切遲杜威 (CHD) 2008 Q3 法說會逐字稿

Good morning, ladies and gentleman. Welcome to the Church & Dwight third quarter 2008 conference call. Before we begin, I have been asked to remind you that on this 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 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.

Thank you, Chanel, and good morning to everyone. It is always a pleasure to talk to you, particularly when we have good results to report. I will begin this call by providing my perspective on our excellent third quarter which you have read about in the press release issued this morning. Let me start out by saying that I am very proud of my Company, for both the quality and magnitude of our results, particularly in this recessionary worldwide business environment. Our business 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 despite softening consumer demand. Our business teams and supply chain organization are working closely together to deliver exceptional growth margin expansion despite the volatility in commodity prices. Everyone is continuing to keep a tight reign 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 also 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. Consumers are trading down, and we believe that consumer spending is going to get worse before it gets better. However, Church & Dwight have handled this crisis exceptionally well so far in 2008, as demonstrated by our strong organic revenue growth, our gross margin expansion, and double-digit earnings per share increase. No other consumer packaging company that I can think of is as well suited to handle a recession as Church & Dwight. We have achieved share gains in 2008 across almost every one of our categories, including liquid and powdered laundry detergent, laundry additives, cat litter, battery-powered toothbrushes, depilatories, diagnostic kits ,and condoms. And we face less of a threat of consumer trading down because over 30% of our domestic portfolio consists of value-oriented products. Finally, we have a superb plan in place to continue to deliver on our goals of growing gross margin by at least 100 basis points per year. We promised that result for 2008, at a time when oil was less than $100 per barrel. We delivered against that goal in the first nine months of 2008 with a gross margin gain of 130 basis points despite oil rising as high as $140 per barrel. We will continue to deliver against that objective.

You may wonder how Church & Dwight can still do this when most other consumer packages companies are showing gross margin decline. The answer is that Church & Dwight has four key factors driving gross margin. The first two are common to other consumer packages companies, in that we have all taken pricing. In Church & Dwight's case, we have priced over 50% of our revenue base in 2008. And I assume the other CPG companies have been cutting their overhead costs wherever possible. On top of these two common industry factors, Church & Dwight has two unique factors. First, the compaction of liquid laundry detergent product which started in September of 2007, and finished its national rollout in June of 2008, has generated significant cost savings that have more than offset the cost increases in this commodity sensitive business. Second, we had $10 million of manufacturing cost synergies starting last October, so the integration of the acquired OGI brands, primarily Oxiclean into our manufacturing facility.

Not only did 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 expected, the liquid laundry detergent conversion went better than expected, and we exceeded the cost savings from the manufacturing synergies on the integration of the OGI acquisition. When you combine this incredible effort on cost savings with a 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 so far in 2008. Organic revenue growth of 4% in Q3 and 6% year-to-date. Gross margin expansion of 100 basis points in Q3 and 130 points year-to-date, excluding the new plant charges. Earnings per share growth of 6% in Q3 and 10% year-to-date excluding the one-timers, and free cash flow increase of 15% in Q3 and 61% year-to-date, excluding capital expense for the new plant. These results are not surprising to us as we expect to continue to deliver solid organic revenue growth of 3% to 4% and gross margin expansion of at least 100 basis points annually. I will provide more details in my outlook in a few minutes. I will now turn the call over to Matt Farrell, our Chief Financial Officer, who will provide you with greater insights on the financial results for the third quarter and year-to-date.

Thank you, Jim. Good morning, everybody. I am going to start with EPS. Our reported third quarter EPS was $0.69 per share compared with $0.75 in 2007. The current year quarter included a $0.04 charge for restructuring costs related to the closing of our North Brunswick complex which will be closing in the fourth quarter 2009. It is also noteworthy that last year's third quarter results benefited by approximately $0.04 of earnings from a property sale in Canada and also $0.02 of tax benefits. So if you exclude these items, EPS was up about 6% from year ago, and a strong sales performance expansion that Jim referred were to the drivers of the third quarter earnings results. One other thing in our press release, we noted that we sold our business in Spain for a small net gain. The transaction created a low effective tax rate, but it had little effect on EPS since it was offset by the pre-tax loss on the sale which is included in SG&A. You will see both of those numbers in the release.

