切遲杜威 (CHD) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first quarter 2006 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 risk and uncertainties and other factors that are described in detail in the Company's SEC filings. I would now like to introduce your host for today's call, Mr. Jim Craigie, President and Chief Executive Officer of the Company. Please proceed, sir.

Good morning, everyone. It is always a pleasure to talk to you, particularly when we have good results to report. I am going to give you a brief overview of our first quarter 2006 business results and then turn the call over to Zvi Eiref, our Chief Financial Officer. Zvi will provide you with specific details of the Company's first quarter financial results. When Zvi is finished I will provide some further information on the factor driving organic sales growth in our key business segments. And finally, I will provide some earnings guidance before we open the call to questions from you.

You should also know that Bob Davies, our Chairman, is on the call with us today to provide his perspective on any questions at the end. Overall Church & Dwight delivered solid first quarter 2006 results. Here are the key highlights. Our net sales increased over 5% in the first quarter versus year ago. When you adjust for the impact of recent acquisitions, calendar differences between the two years and other minor onetime impacts, such as foreign exchange losses our organic net sales growth rate was approximately 4% in the first quarter. This solid organic growth rate is consistent with our stated revenue growth target of 3% to 4%. The 4% revenue growth rate achieved in the first quarter of 2006 builds upon the successful growth formula in 2005 in which we averaged 5% organic revenue growth.

I will now turn the call over to Zvi Eiref, our Chief Financial Officer, who will provide you with more specific details on our first quarter financial results.

Thank you, Jim, and good morning. I will start with the headlines. Q1 sales increased 5% on a reported and 4% on an organic basis. Earnings per share were $0.60, an increase of $0.04 or 7% on a reported and $0.06 or 11% excluding the FAS 123 stock option charge which we adopted on 1-1-06 on a prospective basis. There were some unusual items in the quarter, which I'll talk about but I do think that these items more or less net out, leaving $0.60, or $0.62 excluding the option charge, a reasonable statement of what happened in the quarter.

One other background note, with the disappearance of Armkel we no longer report internal numbers, including unconsolidated affiliates. We are just reporting GAAP numbers, and the results of our remaining unconsolidated affiliates which are two joint ventures in the specialty products area, are included in the equity and affiliates line.

Now let's drill down the P&L account beginning with sales. As I said, Q1 sales of $442 million were 5% higher as reported. As a productline analysis and a commentary in the release broadly laundry, pet, condoms, kits and specialty chemicals all did well in the quarter, and toothpaste and antiperspirants did not do well. The release also includes a table showing how we get to the organic sales growth number. The main adjustments are the exclusion of acquired brand sales of $12 million and the addition of one calendar day since this year's first quarter ended March 31 versus last year's which ended on April first. That results in organic growth rate of around 4%.

The 4% growth rate includes pricing and promotion efficiency gains which we estimate to be around 2% and the remaining gain is volume and mix. As reported, there was a major price increase; about 35% of our consumer products on February first. But we protected promotions agreed to the further pricing announcement through March 31, as a result more than half of the pricing benefit will begin to flow in Q2.

Moving down the P&L account gross margin of 38.2% is 10 basis points above last year. We described to you how we accounted for SpinBrush, but we don't actually think that had any material effect on the gross margin percentage though obviously it helped the addition -- or it did help the gross profit in dollar terms. So the 38.2 is a fair representation of the gross margin for the quarter. We estimate that during the past year we incurred commodity inflation of around 300 basis points. So in effect since our gross margin percentage is about the same as last year, we absorbed all 300 basis points through pricing, cost reduction initiatives and to a lesser extent, the addition of the higher margin SpinBrush business.

Another important comparison is with Q4 2005 which was our low point for gross margin. The Q4 gross margin was 32.5%. If we add back restructuring charges of $11 million to that quarter, Q4 adjusted gross margin would have been 35.2%. So Q1, 38% is about 300 basis points higher than Q4's adjusted 35%. The same reasons applied here -- that is the pricing, cost reduction initiatives and SpinBrush, another reason is the diminishing effect of Hurricane Katrina. There were some residual effects of Katrina in Q1. For example we were still using some imported surfactant early in the quarter. But the impact was far less, obviously far less than the impact in Q4 when we reported Katrina related costs of about $6 million.

Continuing down the P&L marketing and SG&A expenses we provide some commentary in the release. Marketing spending was actually down for Q1 versus last year, but I just want to reiterate that we expect it to be much higher in Q2 and Q3. SG&A includes $1.8 million of the $2.1 million stock option expense charge. The rest of it is in cost of goods. Adjusted for some unusual items, including the $1.8 million trademark impairment charge, and of course also the incremental SG&A costs with the SpinBrush business.

