切遲杜威 (CHD) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight second-quarter 2008 earnings conference call. Before we begin I have been asked to remind you that in this conference call the Company's management may make forward-looking statements regarding, among other things, the Company's financial objectives and forecast. These statements are subject to risk and uncertainties and other factors that are described in detail in the Company's SEC filings.

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

Good morning, everyone. It's always a pleasure to talk to you, particularly when we have good results to report. Let me start out by saying that I'm very proud of my team as I doubt that few consumer packaged goods companies will match both the quality and magnitude of our second-quarter and first-half of 2008 results.

These results reflect an organization that is highly motivated and firing on all cylinders. Our new product pipeline and increased marketing spending is driving strong organic growth. Our business teams and supply-chain organization are working closely together to deliver exceptional gross margin expansion despite a dramatic rise in commodity prices in 2008.

Everyone is continuing to keep a tight rein on overhead costs, as proven by the fact that we have the same number of employees today as we had four years ago despite a 50% increase in sales during that time. We are squeezing every dollar out of our working capital to drive a significant increase in cash flow. That increased cash flow and strong balance sheet is enabling us to smartly invest in our future through accretive bolt-on acquisitions and building new plants to further lower our cost structure and strengthen our competitive advantage.

While we are feeling bullish about our company's business momentum we are very cognizant of the very tough business environment facing all companies these days. Consumer confidence is at a record low and consumers are trading down, as shown by the growth of private label. We believe that consumer spending is going to get worse before it gets better. However, Church & Dwight has handled this crisis exceptionally well so far, as demonstrated by our strong organic growth and gross margin expansion.

No other consumer packaged goods company that I can think of is as well suited to handle a recession as Church & Dwight. Over 30% of our domestic portfolio consists of value-oriented product. We've also just launched a major new product line that leverages two hot consumer trends, value and green. I'll talk more about this in a moment.

Finally, we have a superb plan in place to deliver on our goal of growing gross margin by least 100 basis points per year. We promised that result for 2008 when oil was less than $100 per barrel. We will still deliver on our objective despite higher oil prices. Now you may wonder how Church & Dwight can still do this when most other consumer packaged goods companies are not able to grow gross margins.

The answer is that Church & Dwight has four key factors driving gross margins. The first two are common to other consumer packaged goods companies in that we have taken pricing, in our case we've priced over 30% of our revenue base, and I assume that other CPG companies have also had basic productivity programs in place to cut costs wherever possible.

On top of those two common industry factors Church & Dwight has two unique factors. First, the compaction of liquid laundry detergent products which started in September of 2007 and finished its national rollout in June of this year has generated significant cost savings that have more than offset the cost increases in this commodity sensitive business. Second, we have $10 million in manufacturing cost synergies starting last October from the integration of the acquired OGI brands into our manufacturing facility.

Not only do we have these four factors driving gross margin expansion, but when commodity prices started to rise dramatically in early 2008 we exceeded our assumptions on all four factors through an extraordinary effort by the whole Church & Dwight organization. In this regard we took more pricing than originally forecasted; we achieved more cost savings than we expected; the laundry [package] conversion went better than expected; and we exceeded the cost savings from the manufacturing synergies on the integration of the acquisition.

When you combine this incredible effort on cost savings with the great pipeline of new products, increased marketing spending, tight overhead controls and squeezing working capital, you get the high quality business results achieved by Church & Dwight in the second quarter of 2008 -- 8% organic revenue growth; 110 basis points of gross margin expansion; 13% increase in net income; and an 82% increase in cash flow.

These results are not surprising to us as we expect to continue delivering solid organic revenue growth at the high-end of our long-term goal of 3% to 4% and gross margin expansion of at least 100 basis points annually. I'll provide more detail in my outlook for the year in a few minutes. I'll now turn the call over to Matt Farrell, our Chief Financial Officer, who will provide you with greater insights on the financial results of the second quarter and first half of 2008.

Good morning, everybody. And I'll start with the headline, as Jim mentioned. Second-quarter EPS was $0.66 per share compared with $0.59 in 2007 and a strong sales performance in gross margin expansion were the drivers of our second-quarter earnings results. Revenues up 8.7% of which 1.5% was due to currency. We had some offsets there to net down to 8% organic growth.