Revenues now -- revenues were up approximately 9% of which about 1% was due to currency, and 4% due to the sales of products acquired from the Del acquisition. So, the organic growth for the quarter was 4%. And of the 4% organic growth, the majority is due to price mix as opposed to volume. So now let us go through the segments.

Domestic business had a strong quarter. Revenues were up about 9.7%. 5% of which was from the Del brand. The organic growth was driven by Xtra liquid laundry, Arm & Hammer liquid laundry, Oxiclean powder, Arm & Hammer powdered laundry, Arm & Hammer dental care, and Arm & Hammer Super Scoop cat litter. And about half of the domestic organic growth came from volume and the balance from price mix. We successfully raised prices earlier in the year, you will remember, for Arm & Hammer powdered laundry detergent, Trojan, and baking soda. New product launches also contributed to the domestic revenue growth year-over-year. One other thing, we also announced 10% price increase in mid-October on our liquid laundry detergent businesses, Oxiclean powder, spin brush, and dental care products. In each case, we are following the earlier pricing moves by competition.

Turning now to international, international posted a 4.3% increase primarily due to favorable year-over-year foreign exchange rate changes and the impact of Del. Organically, however, the international sales were down slightly due to higher sales in the prior year's third quarter in advance of an announced price increase. International represents approximately 17% to 18% of our full-year consolidated sales and earnings. The strengthening dollar will result in lower reported international sales growth in the future. However, we are fortunate that as a US-centric CPG company, the effect of the strengthening dollar will have a lesser effect on us than others in our peer group.

Now, Specialty Products. The Specialty Products business had another great quarter primarily due to price increases for dairy and specialty chemicals business. Specialty Products enjoyed higher year-over-year prices in Q3 for most of its products, but began lapping price surcharges that began in August of 2007. So the growth rate for Specialty Products for the past four quarters has been bolstered by year-ago price increases that we have now lapped. So the growth rate for this division is expected to return to our perennial 3% to 4% range in the fourth quarter of 2008.

Gross margin, turning now to the margins, our reported third quarter gross margin was 39.8%. Excluding the $4.3 million charge related to the shutdown of the North Brunswick plant, gross margin expanded 100 basis points, and remember that the gross margin expansion is net of diesel-hedged losses caused by falling diesel prices, as well as significant year-over-year commodity increases. So very pleased with our gross margin performance in Q3, and also for posting gross margin improvement in each of the first three quarters of this year. Looking ahead we continue to expect a healthy expansion of year-over-year gross margins in the fourth quarter, and expect those to exceed 100 basis points.

Marketing -- marketing spend was 12.6% of revenues which is a 60 basis point increase over the prior year spend of 12%. Marketing expense was about $10 million higher for the quarter than year ago, and included spending behind the newly acquired Del businesses and behind our new Arm & Hammer essentials cleaners, Arm & Hammer liquid, and OxiClean powder. This higher spending is one of the drivers of our organic revenue growth and the success of our new products. Our third quarter spend was about $80 million, and we expect to spend above this level in the fourth quarter.

I am not going to cover SG&A. SG&A year-over-year was up $14.7 million. The quarter included a $3.5 million charge related to the divestiture of a subsidiary in Spain. And last year, included a $3.3 million gain on property sale. The balance of the difference, if you adjust for those two items, is primarily due to a transition and amortization costs related to the Del acquisition, litigation costs, and also foreign exchange. Again, looking ahead to the fourth quarter, we expect fourth quarter SG&A spend to be comparable to Q3, due to higher R&D spending as we continue to invest in new products.

Operating profit -- the reported operating margin for the quarter was 13.6% compared to 15.3% last year. If we exclude the plant restructuring charge and the pre-tax loss related to the Spain divestiture, you will find that operating margins were 14.8%. And if you take a similar approach to 2007 third quarter, we are actually up 10 basis points if we adjust last year for the land sale gain in Q3 2007. Other income and expense is up $2.2 million for the quarter and reflects lower interest expense as both interest rates and our debt levels are lower than year ago, but this was more than offset by $3 million of foreign exchange losses that impacted the quarter. Next is income taxes. As you can see in the release, our effective rate for the quarter is 34.4% compared to last year's 34.7%. It is important to note that the current and the prior year quarters were both impacted by favorable tax benefits. However, in the current quarter, the lower effective tax rate had little effect on earnings per share. Remember that the tax benefit from the Spain divestiture is offset by the pre-tax loss included in SG&A. So the underlying tax rate for the quarter was actually 37.4%. We are forecasting an effective rate of approximately 36% for the full year. That is the all-in rate. And this also includes not only Spain, all aspects of Spain, but includes the 50 basis points benefit of the reinstatement of the research tax credit which will be recorded in the fourth quarter.