Operating profit of $72.3 million was $5.1 million or 7% higher than last year as reported. And $7.2 million or 11% higher including the stock option charge, operating margin was 16.5% versus last year's 16.0%. Below the operating line interest expense was actually slightly higher than last year obviously due to higher interest rates, but the $2.8 million gain in other expense is due to investment and investment gain and foreign exchange gains.

The tax line is unusual. Congress has not approved the 2006 tax bill, so the R&D tax credit is now technically expired. That is the main reason for the unusually high tax rate in the quarter of 39.7%. If the R&D tax credit is reinstated, which most people expect, our tax rate will be down to last year's 35%. If it is not reinstated, tax rate for the year will be probably around 36%.

Bottom line, EPS $0.60 or $0.62 excluding stock option charge versus last year's $0.56. We are not providing an adjusted EPS to take account of all the unusual items, but let me recap the unusual items include on the negative side, the $1.8 million trademark impairment charge and the almost 500 basis point increase of the tax rate. On the other side of the positive side was a $4 million reduction in the marketing expense and the $2.6 million gain in other expenses below the operating line. We think that these more or less net out, as I said before, we think that $0.60 is a fair number for the quarter.

Turning to the balance sheet, accounts receivable up slightly higher at $189. Inventory is at $23 million or 15% higher at $181 million. I can tell you inventory investment in the acquired brands, that is SpinBrush and a Brazilian business, accounted for about half this increase. There were two other special situations -- one related to a potential plant problem, and the other related to Katrina, which accounted for another 20, 25% of this increase. And the rest of it is normal inventory build.

Net debt declined $61 million to $628 million. EBITDA increased $8 million to $89 million. Operating cash flow despite the higher EBITDA, operating cash flow actually declined $18 million to $13 million -- (indiscernible) $18 million to $13 million -- that is due to the inventory build that I described and the timing of tax payment. And bear in mind that Q1 tends to be a relatively weak cash flow quarter for us due to the working capital build and the timing of bonus and profit-sharing payments to employees.

Finally, let me talk about our gross margin objective for the year. In the release we make it clear that gross margin is our primary financial objective for the year. There are two components to this -- first, we want to recover last year's commodity driven cost increases. Last year's gross margin was 36.7%. 2004's gross margin was 38.7%. So in effect we lost 200 basis points due to commodity prices. At minimum, we want to recover that lost margin in the second half of 2006.

Secondly, our long-term objective is to improve gross margin by an average of 100 basis points a year. We did that consistently until 2004 before the commodities cycle started, and we would like to get back on track and at some part unnecessary all of that extra 100 basis points to our gross margin in the second half of this year. If we achieve this (indiscernible) dual objective, that would raise our gross margin to the 39% area. And I stress that is the objective for the second half of the year, not the full year. Obviously the February 1 price increase is a big part of the action. There's our additional cost reduction programs and to a lesser extent the diminishing effect of Katrina, the addition of a higher margin SpinBrush business and the slightly more favorable sales mix for the balance of the year. And now back to Jim Craigie.

Thank you. I would now like to provide you with some 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 am talking about all channel consumption, which includes the traditional food and drug channels as measured by IRI, plus our actual 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 nonmeasured channels are growing faster than measured channels. They represent almost 40% of the Company's total consumption and even greater than 40% on some of our brands. Thus when you see an IRI or Nielsen shared test result it is often a misleading indicator of the actual total consumption occurring for some of our categories and brands.

Okay. Let's first talk about the laundry category, our largest revenue contributor which consists of liquid and powder detergents and fabric softeners. Our laundry all-channel consumption grew 8% in the first quarter driven by the liquid laundry detergent business primarily the Arm & Hammer brand. This is consistent with a solid 2005 growth of over 6% to our laundry business. Looking forward we believe that our laundry business is well positioned to continue to achieve profitable growth in future quarters driven by new products, increased distribution, improved packaging and higher pricing.

For example, our Arm & Hammer liquid laundry detergent is relaunching a Perfume and Dye Free product. Our testing shows that this reformulated product will have a strong appeal among the significant group of consumers with sensitive skin. 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 primarily made from oil-based ingredients and the product is heavy, so that contributes to the higher cost of transportation. As oil and other ingredients have increased in price over the past year we have been aggressively working at a broad range of cost reduction initiatives and pack size changes to offset these higher costs. In addition to these cost reduction initiatives and pack size changes, the Company recently announced price increases across its entire laundry detergent line, most of which took effect towards the end of the first quarter of 2006.