Of the 8% growth approximately 3% was due to volume and another 5% due to price and mix. The pipeline for new products as well as expanded distribution on existing products also helped the quarter by approximately 2% of that 8%.

Now let's briefly review the segments. The domestic business had a strong quarter, revenues up 7.4% lead by XTRA Liquid Laundry, Arm & Hammer Liquid Laundry, First Response, Arm & Hammer Powdered Detergent -- Laundry Detergent, and Arm & Hammer Super Scoop Cat Litter. We successfully raised prices in May for Arm & Hammer Powdered Laundry Detergent and Nice'n Fluffy Liquid Fabric Softener and in February for Trojan as well as baking soda. New product launches also contributed to the domestic revenue growth.

Now the international division -- international posted 3% organic growth as this segment performed well in many countries; the specialty products business had an exceptional, primarily due to price increases for our Dairy Products and the Specialty Chemicals business. The Specialty Products business enjoyed higher year-over-year prices in Q2 for virtually its entire portfolio of products.

Now we'll look at gross margin. Our second-quarter gross margin was 40.8%, that's a 110 basis point expansion versus last year. And we're very pleased with this result despite significant commodity increases impacting the business. As Jim said, we have four levers that contribute to the margin expansion -- cost reduction programs, pricing, OGI manufacturing synergies and the benefits of concentration of liquid laundry.

The cost reduction programs include -- product reformulations; plant automation; more sophisticated forward buying; and optimization of trade spending just to name a few. The price increases we have taken thus far this year began to impact gross margin in the second quarter and we will continue to assess additional pricing actions on products as commodity prices continue to rise.

We are pleased with the progress we have made in the transition to concentrated laundry products and the benefits this is providing to gross margin. These levers serve to offset higher input costs for resin, corrugated paper, liner board, diesel fuel and many others. So we are delighted with our gross margin performance in this past quarter. Now looking ahead and excluding the plant charges that I'm sure you're all familiar with, we continue to expect a healthy expansion of year-over-year gross margin in both Q3 and Q4.

I want to talk about marketing now. The marketing spend was 13.3% of revenues which is 120 basis points higher than the prior year spend of 12.1%. Marketing expense was about $13.1 million higher for the quarter than year ago. This higher spending is a key driver of our organic revenue growth along with our innovative new products which Jim will talk about in the few minutes. Our second-quarter spend was about $80 million and we expect to continue to spend at or above this level in the remaining quarters. So we are targeting marketing spend to be about 13% of sales for the second half of 2008.

SG&A is next -- SG&A year-over-year was $7.4 million due to foreign currency changes, higher R&D and investment in information systems. SG&A as a percentage of sales was 13.7% in Q2 which is up from a year ago. Looking ahead we expect third-quarter SG&A as a percentage of sales to be comparable to Q2 due to higher R&D spending as we continue to invest in new products. Remember also that the third and fourth quarter will also include integration costs for the Orajel acquisition that will be hitting the SG&A line.

Operating margin -- our operating margin for the quarter was 13.8% compared to 14% last year.

Now other income and expense -- other income and expense reflects lower interest expense as both interest rates and our debt levels are lower than year ago.

Next is income taxes -- as you can see in the release, our effective rate for the quarter is 39.3% compared to last year's 38.7. The current and prior year quarters were both impacted by an increase in tax reserves. The underlying tax rate for the quarter was 36.1%. We are forecasting an effective rate of approximately 37% for the full year.

EPS -- EPS at $0.66 has a 12% increase over the prior year.

And finally, free cash flow. We generated $57 million of free cash flow in the second quarter and ended the quarter with $256 million of cash on the balance sheet. Our total debt to LTM adjusted EBITDA per our bank agreement was approximately 1.8 at quarter end.

We also recently called our $100 million convertible debt which will convert by the middle of August, August 15th. We completed a $380 million Orajel acquisition on August July 7th; the purchase price was financed with a $250 million addition to our bank credit facility as well as available cash.

Now post the Orajel acquisition and after converting the debt, our total debt to LTM EBITDA is expected to be approximately 2.2 and sometime in August putting us at the lower end of our long-term leverage range of to test three times EBITDA. So in inclusion, the short summary for the second quarter would be 8% organic sales growth, good gross margin expansion, continued reinvestment in marketing and strong free cash flow. Now back to you, Jim.