Now, turn to free cash flow and debt. We generated $65 million of free cash flow in the third quarter. Netted in our free cash flow is $27 million of CapEx which included $19 million of expenditures related to the new facility in York, Pennsylvania. We have $175 million of cash on hand and approximately $195 million of available credit through our revolver and asset securitization facilities. We also converted our $100 million convertible debt in the quarter into 3.2 million shares of the Company's stock, and we completed the $380 million Oragel acquisition on July 7th which was financed with a $250 million addition to our bank credit facility, as well as some cash. So our total debt to LTM adjusted EBITDA per our bank agreement was approximately 2.0 at quarter end, putting us at the low end of our long-term leverage range of 2 to 3 times EBITDA. We expect to generate over $200 million of free cash flow in 2008, and remember that this is after absorbing approximately $43 million of CapEx in the second half of 2008 related to the new plant in York County. In conclusion, the third quarter results reflect 4% organic sales growth, good gross margin expansion, progress in integrating the Del acquisition, continued reinvestment in marketing as well as strong free cash flow. Back to you, Jim.

Thanks, Matt. I would 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, and 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 new products with strong consumer appeal. Last year, this group launched over 50 new products which was a record for our company. This year, the new product team will launch fewer new products in total, but the revenue impact of these new products in the first half of 2008 is over 50% greater. Let me repeat that, over 50% greater than the new products launch in the first half of 2007.

The new product launches affecting 2008 sales include the following -- A new sub-line of our Arm & Hammer brand called Essentials, which provides consumers with environmentally friendly products at a value price versus category leader. Our first entry in the Essentials line is a liquid laundry detergent product launched in 2006. This product has been a key driver 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 have successfully expanded the Arm & Hammer Essentials sub-line into three other categories. Fabric softener sheets, cat litter, and underarm deodorant. In the third quarter of this year, we expanded that line again into a fifth category, household cleaners. This line of cleaners is built on the following three simple ideas. First, they include plant-based and other biodegradable ingredients that work as well as traditional cleaners. Second, consumers only have to buy a small refill cartridge after the initial purchase which helps reduce the amount of packaging that ends up in landfall by 52%. And third, consumers save money with refills up to 25% cheaper than the category leaders. In order to better help you understand this product line, think of it as similar to Clorox's Green Works new product line of environmentally sensible cleaners, but without the bottle, without the water, which is about 95% of what is in the bottle, and about 40% cheaper than Green Works.

We believe that our line of cleaning products will be very compelling to consumers because it leverages two hot trends. First, providing consumers with environmentally responsible product that work as well as traditional cleaners, and second, providing consumers with a better value. We are supporting this initiative with significant marketing support in the third and fourth quarters of 2008. Now, it is too early to judge the retail success of this new line cleaners, but I will just say that the early results are in line with our expectations.

Other significant new products impacting 2008 sales include Arm & Hammer laundry detergent with OxiClean StainFighters, offered in both powder and liquid forms. This new cold-branded product delivers premium laundry detergent cleaning performance at a value price. It started shipping in the fourth quarter of 2007. It is on track to be our most successful new laundry product ever. All new Arm & Hammer products are being support 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 megabrand marketing campaign we started in 2006. Since the start of that campaign, net sales of all Arm & Hammer brands has grown from 1% in 2004 to over 6% in 2007, and over 9% in the first three-quarters of this year.

We have also launched innovative new products in our other core categories in the first half of 2008 including the following. Two new additions to the Trojan line called Thintensity and Magnum Thin which capitalized 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 new product 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 that are doing extreme well.

