切遲杜威 (CHD) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Church & Dwight first-quarter 2007 earnings conference call. Before we begin, I have been asked to remind you that on today's conference call the Company's management may make forward-looking statements regarding amongst other things the Company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the Company's SEC filings.

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

Good morning, everyone. It is always a pleasure to talk to you, particularly when we have good results to report. I will start off by giving you a brief perspective on the first-quarter results. I will then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with the financial details of the Company's first quarter. When Matt 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.

To put our first-quarter results in proper perspective, I would like to start by reviewing Church & Dwight's corporate priorities for 2006 and 2007. As we stated consistently in our quarterly earnings calls in 2006, gross margin improvement was our top priority last year.

As you know, commodity costs increased dramatically starting in 2005 that 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 margins declined to 36.6% in Q4 of 2005 excluding one-time charges due largely to higher commodity driven costs. We reacted to this unprecedented increase in costs 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 am proud to say the results of the Corporation's focus on offsetting the higher commodity driven costs was outstanding. We not only offset approximately 290 basis points in higher costs in 2006, but we achieved a 240 basis point net increase in gross margin in 2006 of which 130 basis points in improvement came from the base business and 110 basis points came from acquisition synergies.

A key part of the gross margin improvement was price increases that we implemented in the second quarter of 2006. These significant price increases particularly in liquid laundry, our largest business, led consumers to pull forward some merchandising activity from the second quarter 2006 into the first quarter of 2006. Our liquid laundry business grew by over 10% in the first quarter of 2006. This led to unusually high organic growth in the first quarter of 2006 for the total Company and lower than normal organic growth in the second quarter of 2006.

In the subsequent third and fourth quarters of 2006, our laundry business delivered solid organic growth as the retailers returned to traditional levels of merchandise and support and consumers accepted the higher prices.

The rest of our portfolio performed as expected in 2006 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 deodorants. The net effect of these actions in 2006 was organic revenue growth of around 4% in Q1; 0% in Q2; 3% each into Q3 and Q4 for a total year of around 2%. While these overall organic revenue results are slightly below our historic trends and goal of 3% to 4%, the short-term trade-off between gross margin organic growth was definitely in the best long-term interest of the Company for two reasons.

First and most important, the gross margin improvement has enabled us to increase marketing spending going forward to deliver solid organic growth. Second, the gross margin improvement has enabled us to deliver higher earnings. While gross margin improvement was our top priority in 2006, our goal in 2007 is to continue to deliver gross margin improvement while restoring solid organic growth and we expect to do just that.

Overall our first-quarter of 2007 results were right in line with our plan. Sales were up 16%. Gross margins were up 70 basis points and marketing spending was up 140 basis points and earnings per share were up 10%. However as we also reported, while overall sales were up 16%, the organic sales of our base business excluding the Orange Glo acquisition was actually down 1%. I would also like to note that if we added Orange Glo's results to our year-ago numbers, the pro forma organic growth would actually be plus 1%.

Now the slight decline in organic growth for the first quarter when you exclude Orange Glo was due primarily to sales results of our liquid laundry business, which was going up against the unusually high year ago period, which was driven by the higher than normal the levels of pre price increased merchandising activity by our customers. This situation is expected to return to normal levels in the second quarter in which we expect very strong organic growth that should bring us back in line to deliver our organic growth target of 3% to 4% in 2007. Matt will discuss this in greater detail in a minute.

Overall I would like to say that we are very pleased with the solid first-quarter results. They are directionally consistent with our expectations and have set us up for what we expect will be another year of record sales, profit, and earnings per share in 2007. I will provide more detail in my outlook for the year in a few minutes.

Now I'll turn the call over to Matt, who will provide you with more of the financial details on the first-quarter results.

Thank you, Jim, and good morning, everybody. I will start the headlines. They go like this. First-quarter EPS was $0.66 per share compared with $0.60 in 2005. This is a 10% increase. Sales up 16%; gross margins expanded by 70 basis points while marketing spend was up 140 basis points as a percentage sales compared to the prior year quarter.

