切遲杜威 (CHD) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Church & Dwight second-quarter 2006 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 forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the Company's SEC filings.

I would now like to introduce you to today's host of the call, Mr. Jim Craigie, President and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Thank you, operator. Good morning to everyone. It is always a pleasure to talk to you particularly when we have good results to report. I'm going to give you a brief overview of the second-quarter and year-to-date results. I will then turn the call over to Zvi Eiref, our CFO. Zvi will provide you with specific details of the Company's second-quarter and year-to-date financial results. When Zvi is finished, I will provide some further information on the factors driving our key business units. Finally I will provide earnings guidance before we open the call to field questions from you.

Overall Church & Dwight delivered solid second-quarter year-to-date results despite significantly higher costs driven by higher oil and other commodity prices. As stated in our last several quarterly earnings calls, gross margin improvement was our top corporate priority in 2006. As you know, oil costs increased dramatically in 2005 and led to around 300 basis points and higher costs for our Company that year. This showed up in our business results when our corporate gross margin declined to 36.6% in Q4 of 2005 excluding onetime charges due largely to the higher commodity driven costs.

We reacted to this unprecedented increase in cost with a crisis mentality starting in late 2005. This crisis was attacked from multiple angles including price increases, elimination of unprofitable trade promotions, and cost reduction initiatives across the entire supply chain. I'm very proud to say the result of the Corporation's focus on offsetting the higher commodity driven costs has been outstanding. We not only offset over 250 basis points and higher costs in the first half of 2006 versus year ago, but we achieved 110 point basis point increase in gross margin year-to-date including a 210 point increase in Q2 versus year ago.

Before I turn the call over to Zvi, I would like to point out that a key part of the gross margin improvement was price increases that we implemented late in the first quarter of this year. In order for these significant price increases to stick, we had to temporarily reduce merchandising activity particularly in the merchandising [intents] of liquid laundry detergent category, our largest business. As a result of solid organic growth that we have steadily delivered as a total company over the past two years was reduced in Q2, driven primarily by slower growth in our liquid laundry business.

The rest of our portfolio performed as expected with continued solid organic growth in condoms, test kits, cat litter, and international, partially offset by expected softness in oral care, fabric softeners, and underarm deodorant. The net effect was flat organic growth in Q2, which was below the 3% to 4% organic growth that we have steadily delivered over the past two years. If we had not reduced the aggressive merchandise activity in liquid laundry detergent, our organic revenue growth would've been more in line with recent historic trends.

While these Q2 organic revenue results are below our historic trends, the short-term trade-off between gross margins and organic growth was definitely in the best long-term interest of the Company for two reasons. First and most important, the strong margin results will enable us to significantly increase marketing spending in future quarters to restore solid organic growth. Second, the strong gross margin results will also enable us to increase our earnings forecast for 2006.

I will provide more detail on both these positive benefits later in the call. Right now I will turn the call over to Zvi, who will provide you with more specific details on the Q2 and year-to-date financial results.

Thank you Jim and good morning. I will start with the headlines. Second-quarter EPS of $0.54 was $0.03 or 6% higher on a reported basis and $0.05 or 10% higher excluding stock option expense. Six months earnings per share of $1.14 were $0.07 or 7% higher as reported and $0.11 or 10% higher excluding stock option expense.

There are some unusual items in both years, the largest being the 400 basis point increase in our tax rate this year partly due to a delay in approving the 2006 tax bill, which affects R&D credits. If we were to take all these unusual factors into account during both ways, that is the tax rate going one-way and with an unusual gain which I will talk about in a minute going the other way, this year's earnings per share increase over last year would have been more than the 10% I've just referred to.

The key event in the quarter was the price increase, which actually occurred in February for three of our major household productlines, that is what liquid laundry detergent, baking soda, and cat letter. Due to the promotional activity in the first quarter, we only received about half the pricing benefit in that quarter and the full benefit was received in the second quarter. This increase helped restore our margin structure but it also affected our unit volume and slowed down our overall (indiscernible) growth rate. Net we think was a very good move and I'll come back in a sense that the margin gain outweighs the volume loss. I'll come back to that in a minute.

Another key event was the completion of integration of the SpinBrush business, which we acquired in October of '05 and completed the integration of the transition from Procter & Gamble at the end of the first quarter. That means that we consolidated almost all of SpinBrush's sales in the second quarter.