Thanks, Matt. I'd like to spend the remaining few minutes of our portion of the call talking about two subjects -- first, the strength of our new product pipeline and its impact on our current and future organic revenue growth; second, my earnings guidance for the rest of 2008. On the new product front we are continuing 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 launched over 50 new products, a record for a company. This year's new product team will launch significantly fewer products in total, but the revenue impact of these new products in the first half of 2008 is over 30% greater than new products launched in the first half of 2007.

The new product launches affecting 2008 sales include the following -- a new sub line of Arm & Hammer called Escentuals which provides consumers with environmentally friendly product at a value price versus category leaders. Our first entry in the Escentuals line was a liquid laundry detergent product launched in 2006. This product continues to deliver impressive growth and now represents approximately 10% of our total Arm & Hammer Liquid Laundry detergent business which has been growing at over a 14% compounded rate over the past five years.

Over the past two years we've expanded the Arm & Hammer Escentuals sub line into three other categories -- fabric softener sheets, cat litter and under arm deodorants. In total the Escentuals line is projected to do over $40 million in sales this year across those four categories. We expect continued strong growth in future years as this line leverages two hot consumer trends, being green and offering value versus category leaders.

Other significant new products impacting 2008 sales include Arm & Hammer laundry detergent with OxiClean stain fighters offered in both powder and liquid form. This new cold branded product delivers premium look [good] laundry detergent cleaning performance at a value price. It started shipping in the fourth quarter of 2007 is on track to be one of our most successful new laundry products.

As I mentioned earlier, these new Arm & Hammer products are being supported by more appealing and unified packaging, a trademark advertising campaign and increased levels of marketing spending, almost 50% higher than last year, as part of the new Arm & Hammer mega brand marketing campaign that we started in 2006. Since the start of this campaign net sales have grown for all Arm & Hammer brands from 1% in 2004 to over 6% in 2007 and over 9% in the first half of this year.

We've also launched innovative new products in our other core categories in the first half of 2008 including -- two new additions to the Trojan line called Thintensity and Magnum Thin which capitalize on the growing thin segment of the condom category; a new NAIR depilatory product called Shower Power which enables women for the first time to use a depilatory product in the shower where the majority of women remove hair on their legs, this has become the number one new product in the depilatory category in 2008; a new SpinBrush toothbrush called Swirl, a value-oriented product which is designed to encourage manual brush users to trade up into the battery-powered toothbrush category; and finally, the First Response brand has launched a digital pregnancy kit and a daily ovulation kit.

In the second half of 2008 I'm pleased to announce a major new initiative -- we are expanding the Arm & Hammer Escentuals line into the household cleaners' category. This line of cleaners is built on three simple ideas -- first, they include plant-based and other biodegradable ingredients that work as well as traditional cleaners. Second, consumers only have to by a small refill cartridge after the initial purchase which helps reduce the amount of packaging that ends up in landfills by 62%; and third, they save consumers money with refills, up to 25% cheaper than the category leader.

In order to help you better understand this productline, think of it as similar to Clorox Green Works new product line and environmentally sensitive cleaners, but without the bottle, without the water which is 95% of what's in their bottles, and about a 40% cheaper price. We think that our line of cleaning products will be very compelling to consumers because it leverages those two hot trends -- providing consumers with environmentally responsible products that work as well as traditional cleaners and providing consumers with a better value. We plan on supporting this initiative with significant marketing support starting in the third quarter of 2008.

Now let me switch gears and talk about the future. While we are pleased with our solid second-quarter and first-half of 2008 results, as I often state, we are never satisfied. While the current and future business environment will be extremely challenging Church & Dwight has a sustainable growth model that will enable us to continue to deliver strong earnings growth.

Our eight core brands -- Armand Hammer, XTRA, Trojan, OxiClean, First Response, SpinBrush, NAIR and Orajel -- are all powerful brands representing over 80% of our total bet revenues and profits and are all achieving strong growth in 2008. This growth is driven by two key factors -- first, our improved competency in new product development has generated a strong pipeline of new product innovations in every one of our core categories. Second, we've been steadily increasing our marketing spending behind these brands to continue to build equity and deliver or exceed our 3% to 4% organic revenue growth target.