Now let's review the income statement beginning with sales. First-quarter reported sales of $514 million were 16% higher than the prior year quarter. From a product line perspective, Xtra liquid laundry detergent, Super Scoop cat litter, and baking soda all reported year-over-year sales growth. At the same time, toothpaste and anti-perspirants were weaker compared to last year's first quarter.

With respect to organic sales, organic sales in the quarter year-over-year was down 1% but there's really three factors causing that. First being the positive effect on last year's first quarter of the February announcement of an April 2006 price increase. That would be number one. Number two, the timing of our trade promotions and customer merchandising. And finally, we have higher slotting in this year's first quarter coincident with our new product launches.

Last year's price increases served to significantly strengthen the Q1 2006 volumes while at the same time reducing the second quarter '06 volumes, particularly in liquid laundry. Q1 last year was marked by significantly higher levels of trade promotion and customer merchandising activity on liquid laundry and I think it is also important to remember that we then reduced our trade spend in Q2 last year to help the new list price take hold. We have the reversed happening in 2007. In Q2 this year, we have significantly more trade spend than in Q2 2006.

Now regarding slot, in Q1 this year is our heaviest quarter for slotting due to the new product launches so it consequently has an impact on our organic sales year-over-year. The end result is Q1 year-over-year organic sales declined while our Q2 organic sales will be up significantly. So the end result is that if you take the first half of 2007 as a whole, we expect a healthy year-over-year organic growth rate.

Now let's turn to gross margins. Gross margins were up -- increased to 38.9% in the first quarter. That is up 70 basis points versus last year. The prior year price increase and the inclusion of the OGI business are year-over-year positive drivers. Going the other way, we have higher year-over-year input costs such as resin and corrugated, as well as the effect of the higher year-over-year slotting costs that I just mentioned.

Now marketing. Marketing expense was $12.6 million higher for the quarter partially driven by the acquisitions. Marketing expense as a percentage of sales was 8.9% in the quarter in contrast to 7.5% as a percentage of sales in the prior year quarter. So that is a good trend year-over-year, 140 basis point increase.

SG&A, the SG&A increased about $8.6 million year-over-year, which includes the impact of OGI as well as higher intangible asset amortization costs and higher legal costs.

With respect to operating profit, operating profit of $82.1 million is up 14% over the prior year first quarter. The operating margin for the quarter is 16% compared to 16.3% in the prior quarter. Remember that our margins are influenced by the higher marketing spend as a percentage of sales and the higher slotting points and with the new product launches.

Now let's move to other income expense. It increased primarily due to the higher debt levels as a result of the OGI acquisition. Income taxes, as you can see in the release, our effective rate for the quarter is 36% compared to 39.7% in 2006. This is explained by the absence of the R&D credit in the first quarter last year. And while I am on the topic of tax, we are forecasting an effective rate of 36% for the full year 2007.

With respect to free cash flow, we generated $18 million of free cash flow in the quarter compared to $3 million in the year-ago quarter. CapEx by the way was about $11.3 million in the quarter and dividends were $4.6 million.

Turning now to the balance sheet, accounts receivable are up approximately $40 million versus a year ago primarily due to the recent acquisition and also higher international sales in the quarter.

Inventories increased about $35 million versus a year ago. About $30 million of the increase is related to Orange Glo. And it is noteworthy that we are in the process of transitioning the manufacturing of OGI products from copackers to our plants at the moment.

Debt, if you look at our debt levels, our first priority for free cash flow is debt reduction. The net debt at quarter end was $799 million and our total debt to LP and EBITDA for our bank agreement was approximately 2.6. And that puts us comfortably within our long-term target range of 2 to 3 times EBITDA.

So the short story for the first quarter would be earnings up 10% to $0.66. The quarter saw gross margin expansion, higher marketing spend, and new product activities and free cash flow was strong.