Let's drill down the P&L statement beginning with sales. Second-quarter sales of $459 million were 4% higher as reported but flat on an organic basis excluding acquisitions. Year-to-date sales of $901 million were 4.5% higher as reported and 1% up on an organic basis. Incidentally the six-month period had one day less or about one day less than last year, which represents a 0.5% reduction in the selling period.

This release provides a productline analysis and commentary and broadly speaking condoms, kits, head care all did well both in Q2 and year-to-date. Arm & Hammer Liquid, the two liquid brands had strong growth in Q1 and lower growth in Q2. Toothpastes and antiperspirants were weaker compared to last year both for the quarter and the year-to-date. The flat second quarter sales performance compared with -- a flat second quarter organic sales performance compared with a 4% organic growth in Q1 and in 2005 needs some explanation. There are in fact three major factors at work here.

The first and the major one is the price increase. As expected, the price increase affected unit volume especially for the two liquid brands, both the liquid and laundry detergent brands. There was also a minor affect on our deodorizing business and almost no affect as far as we can see on our pet care business. Overall sales came in very close to what we expected. There was really no surprise in our sales results resulting from the price increase.

Secondly, there is the affect of merchandising activity. It is clear that the trade [pull] promotional activity into Q1 to take advantage of the lower price points and we know that Q1 sales particularly for liquid laundry are exceptionally strong. We don't think this merchandising activity had any significant affect on trade inventories, but we do think it resulted in some consumer buy-in which you might describe as pantry loading. Evidence for that is that April sales were very weak, but that May sales were actually quite strong. Consumers came back into the market.

Third and not actually connected to the price increases, are normal activity on promotional efficiency. We are continually reworking our promotional plans to eliminate low margin promotions. We don't normally comment on that but it is occurring all the time. But there was actually more activity on this in Q2 than is normal. Our sales organization estimates that in Q2 we eliminated events which occurred in 2005 that accounted for at least 2% of 2005's second-quarter sales.

The positive aspect of this higher pricing is higher margins. Second-quarter gross margin increased to 40.3%. That is up 210 basis points versus last year and 370 basis points over the Q4 2005 gross margin even after adjusting there for some unusual charges in that quarter. That was the low point for our gross margin performance.

Year-to-date gross margin is 39.3%, up 110 basis points. At this 40% margin we are back to our historic high point of two years ago mid 2004 before the commodity cycle began. To get back to that margin level, we had to absorb about 500 basis points of commodity-based cost increases over the two-year period. We did that through a combination of pricing, promotional efficiency, and cost reduction programs. And we have a solid cost reduction program in place for the balance of 2006 and 2007.

Moving down the P&L account, marketing spending was slightly up for the quarter and is flat for the year-to-date. Frankly we had expected spending on new products to start earlier, but some of the copy work took longer than expected. I can assure you that our marketing spending will be significantly higher in the second half and particularly in the third quarter.

SG&A spending, the $14 million increase for the six-month period, there are three major factors involved here which account for about two-thirds of that. These are the stock option expense, which $4 million actually sits in SG&A, the rest is in manufacturing costs. Plus a second factor is SpinBrush, the addition of SpinBrush with its operating and related amortization costs and higher R&D spending. Again, these three factors account for about two-thirds of the increase.

Operating profit of $66.7 million was up 11% for the quarter and year-to-date $139 million is up 9% over last year. If you adjust for the $4.88 million option expense, the increase would have been over the last year or year-to-date would have been 13%. I have nothing to add on other income and expense for the quarter. There was unusual $2 million gain in this line in Q1.

Now let's look at the tax rate, which is quite difficult to understand. As I said, we are 360 basis points higher for the quarter and 400 basis points higher for the year. A large part of this is that Congress has not approved the 2006 text bill which technically eliminates the R&D tax credit. That is a large part of the increase. I would say it represents almost half of the increase in rate over the last year. The best way to think about going forward is if the R&D tax rates is reinstated, our tax rate for the second half would drop to about 35.5% and we would recover $0.03 of the credit we did not pick up in the first half. If on the other hand the tax credit is not reinstated, the tax rate in the second half will be around 37%.

Turning to the balance sheet, accounts receivables are up 5% in line with sales. Inventories are up $34 million or 20%. I can tell you that about $25 million of this $34 million are related to SpinBrush. SpinBrush does tend to have a relatively high inventory level to its long supply chain from China, but the second-quarter build is about $10 million higher than we would expect long-term and that is due to the very complicated transition process where both we and Procter & Gamble had to hold inventories at the end of this transition in March in order to meet customer demand. We expect to be able to work that excess inventory off in the normal course of business over the next 6 to 9 months.