In addition to our strong portfolio of leading brands, the next major factor driving our sustainable growth model is our ability to deliver solid gross margin improvement and earnings growth despite an unprecedented level of cost increases for raw materials, packaging and transportation. We have a well-established pipeline of cost savings initiatives in the areas of manufacturing, purchasing, distribution and trade spending that is being executed to deliver significant cost savings now and initiatives are already underway to deliver significant savings as far out as 2010.

In addition, the strength of our core brands has enabled us to raise prices while still delivering or exceeding our organic revenue growth target in achieving record shares on most of our core brands. In that regard we're already announced price increases on about 30% of our company's product portfolio so far in 2008. In addition, we are currently considering price increases in other categories such as laundry detergent, toothpaste and cat little in order to remain competitive in those categories.

These cost savings and pricing initiatives have been bolstered by manufacturing synergies from the OGI integration, liquid laundry detergent compaction and volume scale leverage. The net effect of all of these initiatives is expected to lead to further steady improvement in our gross margin throughout 2008 to deliver our target of at least 100 basis point improvement versus 2007. This improvement in our gross margin will also enable us to increase marketing spending in 2008 and future years. Finally, we're keeping a very tight lid on overhead cost as demonstrated by our ability to keep total headcounts flat over the past four years despite a 50% increase in our revenues.

Now let me translate this into specific guidance for the rest of this year. Our sustainable growth model, which enables us to both grow and reinvest at the same time, bodes well for our company and shareholders. In view of our solid organic revenue growth, gross margin improvement and tight overhead expense control we now feel confident that we can increase our previously mentioned EPS forecast of $2.77 to a range of $2.83 to $2.85 for this year, a 15% and 16% over 2007 despite a significant increase in commodity and energy costs in 2008. This excludes the charges for the new manufacturing plant which was previously announced of approximately $0.08 per share.

We also expect second-half earnings to be much more evenly balanced than prior years excluding the impact of the Del acquisition. To be specific, we expect that the third-quarter EPS will be slightly below the fourth quarter and year ago as we will significantly increase marketing spending in the third quarter particularly behind the new Arm & Hammer Escentuals cleaners line, and we have the previously announced one-time step-up charges for the Del acquisition in the third quarter.

The fourth quarter will be significantly above year ago due to lower SG&A cost and the positive accretion from the Del acquisition. That ends our presentation. I'll now open the call to any questions that you may have which Matt and I will do our best to answer. Operator, please go ahead and take calls.

(OPERATOR INSTRUCTIONS). Bill Chappell, SunTrust, Robinson, Humphrey.

Good morning and congratulations. I guess first, generally impressed on the gross margin guidance and EPS guidance, but can you tell us how much of that is just the core business and how much of that comes from Orajel? I guess Orajel does have higher gross margins to start with, but I'm not really sure how the inventory write-up impacts the gross margins on the full year. And on the EPS I guess you funded it a little bit different than originally thought.

We're not going to get that much help in the third quarter, Bill. Are you talking about Q3 and Q4 now, right?

Exactly.

As far as the third quarter goes for gross margin, and when we talk about gross margin we're talking about excluding the plant charges to keep it simple. Remember the $0.08 that's going to be running through the income statement in the second half, $0.04 in Q3 and $0.04 in Q4. So we would expect Q3 gross margins to expand at a rate approaching the Q2 expansion rate, and that would be including Del. So Del is actually going to be a drag on Q3 and some help in Q4.

The second thing that impacts Q3 gross margin expansion is, as Jim mentioned, we're expanding into cleaners with Escentuals. So we will have higher slotting actually in the second half of 2008 than the second half of 2007. So half and half year-over-year '08 is higher than '07. Does that help you?

Yes. Just to make sure though, you're still comfortable getting the legacy business to have gross margin expansion excluding Del?

Yes, absolutely. The legacy business, which is a core business, is what's driving the gross margin expansion this year. We're not going to get a whole lot of help in Q3 and we're certainly not counting on it to hit our target for the full year of being over 100 basis points.

And then second, just Jim, I think you touched on a little bit about consumer trade down. Is that a big part of your business right now? Is it driving volume or are you seeing consumers even trade down further to private legal in some of the categories? Where do we stand in that cycle?

Yes, Bill, we are seeing the quality recession impacting some premium price in discretionary categories. We're seeing some category weakness in categories like battery powered toothbrushes, pregnancy kits, depilatories, and carpet deodorization.