Looking ahead, and Jim will say more about this in a minute, we have had a strong month of April and expect healthy organic sales growth in the second quarter. The first half of the year has a lot of moving parts including a significant increase in marketing spend in the second quarter. And so in order to help everyone understands how we see the year unfolding, we have provided an earnings range for the second quarter and expect the second half earnings to be more balanced between the third and fourth quarter.

And now I will turn the mic back over to Jim.

Thanks, Matt. I would now like to provide you with specific details in some of the Company's key businesses to give you are better sense of what's driving the Company's overall results. Please note that when I mention consumption I'm talking about all channel consumption, which includes the traditional food and drug channels as measured by Nielsen plus our actual retail consumption results or actual sales results in other sales channels not measured by Nielsen, such as Wal-Mart, dollar stores, and clubs.

These nonmeasured channels are growing faster than the measured channels and they represent almost 40% of the Company's total consumption and an even greater percentage on some of our brands. Thus what you see as Nielsen 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 our domestic household business, which consists of laundry projects such as detergents, fabric softeners, and additives, cleaners, and deodorizer such as cat litter, baking soda, and carpet deodorizers. Overall this business had strong net sales growth in the first quarter of almost 30%, driven primarily by the acquired Orange Glo business.

Within the base business, excluding the Orange Glo brands, sales gains on cat litter, baking soda, and Xtra laundry detergent were largely offset by declines in Arm & Hammer liquid and powdered laundry detergent and carpet deodorizers as well as slotting allowances related to new product launches.

As Matt and I previously mentioned, the liquid laundry detergent year-over-year sales were unfavorably impacted by the high year-ago base, driven by the unusually high levels of pre price increased merchandising activity by our customers. This situation is expected to return to more normal levels in Q2 in which we expect stronger organic sales results for both Arm & Hammer and Xtra liquid laundry detergents.

We are also very pleased with the continued strong growth of our cat litter and baking soda businesses, which are being driven by new Arm & Hammer products launched in 2006. The new fridge fresh refrigerator deodorizer and the high-performance cat litter made from the actual ingredients. These and other new Arm & Hammer products launched in 2006 and the new Arm & Hammer megabrand trademark advertising campaign which started in 2006, helped to increase total Arm & Hammer brand sales by over 6% in 2006.

We expect continued strong growth in 2007 behind more new products including, we have expanded distribution of Arm & Hammer Essentials liquid laundry detergent, which is formulated from plant-based surfactants and baking soda to deliver the same powerful cleaning capabilities as regular Arm & Hammer detergent. This product has shown strong appeal among environmentally conscious consumers. We have also expanded distribution on the Xtra Lasting ScentSations line which offers a highly fragrant liquid laundry detergent at a great value.

Also the launch of the highly innovative new cat litter called Odor Alert with crystals that change color when activated by the cat's urine or feces so the consumer can see and remove the soiled cat litter before they smell it. These new products will be supported by increased levels of marketing spending particularly behind the Arm & Hammer megabrand advertising campaign.

The OxiClean and Kaboom brands that we acquired with the acquisition of the Orange Glo Company also had strong double-digit growth in the first quarter behind improved merchandising, increased distribution, and continued strong marketing support. We expect continued strong growth on the OxiClean brand supported by the recent launch of a portable instant stain remover that instantly dissolves most stains. The portable instant stain remover segment is a new and fast-growing segment and we expect that the launch this product under the popular OxiClean brand name will receive strong consumer acceptance.

We have also launched new products in the carpet deodorizer business and fabric softeners to drive improved sales trends in those businesses going forward. Overall we're very happy with the organic growth outlook in our household business driven by innovative new products, improved marketing programs, expanded distribution, and (technical difficulty) improved merchandising.

We will also launch at least one more major new household product in the back half of 2007. However, for competitive reasons, I cannot share any details about this product until it is launch.