In addition to that, there was a small build on another productline connected with a client capacity situation which we are now correcting. There was a small build in Brazil due to the acquisition of a small (indiscernible) grant. Aside from those three items which the major one is SpinBrush, there's nothing particularly unusual about our inventory situation.

Net debt declined -- I'm moving down the balance sheet now to net debt. Net debt declined $34 million over the 12-month period. We spent about $110 million over this 12-month period on acquisitions including working capital and less disposals over that period. So that implies that our free cash flow over the period was more than $140 million and if you adjust for these high SpinBrush inventories, I would say that our free cash flow is actually closer to $150 million. Bear in mind this net debt level is before the addition of Orange Glo, which we acquired yesterday, for a total of $326 million.

Let me sum up again repeating what I said earlier on second-quarter EPS, $0.54, $0.03 or 06% higher on a reported and $0.10 higher excluding stock option expense. Six months EPS $1.14, that's $0.07 or 7% higher as reported or 10% higher excluding stock option expense. And as I said before, if you take account of some unusual items such as the tax rate, the increase over the last year would be higher than the 10% I just described. Now back to Jim.

Thank you, Zvi. 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 mentioned consumption I'm talking about all channel consumption, which includes traditional food and drug channels as measured by IRI, 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 the measured channels and they represent almost 40% of the top Company's total consumption and even greater than that on some of our brands. Thus, what you see at IRI or Nielson share and consumption results 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 contributing 25% of our total company sales. This category consists of liquid and powdered laundry detergent and fabric softeners. In the first two quarters of 2006, our laundry business has been a tale of two cities, both with positive endings. In the first quarter, our laundry net sales grew over 10% driven by heavier than normal merchandise activity on our liquid laundry detergent business, particularly the Arm & Hammer brand. These results exceeded a strong 2005 growth of over 6% for our laundry business.

However, our first-quarter gross margins were well below year ago driven by the higher oil and other commodity costs. To offset the higher costs, we've been working hard on a broad range of cost reduction initiatives. And at the end of Q1, we also announced significant price increases of over 10% to help offset the impact of higher oil prices, which impact the products, the packaging, a shipping costs of our laundry product, more than any other product in our Company.

The price increases have slowed the growth of our liquid laundry detergent products. As stated earlier, in order to make these price increases stick we deliberately reduced some merchandise activity by retailers who deeply discount frequently used product like laundry detergents. As a result, our liquid laundry business sales were up only slightly in Q2 versus year ago; however more importantly, our gross margin on liquid laundry increased over 600 basis points versus year ago.

Now going forward we expect to restore sales growth in our liquid laundry business as retailers are now more willing to merchandise the higher price points and consumers are realizing that the higher prices are sticking. The restoration of sales growth in our liquid laundry business will also be supported by the launch of new products, increased distribution, improved packaging, and new advertising.

On the new product front, we have relaunched the Perfume and Dye Free version of Arm & Hammer liquid laundry detergent to provide consumers with a milder formula for sensitive skin. We will also be launching several new laundry products later this year. For competitive reasons I will not reveal the new product news until after the products have shipped.

I will tell you about the new advertising. For the first time in years, Arm & Hammer laundry detergent will be advertised on television as part of a new trademark advertising campaign that started in the second quarter. This new campaign has been in development for over a year and will unify all the various productlines 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 with 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 have expressed a very strong purchase interest in the other forms of Arm & Hammer.

The continued profitable growth of our laundry business will also benefit from an industrywide cost-saving move to reduce the water content of the products. Our compacted products, as they are called, have begun shipping this month to leading retailers with a full rollout anticipated in 2007.

Finally our laundry business will also benefit from the addition of the OxiClean brand to our portfolio. This leading laundry additive brand has generated strong sales growth in the first six months of 2006. I will talk more about this recent acquisition in a few minutes.

So in summary, we have taken and will continue to take a broad range of actions to recover the cost increases that have impacted our laundry business and maintain our competitiveness in the growing value tier.

Now the next category I'll talk about is our deodorization business. This category consists of the Arm & Hammer baking soda, carpet deodorizer, and clumping cat litter brands. Overall this category had a net sales increase in the mid single digits in the second quarter driven by solid sales growth on our baking soda and cat litter businesses partially offset by declines in our carpet deodorizer business. We expect continued strong sales in this category in the remaining quarters of 2006 driven by some exciting new products.

In the cat letter category, we 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. This product first shipped in May and the advertising will start in late Q3.

