beyond condoms. We are very pleased we have taken that action.

How much shelf space are you going to get?

Enough to fill all the SKUs.

So is it like a foot, maybe more?

It would be more. More like I would expect around 2 feet.

Just one question, then. Are these products going to be priced at a premium to Trojan, or a premium to something else?

They will be priced at the premium end of our Trojan line. More like our new products launched in the past year or two, which were all launched at a premium to the base condom line.

One final question on the way you're reformulating or repackaging or whatever you are doing to laundry detergents to offset the raw material price increase. Is the quality of Arm & Hammer or Xtra changing?

No, we have not changed our efficacy at all.

So you are finding similar ingredients at lower prices?

Yes.

Okay, great. That's it for me. Thanks.

Alice Longley with Fulcrum.

In your guidance for the year, in EPS, are you including the onetime costs associated with the profitability improvement programs?

Yes.

Okay. Are you willing to break out about how much that might be?

No.

With the increased marketing -- I might have missed something. Did you say that your organic growth might be higher in the second half because you're spending so much more than the 4%?

No, I would say right now it is consistent with our 3% to 4% call. Alice, may I comment back on a second on the operational improvements? As we have said in the press release, the reason we're not being more specific -- we're not trying to avoid you -- but those things are still in the process of being evaluated. We haven't pulled the trigger on them yet. We will decide those over the next coming months. And as we do that and make the decision of whether or not to make them, there is a whole slew of them we're looking at, then we will know the true cost impact in the back half of the year.

Okay. Another question. If I put Trojan and First Response together, and let's say look out to 2006 on the operating profit line, am I correct in guessing that they might be 25% to 30% of operating profit?

We don't like to comment on segments of our business.

Is that too high?

We don't like to comment on segments of our business.

All right. Would kind of tax rate should we use for the second half? Because we have got tough tax comparisons.

It is the same rate as we had year to date, and it's around 34%.

Okay. I have one other question. In the quarter, I don't think you broke out price for the quarter. That would include the reduction in price promotions for the trade and toothpaste. If you put the two together, what was that?

Let's try and address -- by the way, the tax rate year to date is 34.5%. Just correcting myself.

We should use that for the second half?

Yes, I think so. Yes. (indiscernible) You take a price in its broadest sense, which is price list increases, washload increases -- that is, sizing changes -- and promotional efficiencies that we have derived. You're saying -- the question is, what is the effect of that on the first half?

First half and second quarter would be great.

I would say for the first half, it is in the 70 to 80 basis points kind of range versus the same period last year. I can not give you precisely for the second quarter (multiple speakers).

That is 70 to 80 basis points up, right?

Yes, and it is our objective to get - to obviously increase that. We will see some more in the second half; and you will see -- going to hopefully double that, I would say, this time next year, at least.

All right. I guess that's it. Thank you.

Dara Mohsenian with JP Morgan.

With the Elexa launch, can you give us some sense of what your full-year marketing expectation is?

We will definitely be increasing marketing support in the back half, as we did in the front half of the year. I don't want to give an exact number. I just will tell you we will spend more in the back half. I think if you have watched some recent articles, I would say some of our competitors are in a situation where they're having to cut their spending in the back half of the year. So we feel that the kind of increases we're looking at will, again, increase our competitive stance and all be behind some great new products that we launched already, and more to come like Elexa.

Okay. Did you guys see a sales pickup in the quarter with the new condom marketing?

It was too early to really tell. Honestly, the campaign just started in June, so it only caught the very tail end of the quarter. Advertising in general isn't intended to have an immediate short-term impact like that. Again I would tell you too, that was just one part of a several-stage effort we have to drive increased condom usage to attack this terrible issue going on with STDs. It is just too early for the second quarter to have seen any impact.

Okay. I know you do not want to get into a lot of detail on the operational improvement programs. But I guess can you give us some kind of sense of how significant these benefits can be long term? Are these really significant changes you're thinking about?