Finally on household, I want to mention that Church & Dwight will fully support the industrywide initiative to reduce the water content of liquid laundry detergents by moving to concentrate offerings. We will begin rolling out concentrated line extensions of both Arm & Hammer and Xtra to retailers this September and complete the national launch to all retailers in mid 2008. This initiative will help to recover the unfavorable cost impact of higher oil prices by reducing the cost of the detergent, the packaging, and its shipping costs.

While the long-term impact of this action is expected to lead to improved gross margins in our liquid laundry brand from the depressed levels in 2005 and 2006, we expect to incur short-term conversion costs from this effort in 2007.

Now let me switch gears for a few minutes and talk about our domestic personal care business. Net sales of this business grew over 2% in the first quarter of 2007 driven by the SpinBrush battery-powered toothbrush business. Importantly, in addition to the strong consumption growth on SpinBrush, we achieved consumption growth on our core personal care businesses of Arm & Hammer toothpaste, Trojan condoms, Nair depilatories, and First Response pregnancy kits. However this growth was largely offset by declines in our value toothpaste and underarm deodorant businesses.

Going forward, we're in the process of launching an impressive array of new personal care products and marketing programs. These include a new subline of Nair depilatory products called Pretty, which is specifically formulated for the more sensitive skin of young girls in their teens and tweens. We've also launched a new Nair sensitive formula line for adults consisting of five new skin loving products.

In the condom category, we will continue to be the innovation leader with the introduction of a Trojan Intense Ribbed condom with specialty formulated ribbing for those users who desire increased pleasure without any compromising protection. This innovative new product and an exciting new advertising campaign is expected to drive strong growth in future quarters in the Trojan brand, which achieved record sales and profits in 2006 and another record share in the first quarter of 2007.

The First Response brand, which is the fastest-growing pregnancy kit brand over the past several years is working the launch of an improved pregnancy kit in 2007 that will enhance the brand's reputation as the first to accurately detect whether or not a woman is pregnant.

Finally, our oral care business will benefit from the introduction of three exciting new SpinBrush toothbrushes including a slimmer handled SpinBrush, a unique two-speed battery-operated SpinBrush, and our first rechargeable SpinBrush that will be sold at a lower price point than any other rechargeable toothbrush in the market. These innovative new toothbrushes are expected to generate strong category growth for the battery-operated and rechargeable toothbrush segment, given their superior training cleaning power versus traditional manual toothbrushes.

These are just a few examples of the innovative new household and personal care products being launched in 2007 to accelerate the Company's organic growth. While we are pleased with the record number of new products being launched, our goal is to develop and launch even more new products at a faster rate in the future to keep up with the demands of our consumers and to stay a step ahead of our competitors.

Finally in order to drive improved organic growth, we have made several organizational changes. Eighteen months ago we created a focused new product development team which has already resulted in the improved pipeline of new products that I have just discussed today. Nine months ago, we divided our domestic business segment into five separate strategic business units to enhance cross functional focus on each business and drive improved profit growth. This is expected to bear fruit starting in 2007 through increased focus on big ideas and execution of the plans supporting those ideas.

Finally in the first quarter of this year, we created a sixth domestic strategic business unit to focus specifically on businesses such as antiperspirants and value toothpaste, where we face a significant competitive disadvantage. This new team of guerrilla marketers and a supporting cross functional team is already moving quickly to slow the decline of these brands despite intense competition in these categories.

Now let me talk for a minute about our other two segments, our international business unit and our specialty products division. Our international segment which represents over 16% of our total sales, had an excellent first quarter with a 16% increase in sales. This increase was driven by strong results in the UK, Canada, Australia, and Mexico. Although the majority of international sales growth was due to the acquired businesses and foreign currency changes, we expect improved organic growth starting in the second quarter due to new product launches and higher marketing spending.

In our specialty products segment, net sales grew a healthy 4% in the first quarter driven largely by price increases in our specialty chemicals business.