In our baking soda business, we have launched 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 an 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. This product first shipped in May and the product specific advertising will begin in August. In addition, Fridge Fresh will be highlighted in our new Arm & Hammer trademark unification advertising which began in late Q2.

Now the next category I'll talk about is what we call family planning. This category consists of our condom and home diagnostic businesses. This category achieved double-digit net sales and consumption growth in the second 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.

For example in the second quarter, we launched a new Ultra Thin condom, which is the thinnest condom product available in the market. Our initiatives have resulted in both higher growth rates for the condom category and higher shares for our Trojan brand. In fact in the second quarter of 2006, the Trojan business had a record share of 73.0%, which is 2.2 percentage points above year ago.

Our home diagnostics business also continues to achieve strong sales and consumption growth. We've driven significant growth in this business behind superior technology, new products, and increased marketing support of our pregnancy and ovulation kit businesses. For example, we launched a new pregnancy test kit product called Rapid Result, 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 behind this business has driven double-digit all channel consumption growth since 2004. In fact, Church & Dwight's pregnancy test kit business has now surpassed Pfizer's business to take total dollar share leadership of this category since late 2005.

Next I'd like to talk about our skin care business, which consists of depilatories and underarm deodorants. As a result of strong competition, this business experienced flat sales in the second quarter versus year ago as growth in depilatories was offset by declines in antiperspirants. On our underarm deodorant business, consisting of the Arid and Arm & Hammer Ultramax brands, we are facing intense competition from much larger brands. To combat this competition, we are upgrading our product fragrances, improving the targeting of our marketing campaigns, and improving the gross margins on this business through cost-saving initiatives that will not degrade product efficacy.

As a result of these actions, our Q2 sales results were below year ago but our profits were equal to year ago. We expect that these new initiatives will eventually improve the sales and profit results on our skincare business in coming quarters, although we admit that this category is really competitive and we are a small player in it.

Next I'd 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 we acquired in late 2003 from Unilever. The Unilever brand, 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 product, the packaging, the advertising, and merchandising of these brands. We were successful in 2005 in reducing the rate of consumption in sales decline experienced in 2004. Our Q2 2006 results were mixed.

On the positive side, the value brand portion of the portfolio, namely Aim, Close-up and Pepsodent, achieved high single digits sales growth versus year ago behind programs that restored their value positioning against aggressive merchandising by Crest and Colgate. On the other hand, sales of Mentadent and Arm & Hammer declined in the second quarter. We have launched new and improved forms of Mentadent and Arm & Hammer toothpaste supported by new advertising campaigns in the second quarter to drive increased consumption of these brands in future times.

In total, we remain concerned about the competitive activity in this category, including the recently announced launch of a new Crest toothpaste. This increased competition will continue to challenge our capabilities in the category; however, we believe that we can stabilize and eventually grow our oral care business in the long-term by implementing defendable mix strategies.

I would now like to take a few minutes and talk briefly about two other business units and then provide updates on our two recent acquisitions. Our international business unit, which represents over 15% of total sales, had a solid second quarter with mid single digits sales growth primarily due to acquisitions. This performance was driven by growth in Canada, Mexico, and Australia, partially offset by soft results in Europe.

Our Specialty Products division, which represents 10% of our total sales, had a flat second quarter. Solid performance in our specialty chemicals business was offset by weak results in our animal nutrition business due to low milk prices. On a positive note, the Specialty Products group recently negotiated a licensing agreement with the Electrolux Company. This agreement provides Electrolux, one of the world's largest appliance companies, with new technology for vacuum cleaner replacement bags that helps remove odors and vacuum cleaner dust and improve air quality. This new technology enabled Electrolux to win Wal-Marts vacuum cleaner bag business. This productline consisting of vacuum cleaner bags for all brands will all be orange in color, branded with the Arm & Hammer logo and cover a 10 foot section of Wal-Mart stores. This exemplifies the ubiquitous power of the Arm & Hammer brand.

Now let me update you on our two most recent acquisitions. As you know, Church & Dwight has been very successful in the past five years as a consolidator in the CPG industry. In the past 12 months, we have completed two significant acquisitions, SpinBrush and Orange Glo. These two acquisitions fit perfectly with our acquisition criteria. They are strong number one and number two brands in their category. They bolster our scale in current core categories. We expect them to be accretive to our earnings results based on the prices that we paid for them and the synergies that we will achieve, and we expect them to deliver long-term profitable growth based on their competitive advantages.