What we're trying to do is to get -- first of all, our first objective is to get back to where we started, which is the margin structure of the first half of last year. That is where we expect to be at the beginning of next year, assuming no further significant change in commodity prices. From there onwards, we obviously want to get back to our rhythm here. Our traditional objective has been 100 basis points a year. We did that in '03 and '04, and were it not for the commodity prices we would have had another margin improvement this year obviously.

So I hope that helps you. We just can't be very specific about what is coming, what is ahead of us on this front. We will be more specific possibly in the next call.

Okay, that's helpful. Thanks.

Bill Schmitz with Deutsche Bank.

Can you tell us what the other products are in this Elexa line? I know you don't want to get into too much detail. But what exactly is sexual health products?

Bill, we don't want to comment. As I said before, there are four segments to the line, one of which is condoms; and there's three other segments. Just since the product hasn't shipped yet, I really don't want to get into the details, to give my competition any more of an edge than they would normally have.

Doesn't the trade have it already, though? So I assume they have knowledge. But whatever. On the laundry care side, have you seen a marked change in the competitive dynamic on the value tier? I know P&G launched that Pure & Simple product, and it looks like pricing is not really sticking. Are you noticing that in the marketplace at all?

No. What we understand P&G is doing is just in a very tiny test market, Bill. I would just say our business continues to do very well. Like I said to you before, our liquid laundry business was up almost double digits in the second quarter. So we are very pleased with our position, and believe we're doing the right actions in terms of pricing, and pack size changes, and cost reductions to maintain that momentum.

Will you lose share to maintain profits in the back half of the year?

I don't think we need to do that, Bill. I think we can grow share and grow our profits in the (multiple speakers).

That's fair. Just sort of a housekeeping item. Are you going to continue to provide us with the pretax (ph) by segments now? So the sales breakdown by the four different product categories?

First of all, we provide sales by domestic in three segments; that is the household, the personal care, and the Specialty Products. Then of course for segment reporting we treat -- we have three segments, domestic, Specialty Products, and international.

Formerly, didn't you give us deodorizers and cleaners, laundry and household, personal care, domestic, international, and then specialty chemicals?

We did and we combined. Now we combine the two household product categories here, which create one household product line, if you like. The reason for that, frankly, is we should have done that when we acquired Armkel. We now have a balanced -- two balanced product lines, that is household and personal care. We think that that is the way to report it.

Okay, that's fair. Just in terms of the EPS guidance for the back half of the year, it looks like there is going to be a pretty sharp pullback in year-over-year EPS. If you exclude the extraordinaries in the year-ago, of course. Is that -- that's realistic, yes?

No, Bill. Again, if we maintain just status quo in the business we would have a good second half of the year. But we are keeping our powder dry right now to deal with several things. We want to increase our marketing spending. We have a whole list of some operational improvements that are good for the long-term margin growth of the business. And I would tell you, too, quite honestly with the price of oil the way it's popping around right now, it is only prudent to stay flexible with that. So I reinforce -- we keep saying at least $1.75, so I don't think you should misread into that that there is any problems in the second half of the year.

Sure, not problems. I just know you're going to accelerate spending pretty aggressively, which is good for the business.

Right.

All right. Thanks very much.

Joe Altobello with CIBC.

Good morning. I just wanted to go back to your last comment, Jim, regarding your roll as consolidator in this group, and I want to get a sense of what the acquisition environment looks like at this point in terms of multiples? Are you seeing more things come across your desk this year versus last year? Are they more expensive or are they coming down? The second part of that question is, short of an acquisition, when would you make these decisions to start to buy back stock?

Your question, I think the market is very active, I would say. There is quite a bit out there and we are well aware of all of it. I would tell you it is a seller's market in the sense there's, to us, a lot of private equity money out there chasing deals. Not the environment that was there last couple of years when we made some very good acquisitions. So that would be that. As far as share repurchase, we are not there yet. Let me get Zvi to answer that one.