The totality of all these actions involving price increases, pack size changes and cost reduction initiatives are expected to fully recover the margin and impact the higher oil prices on our laundry business in 2006 assuming no further significant increase in commodity prices. We believe the actions that we are taking to recover the higher costs may have some short-term volume impacts driven by consumer sticker shock. This normally happens whenever a category is impacted by significant price increases. However, we believe that these margin recovery efforts will not impair our long-term competitiveness in the value tiered liquid laundry detergent business where our brand competes.

One other important piece of news impacting our laundry business is that for the first time in years Arm & Hammer laundry detergents will be advertised on television as part of a new trademark advertising campaign that starts airing in the second quarter. This new campaign has been in development for over a year, and we unify all the various product lines of the Arm & Hammer brand under one powerful message. Our consumer research shows that almost 60% of U.S. households buy an Arm & Hammer product but the majority of these households only buy one type of Arm & Hammer product. When these households are made aware of Arm & Hammer products in other categories they express a very strong purchase interest in the other forms of Arm & Hammer. So starting in the second quarter we are launching a holistic marketing program consisting of the television campaign, public relations, new packaging, consumer promotions and retailer events that will support all forms of the Arm & Hammer productline.

Now the next category I would like to talk about is our deodorization and cleaners business. This category consists of Arm & Hammer baking soda, carpet deodorizers, clumping cat litter and various cleaner brands like Brillo and Scrub Free. Overall this category had flat sales in the first quarter as sales growth in our baking soda and clumping cat litter businesses were offset by declines in our carpet deodorizer and cleaner businesses. We expect stronger sales in this category in the remaining quarters of 2006 driven by some exciting new products. In the cat litter category we have just introduced a new corn-based scoopable litter which is targeted at a well-defined group of consumers who prefer to use products made from natural ingredients.

In our baking soda business, we are launching a new product called Fridge Fresh. This is a new refrigerator deodorizer that looks like a smoke detector and has suction cups to attach to the side of the refrigerator. It also has a freshness indicator to tell consumers when the product needs to be replaced. This is literally out of the box thinking as this product represents a significant upgrade versus our famous orange box of Arm & Hammer baking soda which over 80% of U.S. households currently use to keep foods tasting fresher.

Now the next category I'll talk about is family planning. This category consists of our condom and home diagnostic businesses. This category achieved high single digit consumption growth in the first quarter driven by new products and superior marketing programs. On condoms we have driven steady sales growth over the past two years by launching innovative new products and highly engaging new advertising campaigns. These initiatives have resulted in both higher growth rates for the condom category and higher shares for our Trojan brand. In fact in the first quarter 2006, the Trojan business had a record share of 72.5%, which is over two percentage points above year ago.

Our home diagnostic business also continues to achieve strong sales and consumption growth. We have driven significant growth in this business behind superior technology and increased marketing support of our pregnancy and ovulation kit businesses. We are continuing the successful formula in 2006. For example, we are launching a new pregnancy test kit called Rapid Results which will tell a woman if she is pregnant within one minute of taking the test. The steady pipeline of superior products and increased marketing support by behind this business has driven double-digit all channel consumption growth in this business since 2004 including the first quarter of 2006. In fact our pregnancy test kit business has surpassed Pfizer's EPT brand to take total dollar share leadership of this category.

Next I would like to talk about our skincare business which consists of the depilatories and underarm deodorants. As a result of strong competition, this business experienced lower sales in the first-quarter. To improve upon these results, we are launching new products and increasing marketing support starting in the second quarter. The new products include a new line of depilatory lotions from Nair that is significantly preferred by consumers versus the prior lotion line which presently represents the majority of Nair sales. The launch of this new lotion line and other new Nair products will be supported with increased marketing support behind a new advertising campaign.

On our underarm deodorant business consisting of the Arrid and Arm & Hammer Ultra Max brands, we are upgrading our product fragrances and increasing marketing support to be more competitive. We expect that these new initiatives will improve the sales and consumption results of our skincare business in coming quarters although we have admit that this category is extremely competitive, and we are 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 (technical difficulty) Mentadent, Close-up, Aim and Pepsodent were in long-term decline when we bought them. We have taken aggressive actions over the past two years to improve the product, packaging, advertising and merchandising of these brands. We were successful in 2005 in reducing the rate of consumption and sales decline experienced in total 2004. However, we are still experiencing sales and consumption declines in the first quarter this year due to aggressive competitive activity across all channels.

One of the key differences driving these lower net sales trends is that we have eliminated unprofitable trade deals and deeply discounted club store sales that were impacting more profitable sales in other channels. We believe the elimination of these unprofitable deals is in the best long-term interest of these brands.