Let me switch gears now and talk about the future. While we were pleased with the solid third quarter and year-to-date 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 power brands being Arm & Hammer, Trojan, OxiClean, First Response, SpinBrush, Nair, Extra, and Orajel, are powerful brands representing over 80% of our total net revenue and profit, and they are all growing 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 at every one of our core categories. Second, we have been steadily increasing our marketing spending behind these brands to continue to build equity and deliver or exceed 3% to 4% organic revenue growth target. In addition to our strong portfolio of eight power brands, the next major factor driving our sustainable growth model is ability to deliver solid gross margin improvement and earnings growth despite an unprecedented level of year-to-date cost increases for raw materials, packaging, and transportation. We have a well established pipeline of cost-saving 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 cost 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 organic revenue growth target and record shares on most of our core brands. In that regard as Matt stated, we have announced price increases on over 50% of our Company's product portfolio so far in 2008. 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 these initiatives is expected to lead to further steady improvement in our gross margin in Q4 2008 to deliver our annual average target of at least 100 basis points improvement. In fact, based on our year-to-date results of 130 basis points improvement through the first three-quarters of 2008, excluding new plant charges, we will exceed our 100 basis point full-year target in 2008. The improvement in our gross margin has enabled us to increase marketing spending in 2008 to drive a strong organic revenue growth. Finally, we will continue to keep a very tight lid on our overhead costs, as demonstrated by our ability to continue to grow our company sales while keeping our headcount flat.

Now, let me translate this into specific guidance for the rest of the year. Our sustainable growth model, which has enabled us to both grow and reinvest at the same time, bodes well for our Company and shareholders despite the weakening worldwide economy. In view of our solid organic revenue growth, gross margin improvement, and tight overhead expense control, we feel confident that we can deliver our previously announced EPS forecast of $2.83 to $2.85 for 2008, and that is a 15% to 16% increase over 2007. This excludes the previously announced charges for the new manufacturing plant of approximately $0.08 per share. Based on that fact that we have delivered $2.20 EPS in the first three quarters of 2008, this means that we expect to deliver between [$0.63 to $0.65](corrected by company after the call) EPS in Q4, which is a 37% to 41% increase versus year ago. These results reflect continued solid organic revenue growth, a significant increase in gross margins, continued strong marketing spending, in fact marketing spending will be a record for us in the fourth quarter behind our innovative new products, and tight control of SG&A costs. Now, that ends our presentation. I will now open the call to questions that you may have which Matt and I will do our best to answer. Chanel, please go ahead.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Alice Longley of Buckingham research.

Hi. I am confused about something. Your guidance includes or excludes the $0.08?

The $2.83 to $2.85?

Yes.

Alice, excludes.

Was there inventory write-up associated with Orajel in the third quarter?

Yes, as customary with any of our acquisitions we always write-up the inventory to fair value, so that would have impacted to margins and earnings contributed by Del.

How much was that as a cost of goods sold?

We typically do not go to that level of detail, Alice.

I had estimated $0.03. Does that sound right?

We typically do not get into that level of detail on the brands. As you know, our history is we do not quote sales or earnings by brand.

Alright. Raw material costs have come down. Does that, in your outlook for '09, does the benefit of lower raw material costs than you might have expected a couple months ago, is it offset with any new negative, versus what you might have thought a couple of months ago?

Yes, with respect to '09, Alice, anybody who read the release, you will see that we have our Evergreen targets of 3 to 4% top-line growth, 100 basis points of gross margin expansion, and 60, 70 basis points of out-margin. And yes, we are aware of what is going on with respect to commodities, but like so many other companies, commodities for us were peaking in Q3 and in Q4, so not all of them are actually coming down that quickly. We do not expect the benefits to begin to accrue to us until the late Q1 of 2009. So it is based on our most current information, is why we are confident that we can hit our Evergreen targets in '09.

I guess that is it. Thank you.

Your next question comes from the line of Bill Chappell of SunTrust.

Good morning.

Good morning, Bill.

Just kind of going back to the comments after the second quarter call, I think you had originally said that 4Q was going to be a bigger EPS quarter than 3Q due to the timing of marketing. Should we just look at this as shift of marketing from 3Q to 4Q, or was there something else going on in the guidance?

No, there is a lot of variables, obviously, that go into calling what Q3 and Q4 would be for the full year. Yes, you are right. When we came out at the end of Q2, we said that we expected marketing expense to be 13% of sales, Bill. We came in at 12.6%. You probably know we time our marketing to the extent that we hit certain distribution targets for our new products, plus we have our new Essentials cleaner that is going out as well. More so in the fourth quarter than third quarter. So, yes, there is a shift in marketing spend from Q3 to Q4. That is a piece of it.

But it still sounds like the quarter came in a little bit ahead of your expectations.

Well, we had a really good quarter, and keep in mind we had to take a few hits along the way with respect to FX losses as well as diesel losses. So, yes, it was a good quarter for us. But given the uncertain environment that we are in right now, obviously we would be confident that we can hit the full year number, but we do not think it is prudent to go and start changing full year guidance.

