切遲杜威 (CHD) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Church & Dwight second 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, among other things, the Company's financial objectives and forecasts. These statements are subject to risk and uncertainties and other factors that are described in detail in the Company's SEC filings.

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

Thank you, [Eric], and good morning to everyone. It is always a pleasure to talk you, particularly when we have good results to report. I will start off today by giving you a brief summary of the second 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 second 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.

Overall, we are very pleased with our second results, which were right in line with our expectations. Reported net sales were up 19% versus year ago. Organic net sales, which include the effect -- exclude the effect of acquisitions of foreign exchange, were up a strong 5% versus year ago. The organic net sales growth reflects solid gains in all three of our reported business units.

Gross margin's were down 50 basis points versus a high year ago base that was favorably impacted by lower-than-normal trade spending following significant price increases in April of 2006 on several household products. More importantly, gross margins were up 80 basis points versus the first quarter this year, in line with our plan, for gross margins have steadily improved every quarter of 2007.

Marketing spending was up 30 basis points versus year ago and up 320 basis points versus the first quarter to support the launch of new products. The combination of launching these new products and increased marketing support led to record shares across many of our key brands. And finally, our earnings per share increased 9% to $0.59 per share, which was at the high-end of our earnings guidance.

The solid are right in line with expectations and have set us up for what we expect will be another year of record sales, record profits, and record earnings per share in 2007. I will provide more detail on our business unit results and my outlook for the year in a few minutes. I would now like to turn the call over to Matt, who will provide you with greater details on financial results for the second quarter.

Okay, thanks Jim. Good morning, everybody. I will start with the headlines. Second quarter EPS was $0.59 per share. That is compared with $0.54 last year, a 9% increase. Our revenues are up 19%, of which 5% was organic. Our gross margins improved 80 basis points sequentially from the first quarter. In the first quarter, you may remember we cited our expectation that we should have sequential improvement in gross margins throughout the year. I will say more about the year-over-year quarterly margin fluctuation in a moment.

Marketing spend came in at 12.1% of revenues, up 30 basis points as a percentage of sales compared to the prior year quarter. And then with respect to taxes, if effective tax rate was higher than expected at 38.7% and I will also say more about that in a minute.

Now let's review the income statement, beginning with sales. Second quarter sales were $547 million. The organic sales of 5% year-over-year growth was the result of broad-based growth across all of our businesses. The Domestic business had a strong quarter, led by ARM & HAMMER and XTRA liquid laundry detergent and cat litter. Trojan, SpinBrush, and ARM & HAMMER dental care were also up year-over-year. However, offsetting the quarterly growth were declines in other toothpastes and antiperspirants.

The International business had a strong quarter, led by Canada, Brazil, and Australia. It's a combination of a couple of things. We had good new product introduction, specifically ARM & HAMMER Enamel Care in the UK, Nair new products in many markets, Lineance in France, and secondly, we had higher levels of marketing expenditures in International.

We achieved some notable improvements in market share. We have FIRST RESPONSE, now the number one pregnancy kit in Canada. Nair share improvement in Canada, France, UK, and Australia and also ARM & HAMMER Dental Care in the UK.

The other business, Specialty Products, the Specialty Products business also had a good quarter due to strong demand for our dairy products and higher volumes and pricing in the specialty chemicals business.

Year-over-year we had higher slotting in the fourth quarter, coincident with a new product launches. Most of the slotting expense is behind us now as we enter the second half of the year and regarding slotting, Q1, our previous quarter, was the heaviest quarter for slotting due to the new product launches.

In comparing year-over-year organic growth in the quarter, it is important to remember that last year's price increases served to significantly strengthen the first quarter 2006 volumes, while reducing Q2 2006 volumes, particularly in liquid laundry. So consequently, we had an easier year-over-year comparison in Q2 than in Q1. The end result is that Q2 year-over-year organic sales were strong at 5%.