But in all four cases we're growing shares in those categories that more than offset the category weakness and then keep in mind that we have a very strong value position in other key categories that we're benefiting from being the value laundry detergent which is our biggest business. We also have a pregnancy kit that is a value kit called -- a brand called Answer that's delivering double-digit growth. And we also have a value toothpaste business that's doing very well.

Private label is a bit of a concern, it is growing in some categories like liquid laundry detergent, cat litter and pregnancy kits. But again, we're growing in all those cases. We've just hit our seventh consecutive quarter of share growth in cat litter to record shares, pregnancy kits are hitting a record share and we're experiencing double-digit growth of liquid and powder, the powder laundry detergent is really taking off right now I think due to some consumer reaction to compaction and that and we're delivering some exceptional growth in that category.

So we're watching it closely. We do see some trade down, but in all cases our businesses are doing exceptionally well and more than offsetting that trade down and we expect that to continue.

Great. And then one last one on pricing, I guess that hurt that P&G is going to move forward with some liquid laundry price increases. Is there any reason you wouldn't follow that?

We're in the process of looking at that, Bill, but I can't imagine why not.

Great. Thanks again.

Alice Longley, Buckingham Research.

Good morning. I'm looking for a breakout of that 8% organic growth. The 5% price mix, how much of that, what's price and what's mix in there?

We haven't historically broken that out, Alice. So price and mix we lump in together, but suffice it to say that price would be larger than mix.

Okay. And then the pipeline you said was 2%. Is that all that Arm & Hammer Escentuals home cleaning product?

No, that's more of a second half. Some of the other products that Jim talked about like Shower Power for example would be some of the new things -- digital as well as for pregnancy kits.

All right. And then could you tell me more about this Arm & Hammer Escentuals household cleaners. It sounds like it's something you have to mix as a consumer, is that right?

Think of it as -- the honest truth is again 90%, 95% of what's in a cleaner bottle is pure water and in the world where shipping costs and diesel costs after tripled in the past two years. You've seen what's happened in liquid laundry detergent. We took a fair amount of the water out and very successfully. We looked at the cleaners category and said why can't we do the same thing; in fact take it all away.

And the consumer will initially have to purchase an empty bottle with a refill tube attached to it. Then after that all they have to purchase is the refill tube. And that refill tube will be 25% cheaper than buying the full bottle -- replacement bottle. The product is green, it's environmentally friendly, it works just as well as traditional cleaners.

So as I said to you before, think of it as a green product like Clorox Green Works line, but without the bottle, without the water and in that case about 40% cheaper than their product which is selling at a premium price. So we think we have a great idea out there, consumers I think will love it, especially in a time when being environmentally friendly or green is a hot trend and being value-oriented is a hot trend.

And it's under the Arm & Hammer line and in the sub line of Escentuals which has already been a very big hit out there. So we think we have an opportunity to really take advantage of some hot trends out there with a very great product.

Well, I'm worried that consumers are lazy and have you done testing with this to see what percentage of consumers are willing to do all that mixing?

Yes, we've done a great deal of testing on this. It's very easy, Alice. In fact, the bottle screws into the top -- the little test tube type thing screws right into the top of the bottle, you don't even have to break the seal yourself. So there's no mess, no fuss, as you screw it in it breaks the seal into the bottle that you've filled with water, add it, then you just put the sprayer top on and shake it up and you've got a great product. So it's very, very easy to use -- even you could do it.

Well, I'll have to learn. And who is the category leader?

You've got a bunch. Cleaners is actually a very fragmented category.

But you said you were 25% cheaper than the category leader.

You're talking Windex's, 409's of the world, there are three items in our line right now we'd be glad to share all those details with you. But you're talking the 409's and the Windex's of the world.

I thought you meant 25% cheaper than the category leader in organic --

No, we're 25% cheaper than the mainstream category leaders and then Clorox Green Works tends to be a little higher priced than that so we're actually about 40% cheaper than them.

Okay. And could you comment on the specialty category that was sort of unusual in the first quarter?

You mean Specialty Products?

Yes.

It had, again, supercharged growth rates driven by price just like in the first quarter, Alice.

Was volume up in specialty or was volume down?

Volume was flattish in specialty.