And just sticking on the marketing theme, with the rollout of all the new products, was there trade promotion or couponing that impacted net sales, and was it meaningful?

Every quarter, there is a significant amount of promotion and couponing. I will say slotting is something that we often get questions on. Slotting was slightly higher this year than last year. With respect to couponing, that is not a big factor for us. We are not big in coupons.

Okay. Then one other, just trying to understand 2Q versus 3Q. If last quarter hit 8% organic growth and 3% volume growth, this quarter, 4% organic growth and no volume growth, but you say you are seeing consumers start to trade down so I am just trying to understand if it is just tougher year-over-year comparisons or is there something else going on?

No, when you think about the second quarter, Bill, one thing to remember is that we had huge growth on the part of the Specialty Products business. So if you went back and said what was your organic growth for Specialty Products in the first couple quarters of the year, it was both 19% to 20% or higher in Q1 and Q2. Q3 is 14%, and Q4, as I said, will be back down to earth. Organically. So we have the deceleration of the add from Specialty Products going from Q2 to Q3. I would say in that 8% number you quoted for the second quarter, it is about one point and one half for that. So that would say the consumer business worldwide was 6.5% in the second quarter. And we had lots of things that were going out in the first quarter that helped us so we got some new distribution. We had new product launches, and we had some lower slotting year-over-year, because we knew it would be higher in the second half, particularly in the fourth quarter year-over-year. So if you adjust for those you get consumer business more down to the 4% range.

Okay, and with respect to volume versus price, the domestic businesses still rock along pretty well.

The domestic business is one half volume and one half price. It is the other businesses, the international and SBD, that caused us to say that of the 4% organic growth most of it is price. That is because for those other businesses, international and SPD, it is way more skewed toward price than volume.

Okay, that makes much more sense. Thanks so much.

Your next question comes from the line of Doug Lane of Jefferies & Company.

Good morning, everybody.

Good morning.

Just a follow-up on Bill's question, I mean, you can interpret your outlook for the fourth quarter today to be a little bit more cautious than it was at the second quarter given the third quarter up side, plus it sounds like the Oragel contribution is going to be more than you originally thought. Is there, on the flip side, something in the fourth quarter that is maybe working against you now that was not quite the case at the second quarter release?

No, I would not interpret the fact that we're at 50 or, pardon me, $0.73 versus $0.69, and not taking up the year as any kind of signal other than what we said before is that we did have far less marketing spend in Q3 than we expected. So obviously we expect to spend that in Q4.

Okay. That makes sense. And then with the currencies, I know you do not have a big international presence, but can you just give us a brief on what the key currencies are and without getting into specifics, what do you think the currency impact will be to your sales and EPS next year if we stay where we are today?

Yes. I am sure everybody is listening very closely to my call on currency for '09. Here is the way to think about. We have four core markets. Canada, U.K., France, and Mexico. So obviously, anybody that is on the call can compare the spot rates today to the average rates in the first nine months of the year. And you would see, there would be around a 15% change. But, I think we come back to the point that it is hard to call 2009 rates right now. We are fortunate that we are US-centric, so we have far less concern that some of the competitors with respect to what kind of impact that is going to have.

Okay. Thank you.

Your next question comes from the line of Bill Schmitz of Deutsche Bank.

Hi guys, good morning. Have you seen distribution gains with some of the value laundry product because of the softening consumer environment?

Bill, not really. Glad you asked. Let me try to give some facts on two issues. One I call trading down, and the other private label. Obviously, everybody knows what is going on in the economy. We are seeing consumers trading down, and as you know, about 30% of our portfolio is a value for us versus competitors, particularly laundry detergent, both liquid and powder. We also have value toothpaste business. We also have value pregnancy kit business. And our cleaners business, especially the new Arm & Hammer Essentials line is a value. We are seeing good growth in those businesses, particularly the laundry side of the business is seeing good growth, but also the other ones are seeing -- laundry business is over 10% growth. And the other businesses are all seeing high single-digit growth. So in those businesses where Arm & Hammer laundry detergent is half the price of Tide, we are seeing a benefit from consumers trading down. Private label, yes, you are all hearing private label is growing, but the honest truth to us is private label for the most part is not a threat to us. If you were to look at all outlet shares for private label in the majority of the categories we compete in, private label is very small. Just to give you some hard numbers, private label liquid laundry is less than a 5% share of the total market. Powdered laundry, less than a 3% share. StainFighters category, that is what we call Oxiclean, is less than 2%share. Carpet deo, about a 2% share. Toothpaste, private label, is less than a 1% share. Battery-powered toothbrush, private label is about a 2% share. And then in condoms, depilatories, underarm deodorants, private labels all less than a 1% share. So on those businesses, we do not worry about private label. If you hear private label in those categories is growing double digits, my answer to that is, big deal, we do not care.