And now gross margins. Turning now to gross margins, our second quarter gross margin was 39.7%. That is lower by 60 basis points than last year, but 80 basis points higher than the first quarter of the year. The year-over-year gross margin decline was expected. Now, remember that we raised prices last year effective April 1, 2006. At the same time, we reduced our trade spend in last year's second quarter to help the new list price take hold and as a result, the highest quarterly gross margin in 2006 was the second quarter. We had the opposite happen this year in Q2, as we have more normalized trade spend now than last year.

When compared to the first quarter of this year, we are pleased with the sequential improvement in gross margin. We continue to expect the second half gross margin to exceed first half margins. On a full-year basis, although we have an evergreen target, as you know, of 125 basis points expansion, we will likely be lowered due to compaction and the uncertainty of the commodity market. We will talk more about that later.

Marketing. Moving down the P&L now to marketing. Marketing expense was about $12 million higher for the quarter year-over-year partially driven by the acquisition. Marketing expense as a percentage of sales was 12.1 in the quarter and contrast to 11.8% as percentage of sales in the prior year second quarter. The dollars spend was just a couple hundred thousand dollars shy of our previous record spend in Q4 of 2006 and, again, looking ahead, we expect Q3 marketing spend in both dollars and as a percentage of sales to exceed Q2 levels.

SG&A. The SG&A increased by about $10 million year-over-year, which includes the impact of OGI as well as higher intangible asset amortization costs, higher brokerage fees, and higher legal costs in this year's second quarter area. Year-over-year SG&A as a percentage of sales declined from 13.9 last year to 13.5 this year.

Operating profit of $76.6 million is up 15% over the prior year's second quarter. The operating margin for the quarter is 14% compared to 14.5% in the prior quarter, but remember that the year-over-year comparison of operating margins is also influenced by the high gross margins in Q2 last year, as well as the higher marketing spend this year as a percentage of sales.

Other income expense increased primarily due to higher debt levels as a result of the OGI acquisition. There is really nothing more to say there.

Now, income taxes. As you can see in the release, our effective rate for the quarter is 38.7%, compared to 37.6% in 2006. This is explained by an additional $2.1 million valuation reserve that was recorded in the quarter for tax assets at one of our foreign subsidiaries. While I am on the topic of tax, we are forecasting an effective rate of 36% for the balance of the year.

Free cash flow. With respect to free cash flow, we generated $32 million of free cash flow in the quarter compared to $4 million in the year ago quarter. And CapEx in the second quarter this year was $14 million. Dividends were at 4.6.

Now just looking at the balance sheet, accounts receivable are up approximately $30 million versus a year ago primarily due to our recent acquisition and also higher sales in the quarter. Inventories increased about $19 million versus a year ago, again, due to the OGI acquisition. It is also noteworthy that we are in the process of transitioning the manufacturing of OGI products from co-packers to our plans and it is going very well.

If we look at our debt levels, our first priority for free cash flow, as you know, is debt reduction. And our net debt quarter-end was 768, $768 million. Our total debt to EBITDA per our bank agreement was approximately 2.5, putting us comfortably within our long-term target range of two to three times EBITDA.

So in conclusion, the short summary for the second quarter would be 5% organic growth, sequential quarterly gross margin expansion, higher marketing spend, new product activity, and strong free cash flow. Now back to you, Jim.

Thanks, Matt. I will now provide everyone specific details on each of our three key business units -- our Domestic business unit, our International business unit, and our Specialty Products business unit -- to give you a better sense of what is driving the Company's results. Please note that when I mention consumption, I am talking about all channel consumption, which includes the traditional food and drug channel, as measured by Nielsen, plus our actual retail consumption results or actual sales results in other sales channel not measured by Nielsen, such as Wal-Mart, dollar stores, and club. These non-measured channels are growing faster than the measured channels and they represent almost 40% of our company's total consumption and even greater than that on some of our brands. Thus, what you see as Nielsen share in consumption results is often a misleading indicator of the actual total consumption occurring to some of our categories and brands.