And so --

So their top line was driven by price. So one way to think about our 8% growth rate is that, as I said in the opening formal remarks, that 2% of that 8% growth was driven by for -- tied for new products and new distribution on existing products. There's another 1.5 in round numbers that's attributed to Specialty Products. So that would suggest then that the consumer business grew about 4.5% in the second quarter which is way over our 3% to 4% target.

Okay. And how about specialty profits?

What's the question?

Nevermind, I'll talk to you about that later. Okay. Thank you.

Bill Schmitz, Deutsche Bank.

Good morning. Can you just talk about your input cost inflation assumptions for this year and next?

That is a difficult question to answer because you know how volatile all of our input costs have been.

Have they been? Just kidding.

Yes, you think? In fact, virtually everything that -- all of our major inputs are up double-digit year-over-year. So we're not in a position right now to call 2009. Some of the things that we have done that I think are as a result of the growing sophistication of this company is that we have done a lot more forward buying and hedges beyond diesel for the current year and into mid-2009 already.

So we're not in a position right now to call what do we think and specifically what do we think is good to happen to resin, diesel, etc. But we do expect that there will be significant inflation as well in '09 versus '08, so we are preparing for that now.

Okay. What happens if stuff starts to roll over? Are there going to be hedging losses then?

Well, one thing that could roll over is, for example, in the specialty business we've had a surcharge; this is on the top line. So we had a surcharge for PFAD, which is one of our very expensive inputs, palm fatty acid distillate. So if PFAD pricing were to come down, then what happens is Specialty Products growth rate then comes down, because that will be rolled out all of the invoice price to SPD.

Then just on the compaction stuff, when you laugh at next year, can you just tell us what the sort of nonrecurring startup costs were associated with it, the molds, etc.?

No. I wouldn't be in a position to quote that.

Okay. So Bill Chappell talked a little bit about the liquid laundry price increase. What is the delay there? It's kind of like a free gift, so I don't know why you guys wouldn't take it.

I didn't say we wouldn't, Bill. The details brand-by-brand price-point-by-price-point, the competition is -- we still don't know those details. We have to look at it and study if we want to follow it. But yes, the liquid laundry business is most impacted by rising commodity prices. We've been able to hold off stuff because of the benefits of compaction, but we're studying it very quickly and we should know very quickly.

The talk to us about liquid laundry compaction just since it's been a big issue. All manufacturers have now converted 100% on that. In the wave one markets, which were the southern half of the United States, which were the first to convert last September, we feel very good. Our share is up almost 100 basis points in those markets, so we feel very good we're doing well in that. The category growth rate overall has also been very well at high single digits benefiting from compaction.

And then I would also tell you, too, it's important to us -- liquid laundry detergent is our biggest business and we completed a Nielsen analysis -- well I should say with the help of Nielsen -- that shows that liquid laundry detergent is about the least sensitive recession business out there. So that was good news to us that the recession won't impact liquid laundry detergent. So we're feeling pretty good about that business and competition is obviously taking a price increase and we're studying it quickly. So all good news.

I've got two more quick ones. Is your business running a lot faster in alternative channels? If you pull the scanner data business by business it looks like sales are down a little bit in those channels.

In which channels, Bill?

In the scan channels, so ex-Wal-Mart and club and everything else.

Yes, the mass market and club channels are definitely growing faster than the traditional food retailers at this point in time. And there's definitely a channel shift going on and you'll even see it within some of the mass channels between some of the players there -- I won't name names, they get upset when we name names of accounts. But you read the papers and you know who's growing and who's not doing well.

But there's definitely a shift headed toward the more value-oriented channels which are the mass channels, the dollar channels and the club store channels and we do very well in all three of those.

Okay. And then one final one, it's more out of curiosity than anything else. So this new Escentuals cleaning product, is it going to be corn-based ethanol and coconut oil like Green Works or are you just going to do the same MES you're using in the Escentuals laundry detergent?

Bill, I don't want to get into all that. That's kind of competitively sensitive. But it's a green product and meets all the criteria.

Okay, great. Thanks so much.

Joe Altobello, Oppenheimer.

First question, just wanted to follow up on Bill's question quickly. The shift into mass dollar and club, what does your profitability look like in those channels vis-a-vis grocery for example?

Bill, we don't typically quote what our margins are by channel. Certainly I'm sure customers would be interested in hearing that, but --.

I'm not asking for numbers, I'm just saying directionally are you more profitable in these channels?