Let me 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 price increases for raw materials, packaging and transportation, and still deliver significant earnings growth. We have a well-organized pipeline of cost saving initiatives in the areas of manufacturing, purchasing and distribution that are being executed. And along with the price increases taken in 2005, 2006, and 2007, have enabled us to more than offset the higher commodity costs in 2007.

Second, while the actions taken to offset higher costs have temporarily impacted our organic growth in the first quarter of 2007 primarily due to its impact in our liquid detergent business, we are confident that we can store strong organic growth over the rest of 2007 for several reasons.

First, the improvement in our gross margin will enable us to significantly increase marketing spending going forward. Second, this increased marketing spending will be focused behind a strong pipeline of new product innovations in every one of our core categories. And third, organizational changes have been made in 2006 to drive improved organic revenue and profit growth.

In total, I am very confident that the 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 in the rest of 2007.

Now let me translate this into specific guidance for the rest of this year. In view of our solid results in the first quarter, our confidence in our new product launches, and improvement in our gross margin, we remain enthusiastic about 2007. However, since it is still early in the year and commodity costs remain unstable at this time, at this time we're going to reaffirm our earnings per share forecast for the year of $2.34 to $2.36, which is equivalent to a 13% to 14% increase over 2006 results. This goal includes the expected negative impact of conversion costs related to our anticipated shift to concentrated liquid laundry detergent in late 2007.

Organic sales results are expected to be very strong in the second quarter behind significant increase in marketing spending to support our new product launches and several new advertising campaigns. Consequently we are expecting earnings per share in the range of $0.57 to $0.59 for the second quarter. We also expect continued solid organic growth in the back half of 2007 which will support our total organic revenue goal range of 3$ to 4% for the total year. This excludes the impact of foreign exchange and the Orange Glo acquisition.

In addition, we expect second half earnings to be more evenly distributed in the third and fourth quarters than in prior year. In summary, we are very pleased with our first-quarter business results and we feel confident that we can deliver our higher earnings per share forecast for the year.

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

(OPERATOR INSTRUCTIONS) Alice Longley, Buckingham Research.

The shift to compact to concentrated detergents, can you quantify what the negative impact of the costs temporarily might be this year and next and tell us how long that will kind of persist maybe into '08? Then quantify what the benefits are going to be once they get rolled out and when do the benefits start offsetting the costs?

That is a good question. What I can tell you at this point -- I am not going to give you exact numbers, but what I know for sure is that there are conversion costs that will start later this year as we start rolling it out in parts of the country and they will continue in the first half of next year. That is a given. Then what is going to be (technical difficulty) determined by the marketplace is what happens as far as category and what happens as far as consumer takeaway?

I would tell you that in test markets right now, consumers are shifting to the higher sizes, our larger sizes and also the category growth is stronger than it has been. So those are good positive trends. What I can't tell you though in the end is final pricing of the liquid laundry detergents out there. That is still to be determined by the marketplace. So there's a lot of factors floating around right now.

But I think you will see the conversion costs between the fourth-quarter of this year, starting late for third quarter, fourth quarter, and the first half of next year and then the positive benefit coming through hopefully as consumers move to these sizes, there should be some gross margin improvement.

So next year it will be a mixed bag and we just can't sort out exact numbers right now given we just don't know how the consumers will vote on this and where price points will end up in the marketplace.

And the second half, when you have to shoulder the costs of this shift, what are the offsets that will enable your earnings to grow faster than in the first half?

You're talking 2007?

Yes.

This is Matt. What we expect to happen during the year is for the gross margins to expand sequentially from one quarter to the next and there are a number of things that are going to -- influencing that. As you know, the number one would be our cost reduction programs that we get traction on those quarter after quarter. Some other things that are influencing the first half versus second half, as I said, we have pretty high slotting in the first quarter, even more in the second quarter but less so in the second half.