We are also launching new and improved forms of Mentadent and Arm & Hammer toothpaste supported by new advertising campaigns starting in the second quarter. In total we remain concerned about the increased competitive activity in this category. But we believe that we can first stabilize and eventually grow our oral care business in the long-term by implementing dependable niche strategies.

Let me put switch gears now and talk about the future. While we are pleased with the solid first-quarter results, we are never satisfied. First in terms of dealing with issues, we have been able to absorb an unprecedented level of cost increases for raw materials, packaging and transportation and still deliver positive earnings growth. We have a well-organized pipeline of cost saving initiatives in the areas of manufacturing, purchasing and distribution that are in the process of being executed and along with the price increases taken in 2005 and 2006 will enable us to more than offset the higher commodity costs.

Second, despite higher costs and intense competitive activity across all of our core categories, we've been able to deliver solid organic growth as a total company. We've achieved this growth in recent quarters despite lower marketing spending. I would caution you to not dwell on absolute levels of marketing spending as many factors are going on beneath the surface that affect the impact of the total spending. For example, we constantly analyze the impact of every element of the marketing spending and we eliminate programs that are not profitable. We've also renegotiated the cost of many of our marketing programs with outside suppliers to deliver the same positive impact but at a lower cost. For example, we will save over $5 million in 2006 in media cost by switching our media buying to another agency.

Lastly we have improved the timing of marketing spending to better support new product launches and the seasonal trend of key businesses. As a result, we shifted some first-quarter media into the second and third quarters of 2006. So in total I would advise you to take these factors into account when looking our marketing spending in the first quarter. Despite these spending cuts we delivered strong organic volume growth. More importantly, we will be increasing marketing support over the rest of 2006 to help deliver our business targets.

Now let me translate all this into specific guidance for the rest of this year. Previously, we told you that we expected to deliver an EPS of $1.93 in 2006. Despite our strong start in the first quarter our current estimate for the total year is still $1.93. Although we may have upside versus that target, we believe it is prudent at this time to confirm our earlier guidance for the following reasons. First, as Zvi mentioned we took price increases in Q1 on over 35% of our revenue base. While competitive reactions have largely been in line with our expectations it is still too early to be fully comfortable with either the competitive or consumer impact on these pricing actions.

Second, there still a lot of volatility in commodity prices which could unfavorably impact our cost of goods. Third, we would like to maintain the capability to support even further increases in marketing spending behind new product and advertising initiatives that are currently planned in 2006. We have already launched several exciting new products, which I told you about, and we expect to launch more new products through the end of 2006. We also have high hopes for several new advertising campaigns particularly the new Arm & Hammer trademark campaign. So in summary, we are very satisfied with our solid first-quarter results. That ends our presentation. Now I will open the call to any questions that you may have which Zvi, Bob and I will do our best to answer.

(OPERATOR INSTRUCTIONS) Bill Schmitz, Deutsche Bank.

Can we (indiscernible) in the laundry category because it looks like shipments dramatically surpassed consumption in the quarter. So is part of the tepid outlook for the next quarter some sort of preselling and maybe even some accelerated buy in by the trade ahead of the price increases?

No Bill, I again would caution you to go back to watch when you see consumption numbers; the consumption numbers you see reported really represent only about half of the total business out there because they don't capture the mass merchants and dollar stores that are key channels for us. We don't believe there was any significant inventory build. We took the price increases actually in early February, and were very careful in what we shipped to the trade to the end of the quarter. So we very much feel that our consumption in total across all channels would have been in line with our shipments.

Okay, cause I think you said it was 8% increasing consumption. If the math is right (indiscernible) business was flat, it sounds like 11, 12% increase in shipments in laundry. Is that math flawed?

I don't have the exact numbers in front of me -- by our check there was very little difference between shipments and consumption and nothing we were worried about as far as an inventory build.

Okay, great. Thanks and can we just talk about specifics on pricing, like which products had price increases from what they were, because I know it has been hard to get those numbers.

Yes, in general we price baking soda about 5%. We price our laundry category in the high-single digits, low-double digits. We took price increases in our specialty product division on certain products we sell. And we also took price increase on cat litter of about 5%.

Great. Thanks very much.

Dara Mohsenian.

Have you seen a big volume impact in April from the price increases and specifically in the liquid laundry category? And I know this will be oversimplifying it a bit, but can you give us some sense for the trade-off between pricing and volume in your portfolio? Do you think it is very elastic, is it one to one, more than that, or less than that?

Derek, a good question. And honestly the jury is still out on that. We have not received specific April consumption results yet. It will be the first month in which we begin to see the extent of the consumer sticker shock which we believe there will be some particularly in the second quarter. We don't have any diagnostics yet with actual numbers to give you a solid answer to your question. It is a very important question. We believe we've conservatively planned the business to adjust for consumer sticker shock, and we expect that to happen because of the significant price increases by all competitors in the laundry category.