Joe, we don't want to get into that, that's very sensitive with customers. We treat all customers fairly, that's as far as we'll go.

Okay, fair enough. And then secondly, in terms of your marketing spend, obviously up big this quarter and you saw about a 4.5% volume growth it sounds like in your consumer businesses. Are you happy with the effectiveness of that marketing? Is there an opportunity to increase it beyond 13% of sales or is that where you see the dimension return start to kick in?

We're very happy. Our marketing team has done a superb job. I think I've told you in the past, we've been I think smartly shifting money onto our eight core brands, away from some of our minor brands and then managing the minor brands differently to also do well there. The eight core brands are all growing, most of them are having record shares and we do see the ability to continue to increase the marketing support. At some point it will cap out, but we've told the world it will probably be up 50 basis points this year from 11.6 last year to around 12.1% this year and I still think there's room to grow after that.

Okay. And then lastly, just a modeling question for Matt. Matt, you mentioned that SG&A spend you expect to be flat year-over-year as a percentage of sales. I think in the year-ago third quarter you had a gain on a sale; so are you including that in your estimate?

I actually didn't say it was going to be flat year-over-year. We actually started to get some leverage on the SG&A line as a percentage of sales year-over-year.

Okay. Got it. Okay, thanks.

You had a second question though?

No, actually that was it. Thank you.

Jason Gere, Wachovia.

Good morning, guys. Just thinking about organic sales in the back half, obviously you're expecting to exceed the three to four, first half was up seven and you're probably getting some additional pricing. I guess two questions. One, are you building in the price increases on liquid laundry and some of these other categories into your expectations for the back half? And two, can you talk about price elasticity with volumes, do you think you can maintain that 3% that you did overall in the second quarter?

The question with respect to growth is, recall the comment on Specialty Products. As we start to lap the surcharge on the Specialty Products business, the Specialty Products' growth rate then comes back down to earth. That's why all along it's been important to focus on what is the core consumer business, not only the other two segments that have domestic and international. So you would expect the Q4 growth rate then to be lower than Q3 certainly. So we see a deceleration from 2 to 3 and 3 to 4.

How about in the domestic business when you think about the good volumes you got and obviously there could be some more pricing coming about. How do you think about that? With the model certainly we've seen in kind of the HBC land there's been a bit more pricing, a little less volume as expected, so I was just wondering your thoughts on maybe the back half of the year.

The price increases probably will have no impact on the third quarter, they'll have probably some impact in the fourth quarter. We are definitely worried about the price elasticity with consumers; there's just got to be a breaking point at some point with consumers. So we'll be watching that carefully, but that's where our new product innovation, our increased marketing spending is out there helping us.

It's helping us so far in the categories where there's been pricing, we're still growing and still growing to, again as Matt said, at the high end if not above our target range. But we are worried. There's some point where consumers just don't have a deep enough pocketbook to pay for everything going on out there. So we're watching it closely.

And I don't know if you mentioned this on the call, can you talk -- what was the growth of Arm & Hammer in the quarter? I know last quarter it was 10%. If you said that I apologize?

We'll dig it up for you, Jason.

Okay. And then just a last question -- go ahead.

Arm & Hammer, as you know, has been growing 1% over the last couple of years 1%, 4%, 6%.

And I know you were talking that it would pull back from that 10. I was just wondering how that played out in the second quarter?

It was 8%, Jason.

8%, great. And then the last question, I'm sure you guys are thrilled that all the Unilever questions are behind you. Just maybe thinking forward how you anticipate any change in that midtier category with [Uish] now owning the liquid laundry brands?

Let me say, I can't comment too much on the process; I'll just say we are fully aware of the sale process. That opportunity to buy that business didn't meet our stated M&A criteria for acquisitions; it wasn't a case of the number one or number two brand with strong growth potential. It wasn't better than company gross margins and basically that business has been a falling night for the past 10 years, so that's why we didn't have interest.

We feel great about our current laundry business, it's been doing very well, especially with the value positioning. The whole compaction process has gone well for us and we told you just recently we built a new plant which we feel will continue to give us a strong competitive advantage in that business going forward. So we love that business right now and I don't see any reason why it shouldn't continue to be a big contributor to our future success.