Joe, because the stock repurchase is a Board decision, which is something we don't have at this point, I can give you a personal point of view that as we get into the two times debt to EBITDA area that I will certainly be thinking about it and possibly recommending something like that, some kind of stock repurchase program for the Board. That would put it somewhere in the first half of next year. But it is subject to Board approval.

So short of something in the back half of this year, we should see some type of repo by first quarter of '06?

I am saying that would be something I might be recommending in the first half of '06.

Okay, fair enough. Thanks, guys.

Ilias Papasadariou (ph) with Lehman Brothers.

Congratulations on the quarter. I wanted to ask you, what was the driver of the negative sales mix that impacted gross margins?

I thin it is nothing very complicated. It is the effect of higher household products versus personal care sales in the quarter.

Would you expect that to go away soon, or should we see that staying for the rest of the year?

I don't have a strong point of view on that. (multiple speakers) either way.

I think in your release you mentioned that distribution expansion in the second lines helped sales. Is this distribution expansion largely complete?

No; I would tell you it is ongoing. We are continuing to launch new products like Elexa and some other new lines, so. And we're also filling voids we have on some of our products. It is one of the beauties of our Company, our liquid laundry detergent business is, like I said, driving almost double-digit sales growth; and yet we still have probably somewhere (technical difficulty) 15% of the U.S. where we still do not have APD (ph) distribution yet.

So we have the opportunity to continue to grow our business in terms of distribution, which a lot of our competitors don't have. So we are account by account attacking that and closing voids. So there will be ongoing distribution costs to our business, which is good news.

Okay. Lastly on the specialty chemicals business, should we assume that sales growth was primarily related to price increases? Or could you elaborate a little bit more on that segment?

There definitely was some price increase factor to the sales growth. But I would also tell you our business is doing very well. Their animal nutrition segment continues to capitalize on the very healthy dairy economy. We are increasing our penetration of that with new higher value products. So it was a mix of both some pricing we took to reflect commodity costs and also some strong organic growth in our business.

Okay, great. Thanks a lot.

Joe Norton with Banc of America Securities.

Just coming back to the second half EPS, I am just trying to be clear on this. So you don't feel that EPS will be down in the second half?

At $1.75, it will be up on a GAAP basis. Are you looking at GAAP or are you looking at adjusted (multiple speakers)?

Adjusted; sorry.

On an adjusted basis, it is saying that on an adjusted basis if we stick to the $1.75 -- remember, we said at least $1.75. Right?

Right, I mean I am just trying to get -- I mean, I know at least. But the consensus right now is that in the $1.80s and you beat the number by $0.08 or $0.10 this morning. So I am just curious. Are you comfortable with that consensus? If consensus goes up $0.05 are you comfortable with that?

I don't want to comment on the consensus of analysts. But I think as we told you the business had a very good first half. If we were just to continue that status quo, we would expect to have a good second half. But we're taking the opportunity right now to take that earnings potential and potentially spend it back on more marketing or operational initiatives or (technical difficulty) with commodity costs. At this point in time, given all those opportunities in front of us which are all, except for (ph) the first two, good for the long-term growth of the business, we're just keeping our powder dry and continuing to hold at the at least $1.75 call.

Then a couple more on the laundry business. First of all, did you tell us what the consumption growth was in the quarter?

I didn't give you that. I could give you a rough number here, if you give me a second to look that up. But it was very strong. Our laundry consumption growth was high single digits.

Okay. Can you tell us any more? Is that driven -- that is an all-in number that includes clubs, etc.?

That is all channels, and it was driven largely by our liquid laundry detergent business, which was very strong.

Was there any particular channel that was driving that?

We continue to do well particularly in the channels that are growing the quickest, which is the mass and dollar store channels. So again that is good news that we are very strong in those channels and doing well. We're holding our own in FDKDS (ph) channel. That's typical (ph) food and drug, I'm sorry for the acronym.

Just clarify on the price increases, when you say 20% of the line you have had price increases, does that include the pack size change, or is that additional?