The SpinBrush business fit all these criteria. It is a strong brand which competes with Oral B for share leadership in the battery-powered toothbrush category. It will help to bolster our competitive position in the oral care category. We purchased this business with about $100 million in sales for less than $100 million price tag. The SpinBrush product is sourced out of China, which now provides Church & Dwight with a foothold in China which we can potentially used to source other Church & Dwight products or their components to help drive future gross margin improvement.

Most importantly, we believe that battery-powered toothbrushes have significant long-term growth potential in view of the following facts. The total toothbrush market is nearly $2 billion in sales, almost as large as the toothpaste market. Manual toothbrushes still dominate this market with over 60% of a share. However, battery-powered toothbrushes provide superior cleaning versus manual powered toothbrushes. Given increased consumer awareness of the benefits of good oral hygiene to a person's overall health, we believe that battery-powered toothbrushes have a significant growth opportunity. We intend to reignite this growth starting in 2007 behind several new product introductions. So in total, we are very excited about the long-term growth potential of the SpinBrush business.

Let me switch gears for a minute and talk about our most recent acquisition just completed yesterday of the Orange Glo Company. This business unit consists primarily of the well-known OxiClean brand and also as a cleaners business with the Kaboom and Orange Glo brands. Like SpinBrush, this acquisition fits our criteria. OxiClean is a leading brand in the growing laundry additive category. It will bolster our competitive position in the laundry category. It provides us with marketing expertise and direct response sales which we plan to leverage to more efficiently test and launch new products across our entire portfolio.

We acquired almost $200 million in new sales for $326 million purchase price and with projected synergies of over $20 million are included, this deal will provide meaningful accretion in future years. Most importantly, we believe that the laundry additive category has strong growth potential. The current category is over $1 billion in sales out of the $8 billion in total laundry products market.

The cleaning power of laundry detergents, of liquid laundry detergents, has steadily declined over the past 15 years, driven by a consumer switch from powder detergents to liquid detergents. Powder detergents provide much better cleaning power than liquid detergents, but consumers prefer the convenience of liquid detergents despite their higher price per washload. As a result, powder detergents have gone from a 70% market share 15 years ago to less than 30% today as liquid detergents have increased from 30% to 70% of the laundry detergent market.

The laundry additive category benefited was from this consumer shift by offering products such as OxiClean that boost the cleaning power of liquid laundry detergents and products like OxiClean can provide a valuable liquid laundry detergent with the cleaning power of the leading premium brand for less total money than buying the leading premium brand. So smart consumers are increasingly buying laundry additives such as OxiClean to boost the cleaning power of their liquid laundry detergent back to what they once were when they used powdered laundry detergents. And even smarter consumers are buying good value liquid laundry detergents like Arm & Hammer and Extra, adding OxiClean to it and getting the cleaning power of premium brands for less costs than the premium brands. We believe this trend will continue which means continued growth for both our value laundry detergent business and the laundry additive business.

Okay, let me switch gears now and talk about the future. While we are pleased with the solid second-quarter and year-to-date results, we are never satisfied. First in terms of dealing with issues, we've 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-balanced pipeline of cost savings initiatives in the areas of manufacturing, purchasing, and distribution that are being executed and along with the price increases taken in 2005 and 2006 have enabled us to more than offset the higher commodity costs in 2006.

Second, while these acts we have taken to offset the higher costs have temporarily slowed our organic growth primarily due to the forward sales growth of our liquid laundry detergent business, we are confident that we can restore strong organic growth for several reasons. First, the stronger than expected improvement in gross margins will enable us to significantly increase marketing spending starting in the third quarter. Second, this increase in marketing spending will be focused behind a strong pipeline and meaningful new product innovations in every one of our core categories. Third, organizational changes have been made in 2006 to drive improved organic growth in profit. These include the creation of five strategic business units for our U.S.-based consumer business and a new product development team.

The five strategic business units are headed by outstanding general managers and they will be supported by dedicated resources from every function to drive quicker and better decision-making with a stronger focus on organic growth and bottom-line profitability. The organic growth of the strategic business units will also benefit from our dedicated new product development team. This team has been in place since early 2006 and has already significantly bolstered the pipeline of new products that will be launched starting late in this year.

In total, I am confident that a combination of increased marketing spending, a deep and broader pipeline of new products and focused strategic business units will reignite organic growth in the Company.

Now let me translate this into specific guidance for the rest of the year. In view of our solid results in the first two quarters and the significant improvement in our gross margins, we are going to raise our earnings per share forecast for the year from $1.93 to $1.95. When you add $0.09 for stock option expensing, this represents a total earnings per share for this year of $2.04 in comparison to last year's $1.83, an increase of over 11%. We feel comfortable that we can achieve this higher EPS target despite continued volatility in commodity prices and spending significantly more on marketing in back half of the year to reignite organic growth heading into 2007.