So it is more of an expectation going forward as opposed to something you've seen already?

Right, because the price increases really did not hit retail until late March, early April.

And a couple quarters into the Elexa launch can you give us a review of how the brand is performing at this point versus expectations, and is it fully rolled out in the feminine aisle?

Okay, first of all Elexa, Elexa has been a key contributor to driving our record share results on Trojan. As I've said that we had a 72.5 share in the first quarter, which was up several share points from year ago and just continues to build upon our strong leadership position. It also was a key factor we believe in helping to drive stronger category growth, which has now about doubled the rate of growth in the category versus before Elexa launch so we're very pleased by that. And obviously the brand has come in a little bit below our expectations. It has been a challenge to try to hit the right consumer -- communication with consumers out there particularly a female consumer that this is targeted at, and we're in the process of adjusting our marketing program to continue to try to energize that consumer to buy the product. But the product is -- we did get excellent shelving of the product in the feminine hygiene aisle, and we are working just hard right now to continue to build upon the consumption that's happened.

And can you also review your level of interest in share repurchases at some point over the next few quarters?

It is something we have done a lot of in the past, Dara. In recent years if you go back a few years we did a lot of share repurchase. We suspended that activity when our debt level was as high as it has been. And I expect the Board will come back and re-examine that subject sometime this year. I can't exactly tell you when or what they will do about it, but as a company we do have a record of tying cash flow back into stock repurchase when we -- when the right conditions exist.

Okay, and is there a certain leverage ratio where you would start to consider more aggressively repurchases?

We've always said we like to see our debt to EBITDA ratio get down to around a 2. And we should get to that level sometime this year.

And then last Zvi, can you clarify the tax rate you are using in your full year guidance and have you seen or do you expect to see any impact from retailer inventory reductions?

The tax rate, I think I said assume the only tax credit gets reinstated. That would be back to a 35% tax rate. So that is again the most likely outcome. If not, then we have the 35%.

Okay.

And this whole issue of retail inventories -- we have heard a lot about that and indeed it was. (indiscernible) comes out of some action by Wal-Mart I think by some other retailers; something did happen on this front. There was a change in Wal-Mart's replenishment as (indiscernible) would say. It happened last year, and it did have an effect on inventories, it did reduce inventories at their warehouses by a few million dollars. By the way it had a counter effect which it not only improved the service levels for smaller brands because the increased the rate of the order for these brands. So I think the effect on us is mixed. As I said, a onetime imagery effect mainly last year. So it -- and we didn't think at the time it was material enough to make an issue of. Does that help.

That helps very much.

Alice Longley, Buckingham.

You said that the effect of higher commodity cost hurt your gross margins by turning the basis points and that you offset it with three factors, that the major two were cost-cutting and price promotion. Where they sort of 50-50 responsible for the offset, or was one more responsible than the other?

Actually I think cost reduction was slightly more important, over the last year.

Could you highlight the most important benefit there? What were they?

There is a massive number of projects that we've (inaudible) a, continued and b, that are still underway and a tremendous amount of activity on reformulation. And a certain amount of repackaging. You know we found out for example under pressure that you could formulate the Trojans with a different surfactant mix to get the same clinic performance, and that helped us tremendously last year. That is the purchasing initiatives, a lot of strategic purchasing initiatives that we were already engaged in and we just accelerated that activity. We actually had some help from (indiscernible) with outside (inaudible) extremely helpful to us. We worked very hard on truckload quantities, and every thousand pounds -- we sent out about 200 truckloads a day -- every thousand pounds we add to the back of the truck has a material effect on our freight costs.

We began a European supply chain integration project; has not been completed yet but we think it will deliver some good results. And (indiscernible) information a couple of our plants were in need of automation. We started that process. We're continuing it. And we are also hard at work on best practices. We compare, we have about six major plants in the U.S. we're constantly looking for the chance to perform better than average and take those practices over to the plants (inaudible). That is just a number of these initiatives. And as I say, we do have a big pipeline for the rest of this year and we have a pipeline going into next year of major cost reduction initiatives.

Would you say that these programs are materializing in cost savings more in the first quarter than the fourth quarter? Significantly more?

I would think it is pretty much even as the year goes on.

Alice, you talking about the fourth quarter of last year?

Yes.

Well, yes. These programs -- the oil shock again really happened about the end of third quarter, early fourth quarter last year and you have to just take the time to make some of these adjustments. So I would say as time goes by you are going to see more impact in some of these changes. But as Zvi said we already had a strong pipeline; we just stepped on the gas even further to deliver more. So you are seeing the impact flowing through in the first quarter. It will be more in the second quarter, and certainly by the back half of the year the impact of that plus pricing will deliver the kind of numbers Zvi talked about.