Yes, it does. It includes any initiative which would increase the price per ounce of the product.

Okay, got it.

That is list pricing; that is merchandising effects; that is cost-reduction initiatives; that is pack size changes.

Okay. Just a couple more.

It does not include cost reduction. It includes any initiative that increases the price per washload, I would say.

On the Elexa launch, I know you don't want to say too much about these. But are these -- the products that are not condoms -- are these products that are going to be new to the marketplace? Are these going to be things that no one has ever seen before?

Let me just comment, Joe. These products were all designed from extensive consumer research with thousands of women and talking to them about the kind of products they want. The products we are offering, I would say part of them are very relatively new to the market and part are just different versions of things out there that, again, we modified to be specifically designed with what women have asked us to do. So I would say it is part unique and part changes to some products out there.

Just on the branding, how is it going to be branded exactly? Is it going to be branded Elexa or is it going to be branded Trojan?

The Elexa name will prominent on the package, but it will be from Trojan. It is -- we're calling it, it's a woman's perspective by Trojan, with the key name that you will see on the package being Elexa. E-l-e-x-a.

Okay, got. I think that's it. Thank you.

Alice Longley with Fulcrum.

Just a couple of follow-up questions. When you said your pricing for the first half was up 70 to 80 basis points, was that for the Company overall or just the U.S. business? What was that covering?

I was talking about U.S. domestic consumer.

Okay. Just a clarification. When you said gross margin should be even starting in the first quarter, that means you think gross margins might be flat year-over-year first-quarter '06 to first quarter-'05. Is that right?

I'm sorry. What I'm saying is at that point we should have recaptured the margin deficit that we have incurred, expect to incur this year. So we should be back to the kind of margins we had in the beginning of, say, the first half of '04.

Oh my goodness. So the gross margin you think might be up, then?

That would be up on this year, yes. Absolutely. Yes. Now that is assuming no further commodity -- no further major commodity shifts, and also and actually it assumes a similar product mix, obviously. Those two (ph) would affect it one way or the other. So that is where we would like to be.

That assumes the cost of oil is what?

I'm sorry, what was the question?

That assumes that the cost of oil is what?

Our thinking is that we're basing our model on the assumption that oil will remain about $60 a barrel. Right about the current level. It's a complicated equation, because crude itself is only part of the equation. It also assumes there is no major supply disruptions, assumes there is nothing strange happens in the worldwide supply-demand equation. But crude is only part of the equation. But assuming everything else stays the same we're assuming 60 -- all the other factors are as they are today, then we're assuming $60 crude.

If we look at the fourth quarter of this year, and we take out whatever might be some one-time profitability improvement charges, where might the gross margins be in the fourth-quarter '05 versus the fourth quarter of '04?

I said I would not expect much improvement.

But they might be flattish you think?

Over last year. In fact I don't think -- I would not expect an improvement over last year.

But would you expect them to be flat, or down a little bit, or?

Because I am influenced nearby (ph) I am trying to think through the implications of what we might do in the one-time arena. I would not expect an improvement, Alice. Exactly. I would not expect an improvement.

But they have been down sharply. So the issue is it would be quite an improvement if they were even flat with a year ago? Is that where you think they might be?

I think the gap will close; but I would not expect it to close entirely.

So down maybe as much as 50 basis points?

I think we're getting too precise here.

Okay. But flat to down some, a little bit.

I'm not -- you are being too precise.

All right. One final question. You gave an interesting calculation at the very beginning of the call, that if you took out -- if you made the comparisons all apples-to-apples into the non-recurring charges and whatever, that the ongoing business would have generated profit growth of 12%. Yet, we have had organic growth of I guess 4.5% for the first half and gross margins down a lot. How do you get to the 12% with organic growth 4.5 and gross margins down a lot?

We have high sales, we have lower SG&A, we have debt reduction, and those two -- then we have the ownership of Armkel.

But that was all in the year-ago number.

If you exclude Armkel, that come (ph) 12%, yes. Combination of the elements I have just give you.