The same is true for trade spend, more in the first half than the second half. So from a gross margin expansion standpoint, I should think that Q2 better than Q1, Q3 better than Q2, etc. And on a full year basis, we would be targeting to hit the 125 basis point gross margin expansion. That of course would include concentration.

So you're still holding to gross margins of 125 basis points for the year?

Look, we don't call line items. Just like we say the top line, we say we're going to target 3% to 4% topline, 125 basis points on gross profit and 60, 70 basis points is on op margins. So those are always going to be our targets from year to year, but some years are going to be high, some years low. But that is what we are shooting for.

And then one last piece on this. You said resin prices are -- or costs for you are up year-over-year. Clorox said that their resin costs were down in the quarter year-over-year. I am wondering why yours would be different?

Maybe they bought bad a year ago. I don't know.

Do you expect resin to become cheaper year-over-year for you in the foreseeable future here?

There is actually pressure right now for resin prices to go up. That is the feedback that we've been getting from our suppliers. It is the usual reason you've probably heard this before, that demand in China is driving the price up.

Okay, thank you.

Connie Maneaty, Prudential.

On the conversion, what percentage of your sales in liquid laundry detergent do you think you will have converted in the fourth quarter this year?

That is a good question, Connie. Basically in the fourth quarter this year, the southern half of the entire United States converts over to concentrated liquid laundry detergents. I honestly can't give you a good -- we will get back to you on that one. It's a good question, I just don't have a percentage off the top of my head on that.

And ahead of the conversion, I am just wondering also about the gross margins. Don't you need to be building inventory and wouldn't that have an impact on the gross margin?

No, not truly. Our laundry plants are highly efficient. They turn over the inventory very quickly and we will have lines dedicated to deliver the concentrated offerings versus lines that will stay with the larger size for other parts of the country until everything is converted to the smaller. So we're not of course seeing any kind of inventory build due to this conversion.

Okay. On the organizational change you made to address the weakness in value toothpaste and APDO, what percentage of your sales do those businesses represent?

We don't like to quote percentages again on business units. They are a minor part of the business. But that team is doing a great job so far. They're doing very account specific marketing programs, putting better value offerings out there, and also looking for increased gross margin savings. It is a relatively new team, but they're off to a fantastic start and we expect that they will slow down the decline of those businesses for us which is very beneficial to our Company.

And do you expect them actually to be able to grow sales in those brands?

No, but I would be very happy to getting down to low single digit declines in those businesses.

Okay, so it is a sort of stop the bleeding program?

Yes.

Joe Altobello, CIBC World Markets.

First question in terms of the guidance for the back half the year, obviously the fourth quarter has typically been a seasonally weak quarter for you guys. Why is it now going to be roughly equal with 3Q? It sounds like it is timing of cost savings on the cost of goods line.

Joe, as you probably know, timing of your marketing spend is a big factor when it comes to your earnings. This is a year where we have a significant amount of new product introductions. So when looking at the remainder of the year, we think that we can achieve the best results for the business by concentrating our marketing spend in Q2 and Q3 and as you probably saw in the release and you heard from Jim's remarks, you got lots of great things going on with Trojan. You've got a new television campaign coming; some new products in Nair. We've got Nair Pretty. You've probably seen the short-short television commercial on TV. It has been pretty broadly seen.

The same Secret, the Secret campaign for Arm & Hammer Master Brand would be a third thing. SpinBrush, lots of new products there as well. And then we have OGI, which we want to promote pretty heavily. So given the number of new products, really the best return from the marketing dollars would be to concentrate them in Q2 and Q3.

Okay and then secondly in terms of the personal care business, I just want to make sure I understand this correctly. In the year-ago quarter, even though you had bought SpinBrush in late '05, you were not consolidating that it in that $130 million revenue number, but it is consolidated in the current quarter. Is that right?

Right.

So if you backed out SpinBrush --?

Yes, we did. In other words, to do the organic sales right we put in -- did an apples-to-apples for comparison, so the 1% decline does include SpinBrush in both years.

What was the decline in personal care?