Okay, let's first talk about our Domestic business unit. Total net sales of this business unit grew 20% in the second quarter over the prior year period, driven largely by the impact of the Orange Glo acquisition. However, organic net sales were also very strong, driven by sales gains in liquid laundry detergent, cat litter, baking soda, condoms, ARM & HAMMER toothpaste, SpinBrush, and pregnancy kits. These sales gains were partially offset by declines in powdered laundry detergent, antiperspirants, value toothpaste, and depilatories.

Overall, we are very pleased with the organic growth of our Domestic business unit, driven by innovative new products, improved marketing programs, expanded distribution, and improved merchandising. On the new product front, we are also beginning to see the benefit of a corporate new product team that was created in 2006 to deliver more innovative consumer products with strong consumer appeal. Last year, this group produced two great new products -- the new ARM & HAMMER Fridge Fresh refrigerator deodorizer and the ARM & HAMMER high-performance cat litter made from natural ingredients. These two great new products are continuing to experience strong sales gains in 2007.

This year, the new product team's effort has resulted in a record number of new product launches, 50 in total, including the following -- ARM & HAMMER Essentials liquid laundry detergent, which is formulated from plant-based surfactants and baking soda to deliver the new powerful cleaning capability as regular ARM & HAMMER detergent. This new product has shown strong appeal among environmentally conscious consumers. We actually did limited launch of this new product in 2006 and the consumer demand for this environmentally-conscious product was so strong that we are now offering it nationally to all customers.

We have also expanded this concept into fabrics often at the launch of ARM & HAMMER Essentials fabric softener sheets, which is also off to a strong start. In fact, our new ARM & HAMMER Essentials line of laundry products has done so well that we understand that Proctor & Gamble will shortly launch a new version of Tide called Pure Essentials. We welcome the competition from the industry leader, which will help to make even more consumers aware of the availability of these environmentally-conscious products.

We have also just launched a highly innovative ARM & HAMMER cat litter called Odor Alert. This clumping cat litter contains crystals that change color when activated by the cat's urine, so that consumers can see and remove the soiled cat litter before they smell it. As our new commercial for this product states, if your litter can't change colors, change letters.

These new ARM & HAMMER products are being supported by increased levels of market spending behind the new ARM & HAMMER mega brand advertising campaign that we started in 2006. The net effect of these great new products, improved marketing programs, and increased marketing spending is record sales and market shared in the second quarter on our ARM & HAMMER laundry detergent, baking soda, and cat litter businesses.

We have also launched innovative new products in our other core categories, including a new Trojan condom called Intense Ribbed that has deep ribs for intense pleasures, a new sub-line of Nair depilatory products called Pretty, which is specially formulated for the more sensitive skin of young girls in their teens and 20s, and three new SpinBrush toothbrushes, including a unique two-speed version to enable both gum massage and brushing, and our first rechargeable SpinBrush.

These new products have been supported by new or improved marketing campaigns that have driven record shares for our Trojan condom business and FIRST RESPONSE pregnancy kit business. The new SpinBrush products and marketing programs have also enabled us to achieve category leadership in battery-powered toothbrushes.

Our new product team has also swiftly applied its skills to our latest acquisition by developing and launching the new OxiClean portable stain remover that instantly dissolves most stains. The portable instant stain remover segment for consumers on the go is a new and fast-growing segment and we expect the launch of this new product under the popular OxiClean brand name will have strong consumer appeal. In fact, the OxiClean brand achieved record shares in the first half of 2007 as a result of this new product, improved merchandising, increased distribution, and continued strong marketing support.

As mentioned earlier, the solid growth that we achieved in laundry detergent, cat litter, baking soda, condoms, ARM & HAMMER toothpaste, SpinBrush, and pregnancy kits was partially offset by declines, particularly in our antiperspirant and value toothpaste businesses. These are tough categories in which we face exceptionally strong competitors with significant scale advantages. However, about six months ago, we created a new team of guerrilla marketers and supported -- in a supporting cross-functional team to stem the decline in these categories. This team was too new to have any effect in the first half of 2007 since that time frame was driven by customer decisions made before the team was formed. We do expect to see improved results in these tough categories starting in the second half of 2007 as a result of the efforts of this new team.