So it was the, quote, other SG&A ratio improvement combined with interest expense drop.

Right, right, right.

Thank you very much.

Alec Patterson with RCM.

I just want to turn the implicit into explicit. You're saying at least $0.68 in the back half of the year?

That is correct.

Okay, thank you. In terms of the factors that you highlighted driving that, in particular, marketing increases and operational spend that are relatively one-time, first, it sounds like the marketing spending initiative may be the greater chunk of that. Is that a fair assessment?

No, I would not jump to that conclusion. The operational improvements, again, they are in-process. We're looking at them. Could be significant; maybe even more than the marketing spending.

Really? Are they going to be non-cash or cash, kind of a split between the two?

I would say a split between the two is correct, yes.

Since they have an element and it is sounding like they're one-time in nature; but it sounds like if you didn't take these initiatives, these spending initiatives, we certainly should not look for the benefits on gross margins in '06 that you're highlighting.

Right. When I talked about a flat to something, talked about flat to lower margin in the second half. That is before these charges, so if there are the charges. So that would also be a factor on the gross margin.

I guess I am just -- because you sort of hesitate to say that -- how much it is, when you're going to do it, if you're going to do it. And if you don't do it, it sounds like that changes the outlook for '06.

For '06?

Correct.

Yes; it would have an effect on '06. Yes.

I just wanted to be clear on that. On your long-term goals, what do you guys think is the appropriate level of marketing to sales ratio? This seems to be the number that is the most elusive in the modeling process, as everybody moves higher and then moves back down. Can you give a sense of what you think is an appropriate level for you guys to drive your 3% to 4% sales growth?

Let me try to address that. Let me first remind you that we have significantly increased our marketing spending as a percent of net revenue from less than 10% in 2003 to about 11% last year. We have been around that range in the first part of this year. We do expect -- we did increase the marketing spending slightly in the first half. We expect to increase it in the second half. But I think long-term you should expect to see our marketing spending in the 11% to 12% of net revenue range for the Company. We feel that is very competitor with our key competitors.

Okay, great. Thank you very much.

Connie Maneaty with Prudential.

I am just sitting here playing with my model and trying to figure out the split between the third and the fourth quarters in terms of the adjusted EPS declines. Because $0.68 in the second half should imply declines in both Q3 and Q4. Is that right?

I don't think we are (indiscernible) that precise, Connie.

That is not precise.

We can't be that precise. What I would say to you, there is obviously a lot more marketing in Q3 than there was last year. And if we have onetime costs associated with operational improvements, which we may or may not have, if we have them they will likely be in Q4.

Is there more marketing in Q3 or Q4?

I'm sorry, say it again?

The marketing spending, would it be higher in Q3 or higher in Q4?

It will definitely be higher in Q3; and depending on what else we do, it could also be higher in Q4.

So the increased sampling and displays, does that all get booked in marketing, or does part of it get booked in cost of goods?

The displays are basically in marketing. Sampling does tend to go through cost of goods.

Okay, thank you.

Those are all the questions we have, sir.

Okay. I would like to thank you all for listening to our call today. Again it was a very good quarter for us and we are off to a very good start this year. We are very pleased what is going on here. We are continuing to aggressively attack this business. Let me just turn it over for a second to Bob Davies, our Chairman.

Hi, it's Bob Davies. I just want to comment that I am altogether very pleased with the progress of CHD under Jim Craigie's leadership. I would say that the Trojan-Elexa initiative is a particularly good example, extending our powerful Trojan brand into women's health, and expanding it beyond condoms, represents a highly innovative move and it is directly traceable to Jim's leadership.

In addition, under Jim's leadership, the Company has successfully managed through much higher costs, driven by oil, affecting our highly important laundry business. So I just want to comment in the end that I continue to be confident and optimistic about Church & Dwight's future. Back to Jim.

Again, thank you, everybody. We look forward to talking to you in three months, and hopefully continue to report some good news to you. Thank you very much.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect. Good day.