We would not call out the declines in any one particular line.

Okay, then lastly the higher legal fees? What was that for?

Just trademark protection stuff.

Was it meaningful?

Well, it was one of a number of elements. That is one that we picked out to explain the year-over-year change. The big increase in SG&A is OGI.

Right. Okay, thanks.

Jason Gere, A.G. Edwards.

A question about with the new products that are coming on, in terms of the shelf space, can you talk about within each of the categories where you are getting additional shelf space? And I guess this subpart is where it comes from, if you're cannibalizing existing products, your own products, and then maybe where you are getting from some of your competitors?

That is very good question, Jason. I would say overall we're very pleased with our ability to get incremental shelf space. We're achieving that in laundry behind our liquid laundry detergent additive products. So far we're achieving that in cat litter. This Odor Alert product is an incredible new product with this color changing technology that nobody else has and the trade is recognizing that and giving it incremental shelf space for the most part.

The toothbrush category, the three new SpinBrush toothbrushes are helping us to do a good job of getting into mental shelf space out there, so very pleased with that. In the personal care side of the world, we have been good at trying to grow incremental shelf space in the First Response pregnancy kits as that brand continues just to grow share and is the leading brand out there now.

Condoms, we already have a very, very strong position on the shelf and our share now is just short of 75 share in that category, but it is kind of hard. We already have an exceptionally strong portfolio their. So those are -- and in Nair, we've had a good year on Nair. There's a lot of competitive activity in the category, but we've launched a lot of new products there and the sales force is helping a lot on the shelf space. And that category almost displays are just as important as shelf space because it is a seasonal business and we're doing a good job of trying to get more displays this year.

So when you have really innovative new products which we have in many of these categories, the trade respects that and for the most part in most categories we're able to gain incremental shelf space so far.

Okay, then I guess shifting gears a little bit here, your guidance -- I know you're long-term guidance on gross margin is 125 basis points and you are sticking with that for '07, correct?

Yes, as I said before, we do not call out a particular line item, so as you know, we're going to call it gross profit margins for the year, but certainly that is our target.

Can you talk about the marketing? Clearly by your guidance about the third and fourth quarters or I guess the gap in the back half of the year versus prior years, you can deduct or deduce that the marketing spending will have to continue in that third quarter. Does that mean that we're going to see a pretty considerable drop (technical difficulty) off in the fourth quarter?

Yes. Here's the way to think about it. If you went back and looked at last year's marketing expense as a percentage of sales, you'd see that the biggest quarter was fourth quarter. That is not going to happen this year. So this year there will be a drop-off from Q3 to Q4.

Okay so then if your gross margins -- if it's in that vicinity and your marketing spending is still going to be up -- I guess I'm just wondering if when you look at the operating margins, is the guidance that you are giving for the back half especially with strong organic sales, does that seem a little bit conservative?

We would not comment on whether another guidance is conservative or liberal, but it is what it is. We feel -- we wanted to help everybody understand what our plans were with respect to marketing, so you could more or less set expectations for the remainder of the year. By the way, we do not feel compelled to give quarterly guidance on every call. But we thought given our plans for the year with new products and the marketing spend that it was a good idea to clue everybody in right now.

Fair enough, thanks.

Connie, if you're still on the line, the answer to your question earlier as to how much of the country of our business converts to concentrated liquid laundry detergent starting in September of this year, the southern half the U.S. represents about 25% to 30% of our liquid laundry business.

Bill Chappell, SunTrust Robinson Humphrey.

I guess first just trying to understand the slotting fees in the quarter and then go forward. Is that something where we saw the peak of it this quarter to get stuff ready to go on the shelves or is that part of the big marketing spend next quarter as you launch other products?

It is concentrated in the first half, Bill, so we have slotting year-over-year up in Q1 as well as in Q2.