Overall we are very pleased with how our organic sales growth of our Domestic business unit. Our efforts to launch innovative new products supported by more tactile marketing campaigns and increased spending is working. However, we are not satisfied. We expect to launch bigger 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.

We are also pushing our marketing team to develop more proactive and appealing marketing campaigns. This was personified by the new Trojan campaign called Evolve, which was launched on June 18 on TV, print, and our website. It received widespread news coverage and public relations support, driven largely by the fact that the CBS and Fox networks had refused to run the commercials. To date, this coverage has generated significant public dialog on the importance of responsible sexual health. This supports our effort to drive increased condom usage in the U.S., which has the worst sexual disease statistics of any developed nation in the world. If you have not seen our new Trojan Evolve commercial and wish to do so, you can see at our website, www.TrojanEvolve.com.

Finally, 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 concentrated offerings. We will begin rolling out concentrated line extensions of both ARM & HAMMER and XTRA to retailers in September and complete the national launch to all retailers in mid-2008. This initiative will help to recover the unfavorable cost impacts of higher oil prices by reducing the cost of the detergent, the packaging, and its shipping cost.

While the long-term impact of this action is expected to help recover the gross margin hit in our liquid laundry brand from the significant commodity increases that occurred in 2005 and 2006, we expect to incur short-term conversion costs from this effort in 2007 and the first half of 2008.

Now let me talk for a minute about our other two business units -- our International business unit and our Specialty Products division. Our International business unit, which represents about 16% of our total sales, had an excellent second quarter, with a 20% increase in total sales over the prior year. This increase was driven by strong results in Canada, Australia, Mexico, and Brazil.

Notably, we achieved market share leadership on FIRST RESPONSE for the first time in Canada. We have also launched the Trojan brand in China through a wholly-owned subsidiary and distribution is growing in key accounts and pharmacies. The approved organic growth in market expansions at our International business unit reflect improved coordination between all functions in our Domestic/International units to leverage new product innovations, improved marketing campaigns, and supply chain best practices.

In our Specialty Products business unit, which represents about 11% of total company sales, net sales grew a healthy 11% over last year's second quarter. This excellent growth was driven largely by strong demand by dairy farmer for our animal nutrition products despite recent price increases. Our specialty chemicals business also benefited from increased sales despite price increases that were necessary to recover higher raw material energy costs. Sales of our products particularly increased in Brazil, driven by the strong Brazilian economy.

Let me switch gears now and talk about the future. While we are pleased with the solid second quarter results, we are never satisfied. First in terms of dealing with issues, we have been able to absorb an unprecedented level of cost increases for raw materials, packaging, and transportation since 2004 and it still delivered solid gross margin improvement and 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.

The improvement in our gross margin has enabled us to increase marketing spending. This increased marketing spending has been focused behind a strong pipeline of new product innovations in every one of our core categories, supported by improved marketing campaigns. As I stated earlier, these new products, improved marketing campaigns, and increased spending have resulted in record sales and shares for the second quarter in many of our key categories, such as liquid laundry detergent, cat litter, baking soda, condoms, and pregnancy kits.

We are very pleased with these results, but we know that we must continue to improve in our core categories and stem the declines in categories where we are weak. We will also continue to drive growth in our international markets by leveraging our new product and marketing programs into all applicable worldwide markets, while at the same time, improving the efficiency of our worldwide supply chain through implementation of best practices.

Now let me translate this into specific guidance for the rest of this year. In view of our solid organic results in the second quarter, our confidence in new product launches, and improvement in gross margins, we remain enthusiastic about 2007. However, since commodity costs for unstable at this time, we are going to reaffirm 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 the transition to concentrated liquid laundry detergent starting in late 2007.

Organic sales growth is expected to stay strong in the back half of 2007 behind a significant increase in marketing spending to support our new product launches and several new advertising campaigns. There will also be one major new product launch in the fourth quarter. For competitive reasons I will not divulge the details behind this launch at this time.