The increased marketing spending will particularly impact Q3 in which we are starting heavy advertising support behind new products launched in late Q2 or early Q3.

In summary, we are very pleased with our second-quarter and first-half results. Our primary objective in the first half was to restore our gross margins to at least year-ago levels. Despite continuing high oil another commodity prices, we have more than offset the gross margin impact. We will continue to drive cost savings to improve our gross margins, but now we can take a more balanced approach and devote equal focus on restoring organic revenue growth. We will also focus on integrating our two recent acquisitions, SpinBrush and Orange Glo, to reap the accretive benefits of these great acquisitions starting in 2007.

That ends our presentation. I'll now open the call to any questions that you may have, which Zvi and I will do our best to answer.

(OPERATOR INSTRUCTIONS) Bill Schmitz, Deutsche Bank.

Can we spend a little bit more time on the laundry detergent stuff here? Can you talk about what unit growth actually was or unit decline was in the quarter? And then also total sales, I know you said it was roughly flat. Was it flat or was it down slightly?

No, Bill, our consumption results were actually up a little bit. Our net sales results were actually up a little bit. What happened was as Zvi and I have said, the price increases went into effect in late Q1. They really affected pricing in Q2. The retailers see that coming, asked for and we supported stronger merchandising support in Q1 somewhat to the detriment of Q2 because they wanted to take a last kick at the cat against lower prices. And that led to the exceptionally strong results in Q1 in terms of consumption and also had a negative effect on Q2 consumption.

Net year-to-date our total sales results are very strong in the high single digits. I would also tell you we are continuing to do exceptionally well in the mass merchant and club store channels even in the second quarter we have had very strong sales and consumption growth in those channels. The channels that are -- have suffered a little bit from the pricing was more of the traditional food and drug channels, where they crossed certain price points and they wanted to back off temporarily on merchandise support.

But going forward in the back quarters, we're kind of through that sticker shock. We see the resumption of normal merchandising activity in the food and drug channels and continued strong support from the mass merchant and -- I said club -- I should have said dollar store channels I meant earlier. We have had some very strong continued results in the mass merchant/dollar store channel.

So that's kind of the profile of the business and again, we feel very strong. The value laundry detergent business has had great results, great growth over the past several years. We see no reason why that would not continue and there was just this short-term sticker shock that happened as prices went up quite significantly in the second quarter.

Got you. So did you get the full 10% price increase in the quarter?

Yes, we did. That or more.

Was there a mix shift between Extra and Arm & Hammer in the quarter? Did that help the growth margin at all or is that de minimus?

Not really much, Bill. We took again significant price increases on both that led to about $0.50 per 100 ounces -- a $0.50 price increase per 100 ounces out there. Arm & Hammer has done a little bit better than Extra as far as business results, but nothing significant.

Okay, great. Just very briefly and this might be a little bit of a minutiae based question, but in terms of SpinBrush when you do sort of your organic growth and said it was roughly flat in the quarter, does that include all of SpinBrush or just the base SpinBrush and is SpinBrush growth in the organic sales growth numbers? Because I think it had a pretty good quarter.

Actually no, SpinBrush is right out of the organic numbers, not included in the organic numbers.

Okay, so even the growth in SpinBrush is excluded?

Right, excluded.

Great, thanks very much.

Matthew Palazzolo, Prudential.

I think you said that one of the reasons for the lower than you had expected marketing spending in the quarter was due to some copy work. Can you just kind of flush that out, what was happening there?

We are very diligent about the effectiveness of our copy. In some cases it took a little longer than we expected to develop great copy. Also I should say most of our new product launches happened late in the quarter, so when you put the two things together of a little longer than expected to develop the copy and the launches late in the quarter, we have starting this year shifted more of our marketing timing to be with the new product lunches. We find it much more effective to spend the money against new product news than again just base business. So we pushed back the start of some of the advertising till late Q2 in some cases early Q3 with the new products that I mentioned.

Okay. Then, Zvi, did I understand you correctly that there is a potential that you could add back $0.03 due to this tax credit issue and that that should show up in the second half? Is that correct?

Because we missed it by this whole tax bill question. They almost approved it or they almost approved the tax bill over the weekend but did get around to it, the Senate didn't quite get around to it. So we don't know what is going to happen. I'm really not forecasting what will happen here. All I was saying to you is if they do approve, the reinstatement of the R&D tax credit it would be worth $0.03 to us in the second half.