Now private label is a bigger threat in a couple categories we are in, two we worry about most are cat litter and pregnancy kits. Private label is about a 15% share of cat litter, and about a 30% share of pregnancy kits. But in both those categories, our business is doing exceptionally well. We have had share growth now for nine straight quarters in cat litter. And in pregnancy kits, we have gone from being the number two brand to the number one brand over the last two years. And in both cases, we are having very strong share growth so the private label threat there is not big to us. And then private label is a player in three other categories that are relatively small to us. That is fabric softener sheets and baking soda and household cleaners, but those are businesses, actually our share is up in fabric softener sheets, and doing well in cleaners with our new Essentials launch. And baking soda, we are about an 80% share, so if we lose a point to private label because of pricing we took, it is not a big threat. So the overall -- I gave you a lot of facts there but bottom line we are continuing to see consumers trading down. For the most part, we are benefiting from that from our value parts of our portfolio. And the private label threat is pretty -- I would not say nonexistent, but a very small threat to us overall.

Okay, great. And then for '09 guidance, I think you said it is in line with your long-term shareholder return model so because you have Orajel coming through does that mean we should look for 12% to 15% next year even with the current [seahead]?

No, Bill, we are going to give specific guidance in the first week of February like we always do. Right now, it is too early to start calling numbers. That's not our practice.

OKay, just because in the press release it says, '09 should be in line with the long-term plan.

Well, our long-term perennial goals are the three we stated.

Okay. That makes sense. Is there going to be any mixed impact to gross margin as you look at some of the categories that are slowing and high-margin? OxiClean? Even on the condom side, pricing has been great. But volume is pretty much flat which actually surprises me because I did not think that was a very elastic category? So what happens on the mixed side of things, because I think the laundry detergent business is lower gross margin than the fleet average and that should grow faster than some of these newer, higher margin products.

Bill, it is true that personal care products are higher gross margin than household, so to the extent that mix changes that could have an impact on gross margin. The good news for us is that our household margins, particularly in laundry, have been growing significantly over the past couple years. Particularly with respect to concentration, so that should mute any effect that that would have on it.

Okay. Then just one more. I am sorry to keep going on this, but if you look at the liquid laundry detergent business. 10% price increase, sort of de facto 10% price increase from compaction, that is sort of a 20% price increase? Are you seeing a lot of pantry de-loading now, and will that catch up at some point? I think initial shock value to the list price then people start to buy again later, but right now is there any pantry loading going on?

Bill, we were watching that. Honestly, we really have not seen much though I know some competitors have talked about that, but maybe they are more sophisticated than us, I do not know. But we have not seen that, our business continues to do very well.

Thanks so much.

Your next question comes from the line of Carla Casella of JPMorgan .

Hi, this is [Ilise Seoni] for Carla Casella. Could you provide an estimate for your cash contributions to the pension plan for next year?

Yes, well, that is something that we will be looking at in the fourth quarter, like many companies, certainly the market has had an impact on the gap between our fair market value of our assets and our liability. So we are looking at that right now, but given the amount of cash flow that the Company generates, I do not expect that that is going to be a material amount to the Company.

That is great. Thank you.

Your next question comes from the line of Joe Altobello of Oppenheimer.

Thanks, good morning guys. First question, in terms of the price increases you are taking in 4Q, did you see any pre-buying ahead of that in third quarter?

No.

Nothing meaningful?

Nothing.

Okay. Secondly, in terms of the Essentials, household cleaners line, how is that doing relative to expectations in terms of sales and distribution?

Joe, it is right in line with expectations. We started shipping that product in Q3. October was really the first big month of trial efforts and strong advertising. We do not know the results yet, but everything we have seen so far is in line with our expectations. We have somewhat conservative expectations for that, but everything is going well so far.