Just to give you a kind of perspective, we're going to launch about 50 new products this year. Thirty-five of them launched in the first quarter, so that is why disproportionate amount of our slotting fees in the first quarter and that is why it is a one-time hit timing wise versus the new product benefit. We will get the benefit of all the products going through in consumption in the second, and third, and fourth quarters.

Okay, that's helpful. Second, just as you look at the whole Trojan business with some of the new products and looking what happened and kind of how growth was last year, are you expecting still kind of mid single-digit growth for the business or are you higher or lower based on what you see in the product pipeline?

We're expecting at least mid single-digit growth in that business. Again we've launched new products and we have a very exciting new advertising campaign that breaks there in the next 30 days that I think will catch a lot of people's attention. But we've actually increased advertising spending on Trojan this year, got the new advertising campaign, and got new products. Obviously our story is the category growth. We need to keep driving the category growth there when you are a 74, 75 share, and that is what we're trying to do.

Sure. Then just looking at future acquisitions, you said kind of the balance sheet is getting close to where you're comfortable. Can you talk about what kind of activity there is out there and whether you're willing to start looking at new things?

Bill, there's a lot of activity out there. Obviously with all these stories and it seems to be true of all this private equity money out there, a lot of businesses are thinking this is a prime time to sell. So there is a lot of activity, but I would tell you we're always very careful. We are opportunistic. Our primary goal is to look for bolt-on acquisitions like Orange Glo was. We always love acquisitions that are accretive from the cost synergies and obviously buying number one brands that have good growth opportunities. So we are careful.

There is a lot out there, but we kind of go through all the clutter and look for the opportunities. Keep in mind we've had honestly four acquisitions in the past 18 months. There were two big ones in SpinBrush and Orange Glo and two little ones, one involving buying the Xtra brand up in Canada which had been previously owned and another one buying a depilatory business in Brazil.

So I would say we've been very active in the past 18 months and we are going to keep looking. But we're patient and we are prudent and when the opportunities come, we strike. If not, we will wait for till the right one comes along.

So for now I should just assume all cash is going towards debt paydown?

That is correct at the moment.

Thanks so much.

Connie Maneaty, Prudential.

Can you talk a little bit about the new ads for Trojan, what is different about them? And are you withdrawing those ads that talked about sexually transmitted diseases and are you getting better placement for the ads?

No, the new ad campaign is different. It is another strike by us to try to change consumer behavior, which is very difficult in that category. The last campaign did very well and it drove category growth rates up in the mid single digits. We think this campaign has potential to do even better.

It is going to be somewhat controversial. I don't want to tip my hand. It is very exciting. I have seen the rough cuts. It is being finalized right now and should be on air within the next 30 plus days. I think it will get a lot of consumer attention out there and it goes to some basic human instincts about people thinking about protecting themselves from sexual diseases and that but from a different angle than the prior campaign did.

So we're never giving up. I always tell you when you nail the bottom line fact, it's still basically people only use condoms one out of four times when they should to protect themselves. There is tremendous opportunity here and we're just going to keep coming at the problem from every angle possible. We're not going to be happy until we start seeing much stronger category growth rates here.

Okay, and I do have a follow-up question. I just can't help myself on this one. So when the cat whizzes in the litter box, what color does it turn?

Blue.

Blue, okay. Thanks.

I would now like to turn the call over to Mr. Jim Craigie for closing remarks.

Okay well thanks everybody for tuning in today. Again, we are very pleased with the first quarter. It's exactly what we wanted to start this year. It puts in a position to do all the things we wanted this year. We're tremendously excited about our new product launches, the new advertising campaign and again, our cost savings machine just continues to truck along and deliver very solid gross margin improvement over the year.

Again, it is still early in the year. There is a lot of volatilities out there still with a commodity side, which is why we are hesitant to be any more bullish on our call but we are already calling the year up 13% to 14% and as things we see the second quarter in commodities hopefully maybe stabilize, we will be back to you in August to talk about the year.

Again, we thank you very much for taking the time today and please give us a call afterward if you have any more questions. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.