And back on this destocking issue since most companies say that retailers focus on it even more in the first quarter than before, I am wondering if maybe it would show up for you more in this June quarter because maybe retailers -- just to highlight some of the things other people asked about -- maybe retailers ordered the detergents a little bit ahead of the price increases and they will focus on the destocking more in the June quarter?

Alice we honestly -- we never saw this problem really until we started reading about it in other reports and we went back and checked our systems repeatedly. And again as Zvi said we are aware of this in the latter half of last year and saw some minor adjustments from it. But we have checked and rechecked this and we don't see any impact on our business or any kind of material time this year.

And you're not seeing it in April or May particularly?

No.

All right, and then my last question is on pricing. Proctor has said that the pricing they are getting at retail in the U.S. has averaged about 4% in the March quarter. But at their level it was less, maybe 3% or a little bit less because they gave some of the benefits to the retailers to help their returns. Is that something we should expect out of you that the pricing will be more at retail than it will be at your level?

Alice, I would say -- I mean the price increases we announced and the expected retailer impact has been very much in line with expectations. We have seen a minor amount of retailers take more pricing than we thought and we are working that out with them, but it has been very much in line with what we expected as far as the retail impact. And we took price increases that would support what we took and we were very smart in getting I think key deciles with retailers and so they would price to those deciles and not under or over, especially over priced.

So if your prices on your Arm & Hammer liquid detergent are up 10% at retail, they are up about 10% at your level as well?

(inaudible) I do think some retailers took some extra price here. That is something that obviously they are entitled to do. I don't think it is broadbased, and obviously over time we would try and get the right price points for our brands. It is our major objective in our sales force.

I guess another one, what was the major upside surprise for you in the first quarter? (inaudible) Or did you expect it to be this strong all along?

I think we were very pleased with the organic growth rates we hit. You're always happy when you're hitting up in the 4 to 5% zone and our businesses very much performed in line. Laundry was strong but that was coming out of momentum we had late last year so it continued to be strong, and that was good news. And like I said, the condoms and the home diagnostic business were also very strong for us. I think if anything maybe I was pleased by the Trojan results. Because don't forget we had taken pricing last year, and then we started the new advertising campaign in the third quarter and launched Elexa in the fourth quarter and was very happy to see the category growth start to pick up. And the share growth when you're already at 70 share to go to 72.5 is very impressive. So I think that was a very good sign of accomplishing our long-term mission there to put a major dent in the increase in sexually transmitted diseases in this country, and maybe we are seeing people start to respond to advertising campaigns in our new productlines.

Did your price increases in Trojans hurt the unit volume there? Last year?

It had a short-term impact in the second quarter of last year, but that was just brief.

All right. Okay. Thanks a lot.

Ilias Papazachariou.

What is your targeted marketing spending as a percentage of sales for the year? Is it like in the low 11% or can you give us a sense on the.

For the balance of the year, is that what you're saying?

For the full year.

Obviously it is higher than the first quarter. First quarter was less than you would expect (indiscernible) for the year. Let me put it this way. Last year's marketing spending was 10.6%. We would expect to spend more than that this year.

Okay.

If you study our history, we generally are in the 11% to 12% zone, and that is where we were before last year. We made adjustments last year when the commodity pricing flowed through, and I think you'll see us return to those levels. I also remind you that about 30% to 40% of our portfolio are value brands where we don't spend much on advertising. So really that 11% gets applied to like 60% of our portfolio, and if you would so adjust it up. So we feel that level is competitive with our -- the companies we compete with in the premium brands that we have.

Could you give us an update on SpinBrush? It showed some decent growth in the Nielsen (indiscernible) year-over-year.

SpinBrush is doing very much as we planned. As you know, we closed the deal last October 31st. We have the right to the use the Crest brand name for up to four years. The transition of the business from Procter & Gamble to our Company has been right on track. We've taken over total management of the business in North America, the UK, the rest of the world which is a small percentage of business we will take over total control of that the next couple months. And the business is recovering very nicely from the recall that it had last year. And we are working on new marketing plans and new products for later this year and next year. So we are very pleased with that acquisition. Its very much on track and a very good addition to our company's portfolio of solid premium brands.

And Jim, I think you said that you hope to achieve at least 200 basis points of gross margin expansion in the second half. That would be excluding any non-recurring charges in 2005. Is that correct?

That would be excluding the plant charges we talked about, yes, for 2005. I said to you that, look at 2005 as having a 36.7% gross margin that is operating back to fourth-quarter restructuring charges. And so we would like to do (indiscernible) basis points on top of that in the second half.