The continued solid organic revenue growth in the back half of 2007 will support our targeted organic revenue goal range of 3% to 4% for the total year. This excludes the impact of foreign exchange and the acquisition of the Orange Glo business. We also expect gross margins to be higher in the back half of the year than in the first half. In addition, we expect second-half earnings to be more evenly distributed in the third and fourth quarters than in prior years.

In summary we are very pleased with our second quarter and first half business results and we feel confident we can deliver our earnings per share forecast for the year, barring any significant changes in commodity costs or competitive actions. 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.

I do want to mention, though, that due to travel commitments, Matt and I are in different locations today, so we may have to call cause some audibles on the phone as we decide who takes the lead in answering your question. Operator, please go ahead.

(OPERATOR INSTRUCTIONS). Bill Schmitz, Deutsche Bank.

How is pricing holding up? I know a lot of the compaction stuff is already out there and I know a lot of people are afraid that a lot of that is going to get dealt back. I was just wondering what your sort of official thoughts on that were?

Bill, pricing is holding up exceptionally well. No issues there.

And why is Wal-Mart launching private label again in the face of this compaction theme? It seems like it is like a pretty disingenuous strategy by them.

I don't know what you talking about.

Yes, you do.

No, private label what, Bill?

Its private label detergent. Was it Simply Elegant or some something, it's some Huish variant that is going to be under Sun and it is kind of like a knock-off of the Tide variant.

Well, I mean it is under the Sun brand, so that it's been there a long time. It is probably just a new variant like everybody else tries.

Okay. Got you. And then how has the OxiClean migration going from their factories to yours? I know you talked about starting it last quarter. I was just curious how that is progressing?

It has been excellent. We will complete the transition from the co-packers into our factories in the second half of this year.

Okay, great. And just on gross margin in the back half of the year, have you thought about taking another price increase or has anybody in the industry thought about another price increase, given the big spike-up in resin and surfactants are soon to follow apparently?

Hey, Bill, this is Matt. We haven't signaled any changes with respect to pricing in the second half. What we are counting on in the second half with respect to margins is that a few things. Slotting is going to be behind us now, because it is pretty much concentrated in the first couple of quarters. The second thing is OGI plant integration (technical difficulty) get some synergies from that in the back half. We are obviously going to get some better distribution on some of the new products that we just launched, so that will keep expanding. And then I guess, finally, as you know, we have our ongoing cost reduction programs in the Company, reformulation, improving fields, etc. So we feel pretty good about gross margins expanding in the second half without a price increase.

Okay, great. Thank you very much. Thanks guys.

Bill Chappell, SunTrust Robinson Humphrey.

Good morning. I guess just talk a little bit more about compaction and it sounds like you now are seeing a little greater cost in the back half in the first of next year than you originally anticipated. Can you give us a little more color around that? Are you now also looking at more marketing and advertising? I know P&G is kind of doing a lot to educate the market. Are you being pulled in to do that as well?

No, Bill, I mean what is going on as we are clearly following the lead of the industry leader here on compaction. It is just as we get closer and closer to the start date, it is getting a little clearer as to what the transition costs are being on both plants and with retailers, so it is just that realization. We are not participating in any industry effort to advertise this issue. We will do our own stuff. Everybody else, to our knowledge, is doing their own stuff, but everything seems on track so far for this effort.

And I guess I am just trying to understand kind of the additional cost that maybe you hadn't seen before. Is that just sharing more of the cost with the retailers as you do the rollout or is it just costs of transitioning the plants is maybe greater than you originally expected?

It is just pretty much -- it is just pretty much what we don't expect that we hadn't talked so much before, but it is transitioning our plans to manufacturing of smaller bottles. Any impact it might have on logistics and also potential working with retailers to reset all the shelves.

I guess you had said in the past maybe you thought to see some benefits from this program by the fourth quarter. Is that probably early? Is it maybe more mid-next year.

Is more mid-next year.

Okay, great. And then I guess, finally, do you see in other areas beyond kind of detergent, do you see other need for price increases?