Okay and then I will assume then that it also is not factored into the $1.95, correct?

It is part of our overall thinking I would say -- you know what I think, I think eventually they will approve a tax bill so I would say it is part of our overall thinking but if we stuck our necks out here, we will have to honor that guidance. By the way I do want to make one thing clear about the guidance, which is $1.95 does exclude -- does exclude anything to do with Orange Glo and we have said that we expect Orange Glo to be dilutive in the second half. I think we said slightly dilutive. (indiscernible) to take into account your net mobile for the Company for the second half.

Okay, lastly just some housekeeping. The $20 million in sales from acquisitions, how much of that -- I know the bulk of it was SpinBrush, but what was it exactly? And how much of that sat in consumer international? Because I think a piece of it is in that segment. Is that correct?

It is mainly SpinBrush. I really don't want to go into any more detail than that. Some of it is in international, yes.

Thanks a lot.

Dara Mohsenian, JPMorgan.

Good morning. Have you seen any pickup in organic growth so far in Q3 particularly in liquid laundry? And with the marketing increase and new product focus in the back half, do you think organic growth can get back up to that the mid single-digit growth level that you've seen over the last year or so?

Honestly we have not seen any share results really on Q3 so far, so it is too early to say. I think what you'll see is a steady progress of building back up to that level of 3% to 4% starting in the back half of this year and it will get fully there in 2007.

Okay. Did you see -- how much pipeline fill did you see in Q2 from these new product launches you mentioned late in the quarter?

I would say versus year ago it was nothing different than year ago new product activity.

Okay. Then last, have you experienced any significant changes in shelf space allocation at retail in any of your product categories?

Let me think for a second. Honestly we have gained some distribution in some accounts on liquid laundry. We are gaining some distribution in deodorizers behind the new Fridge Fresh products. We pretty much have held pretty good in the oral care category. We might have lost a little bit in antiperspirants. We have held our very strong position in condoms and gained some distribution on the test kit side with the launch of the first Rapid Result.

Okay, that's helpful. Thanks.

Alice Longley, Buckingham.

Circling back to the first question on its fair to back out is it not that consumption of your detergents in units was down about 8% in the quarter. The reason that it is interesting is that if the units are in decline like that, is that at a certain point run out of detergents and they're going to have to -- you might get a spurt of unit purchasing and then pricing on top of it.

I don't want to give an exact number, Alice, for units, but yes, units were down. I think what you say could be right. We do believe as Zvi said there might have been some pantry loading in Q1 as the retailers ran extra merchandising at the old prices in anticipation of new prices and consumers have been working down their pantries we believe in Q2. So it would be nice news. I wouldn't want to promise it but it could be good news if some resurgence of buying in Q3 as the pantry load has been worked off.

Were your shipments -- your sellthroughs you said were up slightly. Were your shipments up slightly or were they down because of inventory workdowns?

You're talking about liquid laundry or --?

Laundry overall.

I would say shipments were close to even with last year. Actually liquid laundry was very, very slightly up in dollars, even though units were down. Remember the powder business is in a secular decline and we have to hit a tough fabric softener business, so I would say overall shipments were close to flat with actually slightly higher liquid.

Okay, and what were your -- looking at that all retailer end data that you've got, what were your marketshares in laundry detergent year-over-year? Were they up, down, or sideways? I guess in units and dollar terms.

All channel and liquid, Alice, was relatively flat versus year ago. With again the traditional food and drug channels were down and there was -- we had very strong growth in the mass merchant and dollar store channels. But netted out to be relatively plus or minus on a consumption basis.

And that's in dollars?

That is in dollars.

Okay. Granular you throw that in, how much were your detergent shares overall up or down in terms of share?

I'll have to grab something, Alice, and give you a call back on that one. I don't have that right in front of me.

Okay. And then could you take apart the gross margin? We've got your gross margin up 210 basis points. We have got the raw material costs a hit of 250 basis points. Can you break out the contribution from price, promotional activity and cost savings I guess?

For the quarter I would say price was the largest component of the margin improvement. If you take it over time, which is if you go back to the beginning of the commodity cycle of two years ago, I'm going to make an estimate here because I don't have that right in front of me. But I'm going to estimate that actually cost reduction programs were actually anything -- the three components cost reduction is probably the single largest followed by price followed by promotional efficiency. That is just a feel for it, Alice, I don't have the precise numbers.

In the quarter price was the big driver, but remember we're trying to recover 500 basis points, not just 250 out there for a three-year period our cost reduction efforts are being number one rather than price.