Okay. And then lastly in terms of acquisitions, you mentioned, Jim, earlier that you are at the low end of your leverage range at this point, and I would probably guess you want to integrate Orajel before you do anything sizable. But what is your attitude right now in terms of doing another deal at some point?

Joe, we are ready to do a deal any time. As Matt told you, we have a strong cash position, we have a strong credit lines out there. I would tell you the market is very active. We are very active in looking, and we would make a deal tomorrow if there was a good one out there. So I would say, too, the market is active -- there are some people out there who do not have the cash that maybe we have, so we are not going to wait until Orajel is integrated later next year to make another deal. I do not have one today, but we are not waiting for that to finish.

When you say it is active, it sounds like there are a lot of properties for sale, but in terms of valuations, have they pulled back?

Not really. Not from what we have seen. I have got nothing specific, but I would say there has not been a major change in valuation.

Okay, great. Thank you.

Your next question comes from the line of Connie Maneaty of BMO Capital Markets.

Good morning.

Hi, Connie.

What were the annual sales of the Spanish subsidiary just so we can model it?

Yes, about $9 million.

Okay, so it was really minor.

It was small.

Did it always operate at a loss?

Well, always is a long time, Connie. It was operating -- we had a small operating loss over the past year and a half.

Okay. Why do you have an FX loss in the quarter? Where did that come from?

It came from inter-Company receivables, payables that we have between certain countries. Those get treated as transaction losses.

Okay. So that -- transaction loss. Okay. And the size of your international business, with all the parts and all the -- between the international consumer and the international part of Specialty, does that -- is that about $600 million in total?

Well what you would do is you would just take the international business and add a portion of that for international piece of Specialty Products.

So it is something like 20% to 25% of total sales? Would that be about right?

No, no. Nowhere near that big. Remember, 17% for the international business, and I think you probably add around maybe $80 million of that to come one the combined international and SPD.

So the Specialty international is around 80 million?

Yes.

Would you expect there then to be, if the change in currency. Does it affect you more on the top line or more on the bottom line because of transaction impact as well?

Well, on the top line, as I said before, with 17% of the company, all things being equal. If you translate the P&L, you are going to have an impact, if you have a 15% change. You would have 50% down top line as well as earnings. There is also, with respect to transaction, yes, you can have some of that, too, to the extent that you are manufacturing in the U.S. for other entities. But we always have the option of co-packing locally to overcome that.

Do you think you will be able to overcome the transaction impact? Is that the plan?

We feel confident about '09 as we said in the release with respect to hitting our perennial targets. So if we say 100 basis points of gross margin expansion that would include the impact of currency as well as commodities.

So the impact on the top line in the fourth quarter, let us say of, the change in the dollar, would that be something on the order of dampen the sales growth by about 2%?

I think it could be that high, Connie. You are going to have to make your own guess with respect to where currencies are going to be.

But assuming they stay where they are right now.

Yes, it could be that high.

Okay. And that would be, assuming --

That is unreported, remember.

Sorry?

That is unreported.

Assuming they stay where they are, then that would be 2% to 2.5% increase, then, for the next three quarters as well.

Did you say increase?

Dampening, sorry.

Yes, look, if Q4 is -- if it stays where it is right now, it is just math. So, yes, it could, be up to 2%, and that would obviously affect our reported numbers in a similar fashion in '09.

And my final question is on Arm & Hammer Essentials cleaners. How are these being shown in the store? Are they being all -- do you have end caps? Do consumers see them as a block of product, or are they scattered through the separate categories?

It varies by store retailer, Connie. In some cases, they are blocked together. We definitely have had end cap displays. So it varies, just like it would for any other brand.

Is Wal-Mart doing a brown block on these?

I am not sure what a brown block is, but Wal-Mart has done very significant merchandising support for this including displays and trial offers and everything. It has been a very strong supporter of this new product line.

Okay. That is it for me. Thanks.

Thank you.

Your next question comes from the line of Nik Modi of UBS.

Morning, guys. Just two quick questions. Just generally in October, have you seen any noticeable changes in just the consumer dynamics out there?

No, not yet.

Okay. Then the second question, assuming diesel stays where it is, should we be looking at any diesel losses in the fourth quarter, or are the hedges over?

Yes, the change in diesel obviously will be measured from October 1 through December 31st. So, yes, to the extent there was a change there that will be a P&L effect.

Great. Thanks so much. That is it for me.

Your next question comes from the line of Jason Gere of Wachovia.