Not at this time, Bill. We have taken some of the progressive aggressive price increases in our Specialty Products division this year to keep up with raw material energy costs. Right now, given where commodity prices are, we don't see the need for anything partly because we're being so aggressive and good in our own cost structure of cutting back on cost. We don't have anything planned at this point in time.

Okay. And then one last one, Matt, can you just remind us fixed versus floating, kind of what the capital structure looks like and if you -- there are any changes planned?

No, we haven't signaled any changes in our capital structure. Just in round numbers, you know we have $100 million convert that is out there. We have another couple hundred million dollars of high-yield and then we have $400 million, roughly, of bank debt and that we have another $100 million in securitized receivables. By the way, we are going to file our Q today, so you will get all the details this afternoon.

Perfect. Thanks.

Joe Altobello, CIBC World Markets.

Hey guys, good morning. Just wanted to go back on the gross margin issue for a second. Was compaction cost, or the higher compaction cost the lion's share of the change from the 125 bps, or is it more the commodity cost inflation we have seen in the last couple of months?

Yes, Bill, you have got uncertainty with respect to both of those items, so compaction is an obvious one that was already covered by Jim. With respect to commodities, I am sure you know, we are exposed to a number of different commodities, resin would be one, corrugated linerboard, diesel, but even vegetable oils that affect alcohols for surfactants that go into our detergents. So as you know, there is a lot of volatility right there, so consequently we would say that it is probably unlikely we're going to hit 125 basis points this year.

But you also know we don't call line items on the P&L. The only thing we give guidance on specifically is EPS, which is the $2.35 to $2.36. And we have our evergreen target in the Company of 3% to 4% top line, 125 basis points gross margin expansion. But given compaction and where commodities are, it is unlikely we are going to get that this year, because you also know that as we improve our gross profits, we plow it back in to the marketing line. So you have seen marketing go up year after year, here.

Okay. And then in terms of the quarterly impact from the higher compaction cost, is there one quarter that stands out in the next, let's say, three or four that would be hit the most?

It's kind of hard to say, because you know have three waves that are coming, so you have got September, April -- Jan 1, April 1. I think each one could bring its own, you know, factors that we are going to have to deal with. So it would be hard to predict that right now, Joe.

Okay. And then, lastly, on the acquisition side, it sounds like your balance sheet is pretty much -- or actually pretty strong here. Are you guys looking for acquisitions actively and would you prefer a personal-care or household business?

Joe, we are always looking. We are very, honestly, ambivalent between household and personal care, because we have businesses on both sides, plants on both sides, and everything and other than that, we just don't comment about any activity in that front.

Okay. Thanks.

Alice Longley, Buckingham Research.

Good morning. Hi, how much were your newly acquired brands up year-over-year, apples-to-apples comparison OxiClean and Kaboom, I guess.

I didn't follow the question, Alice. Can you do it again?

How much were their sales up at, I guess the way to put it would be, at retail, your newly acquired brands? Are they growing?

Oh, the OxiClean business? Yes, they are growing.

And can you give us some numbers and tell us are they all retailers then?

No, we don't give numbers on specific businesses, but they were up nicely.

Were they ahead of your expectations?

They were very much in line with our expectations.

All right. And could you give us some sense of how much Trojan might have been up at retail?

No, Alice, we never comment on specific product lines.

All right. Another effort would be we are understanding that Unilever might be getting rid of its U.S. detergent. Is that something that you could do or would want to do?

We don't comment on any actions.

Would there be any antitrust problem in your buying those brands?

We don't comment on M&A action.

All right. I'll give up. Thanks a lot.

Jason Gere, A.G. Edwards.

Thanks, good morning. A couple of questions. One, can you just give a little more color on some of the, I guess, the positive learning so far with the new structure for the value toothpastes and the deodorants?

The special team we put out, you mean?

Yes, maybe just anecdotally share some of the things that you have learned over maybe the course of the three months since you have announced the team there.