Okay, and then just a final question. How can you be sure or can you reassure us that there hasn't been any stuffing of the channel of OxiClean before you bought it that you are going to have to contend with?

Say that again, Alice. Any --?

Channel stuffing of OxiClean before you bought it.

We have been in there talking to the folks. We haven't seen it yet, Alice. Quite honestly with the trade today, it is very had to stuff channels, so it that is kind of -- it is not the kind of a product that -- it isn't a $1 billion brand, which if you let out at a hot price the trade may want to take on it. So we have not seen that so far and we have been -- we are certainly (indiscernible) to go do that thing but we were very careful about that and now that we have -- we just as of yesterday closed the deal, so now we can get into deep detail and the books of the company, but we haven't seen anything so far.

I guess one other thing. How much was advertising alone up or down, Zvi, in the quarter?

Advertising alone versus last year? It was up percentage-wise by the same as total marketing, around 6%.

Thank you very much.

Joe Altobello, CIBC World Markets.

Just quickly on the tax rate again, Zvi, just to be clear, your guidance for this year assumes a base tax rate for the back half of 35.5% plus $0.03 in a true up essentially?

We're not banking on this tax rate. We hope we will get it -- the reduction. And if we don't get it, we're just going to have to make the [objective] from some other sources. That is what we would say to you.

Fair enough. And then on SpinBrush, it looked like when you guys bought that business it was doing about $110 million I think of sales annually. It did about $20 million or actually less than $20 million in the quarter. Is something going on at SpinBrush?

It is going on. It is a seasonal business. There's a big impulse affect in the fourth quarter and so you can't take it, you just can't look at second quarter sales.

Okay, so 4Q is the big quarter for the power toothbrush. Then on Orange Glo, that is not a seasonal business if I recall, right?

No, it is relatively flat sales on Orange Glo.

So for our models it's about $50 million a quarter in terms of sales.

You're in the right ballpark.

Okay. Great. Thanks.

A follow-up with Bill Schmitz, Deutsche Bank.

Sorry to jump back in again. Zvi, can you define what significant means when you talk about marketing expenses? Is that like up 10% year-over-year or is it up like 40?

Here is I what I would say to you, Bill, it was up double digits clearly. They way to think about is we've consistently talked about a long-term marketing spending being in the 11 to 12% of sales range. Now for the first half of this year it was less than 10%, that's partly seasonal because Q1 is never an expending quarter. You expect Q3 to be the biggest quarter because it has both the new product spending and the seasonal spending for the skincare and deodorizer businesses.

So for the second half of the year, I would assume that spending would be the high-end of this 11% to 12% spending objective if you like where it was below 10% for the first half.

So will it be 11% for the whole year?

It will be in the -- I would say it will be in the 11% to 12% range for the year, yes.

Okay, because that's very helpful. Just in terms of gross margin, first just on the quarter, how much of that gross margin expansion was from the addition of SpinBrush? I know you mentioned it in your comments, but was that a --

It is a higher margin business, Bill. I'm just not going to break it out for you. It was part of the increase in margin.

Okay. Was it material? Because you said most of it was pricing.

Most of it was pricing, yes.

Just in the balance of the year, I know you are going to start spending a little bit more and maybe get a little bit more active on the promotional front, so what kind of gross margin expansion -- I mean is it going to be less in this quarter for the back half of the year, substantially less? What should we think about in terms of how much gross margin juice is left if you kind of step up the promotional activity?

A good question. I would think that we will be -- we said I think originally for the year we expected margins in the 39 plus area in the second half. We had a very, very strong performance in Q2. I'm not necessarily assuming the same gross margin in the second half because of production activity, but we will be definitely be in the 39 plus area in the second half.

Okay, great. Thanks again and sorry to jump back on.

I show no further questions in the queue at this time. I would now like to turn the call back over for closing remarks.

Again I want to thank you all for taking the time today to listen in to our second quarter results. Again we are very pleased with our results. We have taken care of a big problem and now on the gross margin side and now we can go forward and as I said earlier, take a more balanced approach, continue to deliver strong gross margins, and invest in our business behind advertising, new product support to drive the organic growth back to historic levels. And also we have two major acquisitions we are in the process of integrating, which will have very positive accretive benefits to us in 2007. So we are very pleased with our progress to date and very pleased with the outlook for the rest of the year and I'll look forward to seeing the rest of you in our next earnings call or on the road. Thank you very much. Goodbye.

This concludes the presentation. You may all now disconnect. Good day.