And what do you spend in terms of your debt leverage; would you buy back more debt over the remainder of the year?

We will pay down some bank debt in the first quarter, and then will obviously will pay down some more as the year goes on.

Great. Thanks a lot.

Joe Altobello, CIBC World Markets.

Just wanted to go back on the gross margin number for a second. I think back in February you guys had mentioned that you weren't expecting much in the way of an increase; in fact I think you were looking to a decrease in gross margin year-over-year. Yet it was a little bit in the first quarter. How did that compare to what you guys are looking for internally in terms of gross margins?

You're talking about the first quarter, Joe?

Yes.

Its a little better than we expected to be frank and I think one factor is that the price increase went in a little smoother than we expected. So we got more of it into Q1, and we will get the rest of it in Q2. I think that is about the only big difference.

Okay, and then secondly you guys were lacking a little bit more tougher organic growth comps in the second half of this year. Is there a specific product or products you guys are pointing to to help drive organic growth in the back half?

Not really, Joe. You know, again we cautioned you because of the price increases we took on 35% of our business, we do expect sticker shock to hit on those businesses and expect some impact on organic growth. But as I told you, we've launched new products in laundry, we are launching new one in pet, we got new oral care products, we got new depilatory products, we got new First Response products, we got new Trojan product I didn't really even talk about. We are launching an Ultra Thin version of the Trojan product; we are launching a new version of Her Pleasure. And we have some other things going on in the Elexa line. But also the baking soda, the Fridge Fresh is a very exciting little item that is after 160 years of being in the baking soda business in the orange box we have basically reinvented that to attach to the side wall of the refrigerator to get better deodorization in the refrigerator so that is exciting, too. So we've got stuff across the line but again we caution you about organic growth because of the price increases we've taken. And it will impact the numbers starting in the second quarter.

Okay, and then lastly in terms of your balance sheet it sounds like you mentioned earlier you expect to get back down to two times debt to EBITDA. Does that preclude any additional acquisitions, or you guys still looking?

We are always looking, Joe. Our company has a great base of both household and personal care. We're very prudent buyers. I would tell you the marketplace has a lot of opportunities out there right now. And we look. And if we find something that would plug into our company and be accretive, and would enhance our product portfolio we are checking it out. But with acquisitions with all the private equity money out there these days you can't count on anything. But we're very actively out there and aware what's going on and where we think it is prudent, we go after it. But we never know if we'll get it given the lots of money on the street these days. But we bought a depilatory business in Brazil last year. We bought SpinBrush business. So we have been active, and we've been successful recently.

Okay. Thanks.

Connie Maneaty, Prudential Equity Group.

Just to keep track of everything could you get specific on which quarter you will be introducing the new products you've already mentioned?

Sure, Connie. Most of them all started launching late first quarter, early second quarter, the ones I told you about which are the only ones I am going to tell you about. So everything I just mentioned is kind of in that line of products. So the new Fridge Fresh for baking soda launched in the second quarter. The new Trojan line items launched in the second quarter; the new cat litter launched in the second quarter. The new Elexa line launched in second quarter. The new Arm & Hammer Perfume and Dye Free that started going out in the first quarter but mostly a second quarter item. I'm forgetting here, but it is mostly -- that is why it was also part of the marketing shift. Most of them started shipping in the second quarter, so we adjusted our media spending to better support them. New news obviously sells better with the consumers than old news.

The pregnancy test is Rapid Response, when did that ship?

Second quarter.

Was there any change in the timing of the introduction of these new products that is the marketing behind them also shifted?

Quite honestly no, Connie. A lot of this is driven by the famous little retailer in Bentonville, who happens to do a lot of the changes late first quarter, second quarter. So we smartly like everybody else, adjusted our marketing flows to support the launches and so we're doing pretty much what the retailers want.

So are these products shipping around planogram changes?

Yes.

Okay. Would you tell us a little bit more about the change in your media agency and what prompted that?

Connie, it was just like any purchase decision. As with anything we buy, we looked at where we getting the best deal and we put the media buying -- we put it up for bid, and one of the top three agencies of media buying came through and was able to show us they can buy the same amount of media and save us about actually $6 million a year. We put that in effect late last year and we are going to get the benefit of $5 million of that savings this year.

What is the name of your new media agency?

The division we are dealing with is called Maxus.

(indiscernible)

I forget. There has been so many changes in that world, I don't know who owns whom today.

Was the change in media related to the somewhat disappointing results from Elexa?