A little bit, Jason. You know we call it guerrilla marketing. That is a fairly common term in the industry. It is just doing much more micromarketing, I would call it, on an account-by-account basis to do what you need to do in the account, the key account that carry the product. We're making sure we have the right pack sizes, the right fragrances on an antiperspirant line. We are doing smart efficient things in every account to support the business and this new team we put in place has brought that much more micro-focus, I would call it, to these businesses and is really doing a much better job of maintaining distribution, in some cases, growing distribution, and then also in driving in-store consumption of the brand.

So we didn't invent this. This has been used in a lot of other big companies, but we are applying it with great finesse, I think, to these brands and I think you'll see the benefit of that starting in the second half of this year, as I said earlier.

Is it too early to ask about maybe shelf space of some of these brands, which probably -- you know, whether or not you are getting any increased space with them or what has been the reaction, I guess, your major retailers with your efforts at this point?

Well, the first job is to hold the space in these categories and the team is doing a very good job of that. In a few cases, they have gone in and gotten some incremental distribution. I think the retailers are generally much happier that we are paying this kind of special attention to these brand with a team that is very focused on issues such as distribution and in-store promotions and in-store advertising and stuff like that.

Okay. And then just a second question I guess going back to gross margins, is it fair to assume that margins in the back half of the year will be around or maybe even a little bit lower than your, I guess, your long-term guidance of 125?

Sorry, Jason. Yes, year-over-year it is going to be difficult to get to a 125-basis-point expansion. What I said earlier is that the second half gross margin '07 will be higher than the first half of '07.

Right, but the increase will still be below, I guess, your longer-term guidance?

Yes, it will be.

Okay. Thank you.

Connie Maneaty, BMO Capital Markets.

I don't know if -- I haven't seen the press release, so I'm sorry if this information is in there, but did you give the organic growth rate for the domestic business?

No, we didn't. We just gave it for the overall company, but I would say domestically, it was in the mid-single digits. On the domestic.

Okay. Also, on the value toothpaste, we are hearing from P&G that they believe they are becoming a category leader overall in oral care and that as such, there will be less and less space for minor brands, some of which are in your portfolio. Is it possible that you would just discontinue some of the smaller brands that have been under pressure for so much time?

Never.

Never?

No.

So is the strategy in the guerrilla marketing just to find places, channels of distribution where the biggest names aren't controlling quite as much shelf space?

Our challenge is to educate the retailers that some of our SKUs have a faster retail movement on them than some of the 50,000 versions of Crest and Colgate.

Do you foresee a time when your share will stabilize or grow?

Our share has already stabilized and is improving on ARM & HAMMER toothpaste and it is actually doing well in some of the minor brands. So, you know, despite Procter's usual proclamations of greatness, we will be very -- we will be doing just fine in the toothpaste category.

Okay. Thanks so much.

Bill Schmitz, Deutsche Bank.

I just have a quick follow-up. What is the gross to net, sort of, this year and what was it a year ago? And can you just -- I know you not to give me the exact numbers, but was it up, like, an order of magnitude and can you just sort of say how much that really impacted the gross margin line?

This is Matt. We don't call out what the gross net percentages or even what the gross dollars are on an annual basis, but, I mean, suffice to say that we spend $100 million plus on a quarterly basis in trade. So as you can see, just a few million dollars can be a pretty large basis point difference in gross margin.

Right. But you call it out in the press release that there was sort of higher trade spending this quarter and that is what impacted the gross margin.

Exactly, right. So if you got $100 million of trade spend and you spend 3% more, that is going to affect your gross margin by 60 basis points.

Got you.

So that is a big lever.

Right. Is that mostly slotting or is that other stuff as well?

No, it is trade spend.

All right. Thanks for taking my follow-up.

Thanks, Bill. Any other questions? Well, again, we are very pleased with our second quarter results, very happy with the first-half results. The business is on a roll and we see continued improvement rolling into the second half of the year. I want to thank you all for taking the time today to talk to us and if you have any follow-up questions, please gave me or Matt a call. Thank you.

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