Okay. And then last, I think there was a question just in terms of the four main factors in driving gross margin. Compaction must have moved up as much -- I think it was number four last time. Can you just kind of give that pecking order? Compaction came in a little bit more on the -- I guess the accretion from compaction came in a little bit more than you anticipated and obviously your gross margins were pretty strong, probably more than most of us were anticipating.

Yes, we've got a lot of ties here, tied for first. Pricing did not help us much in the first quarter, but obviously helped us quite a bit in the second quarter. So I'd say liquid laundry has probably moved us up to the number two position.

Okay, great. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS). Connie Maneaty, BMO.

Good morning. On the testing you did for the Arm & Hammer Escentuals, where does it rank in the lineup of other new products recently? What is the repeat purchase indication you've gotten from consumers?

Connie, we just launched this brand in July, it's just hitting shelves as we speak. The testing would show you this product is as good or better than the mainstream cleaners out there and as good as the other green cleaners out there. So we're not going to go out and claim competitive superiority, we're certainly going to claim it's as good as other products. But it's green and it's got a better value price and that's the positioning we think will be a winner in the marketplace.

Did you get repeat testing data that gives you a lot of confidence about it?

Yes, in the tests we did, yes. Obviously we haven't seen that in the marketplace yet, but the test results were very convincing to give us the go ahead on this major new launch.

Okay. Could you also give us the composition of gross margin change, how much commodities affected the second quarter and how they were offset by pricing in the other cost savings?

Connie, we typically don't get into those kinds of details, but it's fair to say that the cost increases in Q2 '08 versus Q2 '07 would have been a several hundred basis point drag on gross margin which we had overcome with the four levers that we typically talk about.

And we've seen from some companies an impact on the order of 400 to 500 basis points, is that a range that you might do as well?

I don't know if I'd go that high.

Okay. And then also, a final question is the gross margin for the full year, does the first half rate -- it looks like it's about 40.5% -- does that sound like a good rate for the full year?

We typically don't call line items on the P&L, as you know. I did say that we expected Q3 gross margins to expand at a similar rate as to Q2. And then Q4, there are a couple things helping the expansion there, Connie. One is Del gets better in Q4 because we roll off from the inventory step up.

The other thing too is that everybody should remember is that in the second half of 2007 our gross margins and specialty business declined to its lowest point in Q4 2007 so we won't have that drag either sequentially from Q3 to Q4 or year-over-year, so that will help gross margin expansion in Q4 as well.

But it looks like the gross margin expansion has to be pretty significant in the fourth quarter to get to what the implied guidance is for the full year.

Yes, it will be a bigger expansion than Q3.

And it looks like it would be the biggest expansion of the year, is that right?

Could be.

Okay, thanks.

Nik Modi, UBS.

Good morning, guys. Just a couple questions. In terms of the -- Jim, can you update us on the group you put in place to stem the share erosion of some of your declining brands? I guess the value, some of the value deodorant and toothpaste brands?

Yes, we call that our tiger team and they've done one heck of a job. They've slowed the decline in that category from double digits into mid-single digits. And also, that business, because the base business has been growing so much -- the other business has been growing so much in that business, is now only about 5% or 6% of our total company. And again, they've slowed down the decline rate on that and done a nice job on the gross margins side too there. So the actual drag from that small piece of the business has been dramatically reduced which is a nice component to helping the organic growth.

And then on this new natural cleaner line, do you think category growth is enough to give you the kind of growth you need or are you looking for -- are you relying more on share gains?

I think you'll see some of both, Nik, honestly. The cleaners category with the launch of Green Works and other competitive products is all of a sudden heating up as everybody -- the incumbents are defending and the new entries are bringing in the great new news. So I think you'll see a lot of excitement in what was previously a pretty sleepy category in the past and we think we've got a very unique item coming in from using the refill basis and the great value positioning. So I think you'll see some stronger than normal category growth and we certainly hope to get some pretty significant share growth.

And then the last question, just looking at the next couple years, any plans or thoughts about taking the concentrate detergents to 3X from 2X like the Unilever business has?

Definitely a good idea.

Great. Nice quarter.

Thank you.

This concludes the Q&A session. I would now like to turn the call back to Mr. Jim Craigie for closing remarks.

I'll just be real quick. I want to thank you all for taking the time today to listen to our results and I think they speak for themselves. And I think, as I've told you, I think we have a very sustainable growth model in this company right now and I think it will continue to deliver some exceptional results going forward. Thank you very much.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Good day.