Hey guys, just a question about the innovation pipeline for next year. This year, you were saying you did fewer but bigger products. Just thinking about the consumer environment and the appetite out there, can you just talk about your risk appetite with new product and just some color around that?

I think it is about same, Jason. We are going to continue on the theme of fewer but bigger new products in the future. So you will probably see about the same number of new products launched next year as we launched this year. We are obviously focusing on our core categories to do that with, and so far we feel, based on the results this year, which I said our new products this year are delivering 50% more revenue than our products the year before. So we like that fewer and bigger strategy, and that is where we are going to continue into 2009 and '10.

Just changing topics here, just in terms of the pricing that you are taking this quarter, I might have missed this earlier on the call, can you talk about your outlook? How much of that do you anticipate will stick in this marketplace? Any conversations with retailers? Is it too early to talk about when you might see either a little bit more gross to net spending on the promotion side, to just factoring into a softer commodity environment that is going through?

Jason, you hit the nail on the head. It is one thing to take price increases. The other thing the actions of competitors are unpredictable, as is the what is going to be the reaction of the consumer. So will we see consumption declines, and will they need to be stimulated by trade promotions? So yes, all of the above are going to have to be factored in to what happens in the future. So hard to call right now.

I would say we have announced it, consumers have accepted it, the prices will be reflect at retail over the course of Q4, and we certainly do not intend to do anything to unravel it at this point.

Okay. And did you quantify on the liquid laundry, how much of your gains might have come from lagging behind some of your competitors in terms of taking the pricing?

No, we have not quantified that.

Okay. I will not push it. Last question, with the tax credit that just got implemented, how should we think about for next year, how big, or how much could that impact your tax rate for 2009?

Well, the impact on 2008, Jason, is 50 basis points.

So it should be similar for next year as well?

Yes, it doesn't vary too much from year to year.

Okay, great. Thanks a lot, guys.

Thank you.

And your last question comes from the line of Andrew [Sawyer] of Goldman Sachs.

Hey, guys. I was just hoping to get two quick ones. One, I was just wondering if you could help us a little bit with how we should think about the phasing in of compaction benefits in '08 versus '09. I know you completed the rollout in the middle of this year, but you also had some start-up costs. Should we get -- are the savings bigger '09 versus '08, or how can we think about that?

There is actually some benefit in '09. Remember that the whole country was completely converted after the third wave, which started in April and probably completed sometime late June or early July. So on a year-over-year basis, there will be some help in the first half of '09 but not in the second half.

Were there some start-up costs in the first half of '08 as well?

Yes, there are always start-up costs with a changeover like that, but we have never quantified, so obviously that will be gone as well, first half '08 versus first half '09.

Then just a second one, you guys have talked a bit about some of your more discretionary categories, whether it is power toothbrush, Oxiclean. I heard you mention you are launching a lower-priced option on the power toothbrush. Are there other things we are going to see in some of those categories to help sustain consumption if you have a view that consumer spending continues to get worse?

We have had a very strong focus on value part of our portfolio and in categories that we have premium products like battery-powered toothbrushes and that. We have launched more value-oriented new production. You probably will see that. The Arm & Hammer Essentials cleaners line is another great example. We have launched that new line. It is a great new product. It works as well as the leading brands, but it is environmentally based. And when you buy the refills, it is 25% cheaper than the leading brands. So we think it is a very smart strategy in this environment where the consumers are getting increasingly value-oriented. You see that from their channel changes, and changing from the traditional retailers out there to the mass merchant channels. We think that is a wave that is going to happen for a pretty considerable time in the future, and you are going to see probably a good number of our new products have a strong orientation toward value.

Anything on the OxiClean side, I know you talked about laundry additives as a category where you feel like you have some discretionary exposure.

Nothing particularly in OxiClean, right away. That is probably one of the most loyal of all of our businesses. We do not have anything in mind, to my knowledge, in line for a value offering on that business.

Thank you very much, guys.

Thank you.

I would now like to --

Is that it with questions?

Yes, it is, sir, I apologize.

Thank you Chanel, and thank you everyone for taking the time today to talk to us. Again, we are very proud of our Q3 results. We reaffirm our projection for the rest of the year, and we are looking forward to a very difficult 2009 business environment to continue the kind of business results we have in the past. If you have any questions, please give myself or Matt a call later today or whenever, and we thank you again. Good-bye.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.