No, not at all. Not at all. In fact, this agency has been also very good at refining our progress. That had nothing to do with the decision. We just like anything we buy, whether it is classic, resin, corrugated and everything else we put the contract up for bid, and we are very happy with being able to save that much money without any impact. In fact I would say the performance of this new agency has been terrific and I think even getting us better quality media for the lower cost.

Okay. On the businesses or the brands that are struggling a bit, the whole deodorant category and the value end of toothpaste, what is the point of keeping those brands?

It is worthwhile keeping them now, Connie. We still have things to do which we think can enhance their performance. So we are still working on that. You know, we will make a decision on whether to keep them or not down the road but right now we don't think our job is done on trying to enhance our position in those categories. We tried some stuff. Some has worked; some hasn't. But they are still good categories; we have some good brand names there, and we think if we get better dependable niches in those categories we will be successful. You know, in laundry we're extremely successful being in the value niche of that category and we are growing very strongly. And we just feel there are niches in those categories that we need to better define ourselves into, and we will do well. So I don't -- the jury is still out on those and divestiture is not on our radar scope at the current time.

What sort of financial metrics are you using to judge these brands?

We look at many different things, Connie. You know, I would tell you all the brands you talked about are very profitable brands to us. So it would be a lot easier if they were losing money to decide what to do, but they are profitable brands. We've been able to enhance the gross margins in some cases. We are constantly refining the marketing mix, and I would tell you while sometimes you see revenue or consumption declines in those brands, the profit is actually improving because of things we've done. So that is why we're not in any immediate rush to go divest anything because the profit line has performed a lot better in most cases than the revenue line on those businesses. So we look at a variety of things.

One final question on them. Assuming their sales were flat in the quarter, what would your organic sales growth have been?

If the sales of the -- like underarm deodorants and oral care were flat?

Yes.

Probably a point or two higher.

Okay, that is very helpful. Thank you.

Dara Mohsenian.

What was the plan issue you mentioned in reference to inventory, and is that issue resolved at this point?

The plant issue?

Correct. I thought there was a plant issue in reference to the inventory.

Yes, one situation where we just needed to beef up our inventory. I don't want to get into specifics (inaudible) plant issue and we did that, and I'm not sure when we will reverse that. It may be a while before we do that because of the issue of quality. But that was a very specific isolated issue.

Okay. And Jim, I just want to go back to the marketing spending for a minute, and I know you mentioned some of the reasons for the pullback this quarter with the agency savings and timing. But even in the back half of last year marketing was off significantly year-over-year even with the Elexa launch. So can you help us flesh out a bit more fully the marketing pullback over the last few quarters and put some perspective behind that?

First of all at the end of last year, again the oil shock and the hurricanes and everything happened late September, timing put everyone into a crunch on trying to cover a massive increase in commodity costs. And that is why we pulled back in the fourth quarter of last year and as Zvi and I both talked about today we've made massive efforts to recover that gross margin. So that issue will not be an issue as we see it in the back half of this year. We won't have to pull back to cover the gross margin increase because we'll be covering it plus some with all the actions we've taken from cost reductions and everything else. So that was kind of a onetime hit that we took a prudent action to cover and now we've offset that through other means through gross margin improvement through pricing cost reductions, tax hike changes everything else. First-quarter this year was mostly driven by the fact that like I said we shifted some timing to better support the new product launches. We cut some unprofitable programs and renegotiated the cost of other programs. So it was just a wiser again move to shift that money into Q2 and Q3 where you will see increased marking levels versus year ago which we think deliver a better bang for the buck because it will be tied to a bunch of new products that are launching out there in the marketplace that we're excited about.

Also high marketing and higher product development spending -- Q2 and Q3 as we invest more heavily in order to speed up our rate of new product innovation.

Zvi is very right on that. We created a separate new product team in house staffed by one of our senior managers and a whole bunch of people to support him that are now dedicated to nothing but developing new products. And we hope that will increase our pipeline of new products going forward over the next 12 to 24 months to start with and obviously for the long-term. But as we have allocated more money to them to develop new products. So they're working a lot with outside alliances and outside firms to come up with the ideas and help develop the products so there has been more money spent on new product development.

Great. That's helpful. And can you give us a sense of the shift in marketing spending out of Q1 into the next two quarters?

It will be significant.

Do you have a dollar amount or a dollar range you can give us?

I said the total marketing spending as a percent of sales will be higher this year than last year. First-quarter was low. The rest of the year it will be higher.

Okay.

So you might use that as a benchmark.

Okay. Thanks.

Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to your host for today, Mr. Jim Craigie.

I would like to thank you all for participating today. And again, we are very happy with our first-quarter results. Have a challenging year ahead of us but we feel well-positioned to deliver the number that we promised to you. So with that I just thank you for your time and wish you well.

Thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect.