切遲杜威 (CHD) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight second-quarter 2009 earnings conference call. My name is Demali, and I will be your operator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

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, Demali, and good morning to everyone. It is always a pleasure to talk to you, particularly when we have outstanding results to report. I will start off this call by providing you with a brief summary of the key factors driving our second-quarter business results. I will then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with the financial details of the quarterly results.

When Matt is finished, I will return to provide my perspective on our key brands and to provide earnings guidance for the year. We will then open the call to field questions from you.

As most of you know, Church & Dwight has consistently delivered strong earnings growth, which have resulted in an average annual total shareholder return, or TSR, of 18% over the past 10 years. This included EPS growth of 16% and TSR growth of 4.4% in 2008, a year in which the S&P 500 declined 38%.

Despite this consistent record of outstanding performance, our initial business forecast for 2009 was very conservative. As we entered this year, we were very concerned about unprecedented and unpredictable risk to our business related to the impact of the deepening recession on consumer purchases and potentially unfavorable actions by retailers to reduce SKUs and push their private-label brands.

Now, based on exceptionally strong first-half results, a better understanding of consumer purchasing trends in the categories in which we compete and detailed discussions with retailers concerning their support for our brands over the remainder of this year, my team is more optimistic about our 2009 business results.

The Company's exceptionally strong second quarter and year-to-date business results reflect the competitive advantage of our product portfolio and our aggressive management of gross margins and overhead costs. In terms of our product portfolio, Church & Dwight's unique blend of value and premium-oriented brand puts us in a position to thrive in any type of economy, as exemplified by our consistently strong EPS growth over the past 10 years.

Approximately 40% of our domestic revenue base consists of excellent-quality, value-oriented products that are highly appealing to consumers as they look for ways to tighten their belts in this recessionary economy. A key example of this is our laundry business, consisting of our Arm & Hammer and XTRA brands, which sell at one-half to one-third the price of the leading laundry detergent brands. Our laundry detergent brands have been growing at a rate of over 20% versus year ago since the third quarter of last year.

We also sell value-oriented toothpaste, pregnancy kits, laundry sheets and cleaners, which have also delivered excellent volume and share growth in this recessionary economy.

While these high rates of growth in our value-oriented products will not be sustainable forever, we believe these brands will continue to grow once the economy begins to recover, because consumers have already purchased them many times, appreciate the excellent performance of our products and see no reason to ever again pay more for higher-priced brands.

Now the other 60% of our domestic product portfolio consists of premium products that are number one or number two share brands in their respective categories, such as condoms, pregnancy kits, battery-powered toothbrushes, cat litter, depilatories, laundry additives and oral pain relief. Like other premium-priced brands, these brands have been fighting declining category trends driven by the recession and, in some cases, strong competition from value-oriented brands.

However, unlike other companies who are cutting marketing spending on their premium-priced brands in order to deliver bottom-line profit growth, Church & Dwight has significantly increased our marketing support on our premium-priced brands. Our higher marketing spending enabled us to grow share on all eight of our power brands in 2008, which represent 80% of our revenues and profits, and we hope to repeat that performance in 2009.

We are off to a great start, with additional share growth on six of our eight power brands in the first half of 2009. The share growth of these power brands has helped us to offset the sales risk from soft category trends. And once the economy recovers and the categories start to grow again at historical rates, we believe that our premium-oriented brands will benefit from having a higher share position in their respective categories as a result of our increased marketing spending during this period.

No other consumer packages company has such a well-balanced portfolio between value and premium-oriented brands, and this is why Church & Dwight uniquely thrives in any type of economy.

Two other factors are also responsible for our outstanding EPS results in the first half of 2009. First, our organization is hyper-focused in incentive to generate gross margin improvement. Over the past four years, we grew gross margin by 400 basis points, or an average of 100 basis points per year. That includes 140 basis points of gross margin growth in 2008, despite overcoming 300 basis points of higher commodity costs. In 2009, we are off to a fantastic start, with 430 points of -- basis points of gross margin growth in the first half of the year. This significant increase in gross margin was driven by several key factors that Matt will discuss in more detail in a few minutes.

These outstanding results did not happen by chance, but were the result of incredible work across every function in our Company to find ways to drive gross margin improvement in almost every one of our business units. This increased focus on gross margin improvement started two years ago, when we modified our annual bonus plan to link 25% of the annual bonus payment to gross margin improvement. Needless to say, this incentive has paid off, as reflected in the 140 basis point of gross margin improvement in 2008 and 430 basis point in gross margin improvement in the first half of 2009.

And we have many initiatives in place going forward to achieve our goal of continued gross margin improvement. This includes a new state-of-the-art laundry manufacturing facility that we will open this October in York County, Pennsylvania. This new plant will be in full production by the start of next year, and will be a major contributor to our continued gross margin improvement in 2010.

The third key factor which has been driving the outstanding EPS growth in the first half of 2009 is our continued tight control over overhead costs. Over the past four years, Church & Dwight has increased its net sales by 60%, while reducing headcount by 5%. That has enabled us to lower our SG&A costs as a percent of net revenues. As a result, we now have the highest revenue per employee of any mid- to large-cap CPG company.

This trend continued in the first half of 2009, when we grew our sales by 5%, but held our SG&A costs flat as a percent of sales. That is a remarkable feat which has been a key contributor to our strong EPS growth.

When you combine these three factors of our unique product portfolio, consisting of both value and premium-priced products, our hyper focus on driving gross margin improvement and our tight control over overhead costs, you get outstanding business results like we have delivered in the first half of 2009.

I will now turn the call over to Matt, who will provide you with the details on the financial results in the second quarter, and then I will return to talk about our key brands and earning guidance for the year.

Thank you, Jim, and good morning everybody. I am going to start with EPS. Second-quarter GAAP EPS was $0.81 per share compared with $0.66 in 2008. The current year quarter included a $0.05 charge for restructuring costs related to the closing of our North Brunswick complex. Excluding this item, EPS was up 30.3% from year ago to $0.86.

The strong sales performance and gross margin expansion that Jim referred to were the drivers of our second-quarter earnings results, which once again included a significant uptick in year-over-year marketing expense.

Our reported revenues were up approximately 5%. Foreign-exchange reduced revenues by approximately 4%, while revenues from acquisitions, net of divestitures and some other minor items, increased revenues by approximately 4.5%. So the net of all that is we arrive at 4.5% organic growth for the quarter.

Of the 4.5% organic growth, approximately 3.5% is due to price mix and 1% to volume.

Now let's roll through the segments. The Domestic business had a strong quarter, with organic growth of over 7%, with 4% volume and 3% price mix. The organic growth was driven by XTRA liquid laundry, OxiClean powder, Arm & Hammer liquid laundry, Arm & Hammer value toothpaste, Arm & Hammer cat litter and Crest's SpinBrush. So you can see it was very broad-based.

This quarter, we saw continued strong organic growth for our Household division and a turnaround to positive organic growth for our Personal Care division. And as Jim said, we grew share on six out of eight of our power brands in the quarter.

International posted a 16% decrease in revenues due to unfavorable year-over-year foreign exchange rate changes. Excluding the impact of foreign exchange and net divestitures, International sales increased approximately 3.5% due to higher sales, primarily in Canada, Mexico and Australia. This increase is driven by favorable price mix. As you know, we have announced or implemented price increases on over 60% of our International portfolio of products, somewhat offset by lower volume.

The Specialty Products revenues were down $9.3 million below the prior-year quarter, with $3 million due to unfavorable foreign exchange rates. The remaining decline is primarily due to lower volumes in our animal nutrition business. As everyone knows, a significant decline in US milk prices has weakened the dairy market, resulting in lower volumes in this business.

Regarding the impact of foreign currency, the stronger dollar reduced reported year-over-year sales by 4% in the quarter. We expect FX will have a 3% impact for the third quarter. Second-quarter EPS absorbed a $0.05 hurt from currency. This included both translation and transaction FX. We expect the full-year drag on EPS to be about $0.13, most of which is behind us, since FX is less of an issue in the fourth quarter of 2009 year-over-year.

Gross margin. Turning now to gross margins, our reported second-quarter gross margin was 45.2%. Excluding the $5.8 million charge related to the shutdown of North Brunswick, gross margin expanded 530 basis points. So you can see in the release we have a lot of factors that drove gross margin in the quarter. The increase in gross margin reflects lower commodity costs, price increases, higher margins associated with the Orajel products, the impact of liquid laundry concentration, and finally, the benefits of cost reduction programs.

Our Q2 performance was better than we expected for several reasons. We had greater efficiencies in our Household manufacturing plants. We had much better product mix. Remember that our Personal Care business, which is a high-margin business, was up. Our Specialty Products business, which is a low-margin business, was down.

A few other things in the quarter. We had lower coupons, lower slotting, and price was better than expected in the quarter.

So we are exceptionally pleased with our gross margin performance. In fact, we have been able to achieve year-over-year gross margin improvement, excluding restructuring charges, at or above 100 basis points in each of the last six quarters, and have exceeded 400 basis points in the last two quarters.

Looking ahead, we continue to expect a healthy expansion of year-over-year gross margins for the back half of 2009. We have better visibility regarding the factors affecting gross margin. And whereas before, we said 200 plus basis points of full-year gross margin expansion, we now expect to achieve approximately 350 basis points for the year, and this excludes the plant restructuring charges.

The second half will be different from the first half in gross margin year-over-year. We have now lapped the Del acquisition. We will be lapping the price increases in the fourth quarter. And we do expect higher trade spending in the second half.

With respect to marketing, marketing spend was 15% of revenues, which is 170 basis points higher than the prior year's spend rate of 13.3%. We expect to increase our spending level over prior year every quarter this year and increase our 2009 annual spend to approximately 14% of sales, which is 190 basis points higher than 2008. So we continue to stick to our business model by funding higher marketing spending through gross margin expansion.

SG&A. SG&A year-over-year was up $7 million in the quarter. SG&A as a percentage of sales was 14.3%. SG&A as a percentage of sales is up 60 basis points from year-ago. The higher SG&A costs in the quarter include amortization and operating costs related to the Orajel acquisition from last July, and reflect higher incentive compensation accruals, legal expenses, research and development expenditures and IT costs, which should both provide long-term benefits.

SG&A as a percentage of sales is expected to be about 13.8% of sales for full-year 2009, which is down 10 basis points compared to 2008.

With respect to operating profit, the reported operating margin for the quarter was 15.9% compared to 13.8% last year. Excluding the plant restructuring charges, operating margin was 16.8%, or 300 basis points, above year-ago.

Next is income taxes. As you can see in the release, our effective rate for the quarter is 38.8% compared to last year's 39.3%. Both the current and prior-year quarter were impacted by an increase in tax liabilities. We are now forecasting an effective rate of approximately 37.5% for full-year 2009.

Turning now to liquidity, we generated $137 million of free cash flow in the first half of the year. And remember that netted in that six-month number is $58 million of capital expenditures, which includes $45 million related to the new facility in York, Pennsylvania.

We have over $350 million of cash on hand and approximately $180 million of available credit through our revolver and asset securitization facility. Our total debt to LTM-adjusted EBITDA per our bank agreement was approximately 1.8 at quarter end, which puts us below our long-term total leverage range of two to three times EBITDA. We expect to generate over $225 million of free cash flow in 2009. And remember that that is after absorbing approximately $95 million of CapEx for the new plant in York County. So if we include just our base CapEx and exclude the CapEx for the new plant, we expect to generate over $325 million of free cash flow in 2009.

Today, we are also announcing an increase in our regular quarterly dividend from $0.09 to $0.14 per share, or the equivalent of an annual dividend of $0.56 per share, bringing our projected annual dividend yield to slightly less than 1%. This increases our annualized dividend from $25 million to $35 million (sic -- see press release), which is a $14 million increase in our dividend payout.

In June, we divested seven minor brands that were acquired last year from Coty Inc. The net proceeds of $30 million is included in our statement of cash flows. These brands generated over $20 million in annual sales, and the divestiture is expected to have a $0.03 dilutive effect on earnings per share in the second half of 2009.

So in conclusion, the second-quarter results reflect 4.5% organic sales growth, exceptional gross margin and operating margin expansion, continued reinvestment in marketing and strong free cash flow. Back to you, Jim.

Thanks, Matt. I will now provide a brief perspective on our eight key power brands, which represent 80% of our Domestic businesses' revenues and profits. First and foremost is Arm & Hammer, which is our biggest brand. This [160-year-old] brand is one of the most unique brands in the consumer packaged goods world. It competes in more categories than any other brand. It is found in more aisles of the grocery store than any other brand. In essence, this unique brand is a mile wide and an inch deep.

Yet five years ago, this was a very dysfunctional brand, with different packaging, promotions and advertising across all the various categories that it competes in. This situation was unacceptable and was a key factor in the brand's anemic organic growth.

To accelerate the brand's organic growth, I asked our Marketing and New Product teams, led by Bruce Fleming, our Chief Marketing Officer, and Steve Cugine, our Head of New Products, to unify all the marketing elements on the Arm & Hammer brand. Bruce, Steve and their teams have done an excellent job over the past four years of unifying the packaging, launching more impactful new products and developing a mega-brand marketing campaign.

At the same time, we significantly increased the marketing spending on the brand. While the brand is not the number one brand in most of the categories in which it competes, it enjoys the competitive spending power of a number-one brand because of its total sales across all of its categories. In fact, in 2009, the Arm & Hammer brand will pass $1 billion in net sales, and we will spend more advertising dollars on this brand [than] the number one brand in almost every category in which we compete.

We believe [the] total spending power, which has been a key driver of strong consumer appeal and share growth in the second quarter across almost every category in which the Arm & Hammer products compete.

Over the last three quarters, this has resulted in double-digit sales and consumption growth for the total Arm & Hammer brand. That is terrific growth in a good economy and outstanding growth in a recessionary economy. The significant advertising spending on our mile-wide and an inch-deep mega-brand has surprised retailers, particularly in categories in which Arm & Hammer products are not necessarily the leader. When retailers have made the decision to reduce our SKUs or store count in a category that we compete in, they are subsequently surprised to see the negative consumer reaction because of our strong overall consumer appeal.

This has often led retailers to restore the distribution for the Arm & Hammer products, when they recognize the brand enjoys the spending power of $1 billion mega-brand that other competitive brands do not have. And we have plans in place to continue to drive strong growth of the Arm & Hammer brand in the second half of 2009, including new products and increased advertising support.

We will also fold the SpinBrush brand under the Arm & Hammer mega-brand in the fourth quarter of this year.

I would now like to spend a few moments talking about the other seven key power brands in our portfolio. Let's start with XTRA, our other liquid laundry detergent brand, which sells for approximately one-third the price of the leading laundry brands.

This brand has had an extraordinary quarter of growth, driven by its strong value appeal to consumers. XTRA sales and consumption were up over 15% versus year-ago. It is now the number two brand in the laundry detergent category on a wash load basis.

OxiClean also continued to deliver strong growth in the laundry additive category, driven by the new Max Force spray product and increased advertising spending. Its quarterly sales were up almost 20%, which pushed its leading share position to approximately 40%. That represents over 15 points of share growth since we bought the brand about two years ago.

First Response, our premium pregnancy kit brand, increased its number one share position in its category. Our total pregnancy and ovulation kit business, including our value brand called Answer, has now been the category leader for 19 consecutive quarters against such formidable competitors as J&J and P&G.

SpinBrush also increased its leading share position in the battery-powered toothbrush category. This marks our 13th consecutive quarter of share leadership in the battery-powered toothbrush category versus P&G and Colgate. SpinBrush's share growth was driven by our new Sonic toothbrush, which offers superior sonic cleaning technology at a significant value versus competitive toothbrushes.

Nair increased its leading share position in the depilatory category in the second quarter, with a record share of 48%, driven by continued growth of the new Shower Power line. This line of products enables women for the first time to use the depilatory in the shower. This line was first introduced in 2008 and was bolstered this year with the addition of a new SKU for sensitive skin.

Two of our remaining eight power brands experienced very minor share declines in the second quarter. Trojan grew its strong number one share position of over 75% in the condom category versus the first quarter results, but the second-quarter share was down a slight 0.2 percentage points versus year-ago. We expect to achieve share growth on Trojan versus year-ago in the second half of 2009, driven by our new Ecstasy line of condoms, which is already off to a strong start since its launch in June. The new product line is already the number-one selling SKU in several major accounts. We will also significantly increase marketing spending on Trojan by 60% in the second half of this year to drive the total [align] of the new Ecstasy line.

Finally, the Orajel brand also had a slight 0.1 percentage point overall share decline in the quarter versus year-ago due to strong share growth by private-label products. We have plans in place to drive share growth on Orajel in the second half of 2009, driven by increased marketing spending. This recent acquisition has now been totally integrated into Church & Dwight from a marketing, sales and supply chain basis.

So in total, six of our eight power brands delivered strong share growth in the second quarter, and two experienced very minor share declines. Our annual goal is to drive share growth on all eight of our power brands in 2009, as we did in 2008, behind impactful new products and increased marketing spending, which we intend to continue full blast in the second half of 2009.

So as you can see, Church & Dwight is not a one-trick pony. 40% of our product portfolio has a strong value orientation, which we are leveraging in this recessionary economy to deliver significant sales and profit growth. We firmly believe that the current economic environment has created an opportunity for a dramatic shift in consumer behavior towards our value-oriented products, and we believe this consumer shift has the potential to become a permanent shift as consumers' trials of our products leads them to appreciate the excellent quality of our value-oriented products.

The other 60% of our business consists of leading premium brands, which are achieving share growth through a steady pipeline of innovative new products, increased marketing spending and superb sales execution. While our premium brands face similar consumer price sensitivity as other competitors' premium-priced brands in this recessionary economy, the difference is that we are increasing our marketing spending on our brands, while the majority of our competitors are cutting their marketing spending to help their bottom-line profits.

Our increased marketing spending is driving share growth in our premium-priced brands so that when the economy improves, our brands will be able to deliver stronger sales as their categories start to grow again. No other CPG company has such a powerful portfolio of value-oriented and premium-priced brands and a demonstrated track record of driving growth in both types of businesses.

Let me switch gears now and talk about the future. While we are pleased with our outstanding second-quarter and first-half results, as I often state, we are never satisfied. We have launched over 20 great new products in 2009 in our US and International markets that are helping to drive our strong organic growth results. We have supported these exciting new products with increased marketing spending in the first half of 2009. We will continue to provide increased marketing support in the second half of 2009, and our total marketing spending as a percent of net revenue for total 2009 is expected to be approximately 14%, a 190 basis point increase over 2008.

The combined effect of the new products and increased marketing spending is now projected to drive 6% organic revenue growth for the total year on our consumer products. This will be impartially offset by lower Specialty Product sales, driven by the weak milk market, to yield 4% organic growth for the total Company. Approximately 2% of this organic revenue growth is volume-related, and the other 2% is price-mix related.

In terms of gross margins, based on our strong first-half results, we now expect to deliver approximately 350 basis point of gross margin improvement for total 2009, excluding the plant restructuring charge.

Finally, we will continue to keep a very tight lid on our overhead costs.

Now let me translate what all this means into specific EPS guidance for the year. In view of our improved outlook for organic revenue growth, gross margin improvement and increased marketing support, we are raising our previously announced EPS forecast of $3.30 to $3.35 to a new forecast of $3.35 to $3.40. This new EPS forecast represents a 17% to 19% increase over 2008. This is the largest EPS increase in 2009 of which I am aware of any CPG company.

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

Bill Chappell, SunTrust.

Good morning. I guess first on the gross margin side, trying to understand -- it was a phenomenal quarter, but how much of this is sustainable not just for the next quarter, but kind of on a go-forward basis? Is there some laps where you start to have to roll back pricing as commodity prices come down, or do you think you can continue at this kind of level?

Well, let's take the second half first, Bill. You know, we were calling 200 basis points once upon a time and now we are at 350. So the first two quarters have been 330 and then 530. So to hit 350 for the year, obviously we are going to have to average around 275 the rest of the way, which is pretty healthy year-over-year expansion, second half '08 versus second half '09. I ran through some of the things that were not going to be helping us, right? So you know Del is gone.

Sure.

-- for the second half, we are still lapping pricing, etc. As far as your question on commodities go, things like resins, surfactants, paper, PFAD, those are all very big commodities for us, and they are all down quite substantially year-over-year in the second half as well. A little more cautious about diesel. But just about every -- all the arrows are pointing down.

And I know there are certainly worries with respect to commodity reinflation. But that certainly is not around the corner, not in the near term. And when we think about 2010 year-over-year, keep in mind that the biggest driver for us is our new plant. So the new plant is going to drive the lion's share of 100 basis points of gross margin expansion in 2009.

Okay. Switching gears just to the marketing spend, it is certainly great that you have the excess gross margin to spend back on the brands. But if you look on your guidance, it looks like marketing spending in dollars will be up 20% year-over-year.

So how does that -- at what point, when you're only doing 3% or 4% volume growth, are you spending kind of too much in this environment versus trying to let it fall to the bottom line?

I don't think we are spending too much. We are now approaching, as we said, about 14% of our net revenue we spend on marketing. We feel that, plus or minus maybe 100 basis points, is our comfort zone for where we will probably peak out as a percent of net revenue, but of course, absolute dollars grow as our revenues grow. So we feel very comfortable where we are. We may increase it slightly above that in future years, but I don't see any way we'll ever cut back.

Okay, just one last question. Does the raise in the dividend say anything about the acquisition landscape?

No, not at all. If you think about -- we really haven't -- we could have lagged the mid- and large-cap peers for a long time. And if you look at today, we are still going to be less than a 1% yield, and the increase is only $14 million. And a company that is generating $325 million of free cash flow on a run rate basis, that is assuming base CapEx, an increase from $25 million to $39 million annual payout really isn't going to be noticed. So no, it absolutely has no effect at all bearing on our acquisition strategy.

Perfect. Thanks so much.

Jason Gere, RBC Capital Markets.

Good morning, guys. I guess I wanted to just talk a little bit about -- I mean, obviously, there are discussions with your retailers. You are feeling better. Clearly, when you talk about the categories, your biggest driver, laundry, is within there.

I was just wondering if you could kind of talk to us about what we are seeing on the shelf. There has been some more aggressive spending from some of your value players out there. We are seeing a little bit more on the promotional packs that you guys are doing, the 25% more.

Can you just talk about what you are seeing from the category right now in terms of any types of shifts and how you look at it going forward, especially when you get into that fourth quarter, where I think initially there was a little bit of caution because of the tough comp, but now it seems that maybe you guys could even put up positive numbers into that fourth quarter. Thanks.

Jason, first of all, overall the laundry category continues to grow at a very historical rate. A lot of studies have shown that the laundry category is the least impacted by a recession, so it's a great category to be in. Competitively, we are very aware of all our competitors are doing. As I said in my earlier talk, we've been growing at a rate over 20% on our liquid laundry detergent business since the fourth quarter of last year. We feel very confident we are going to have strong growth rates going forward.

You are right, we are beginning to lap strong growth rates from a year ago by this fourth quarter. But there is still plenty of room for our brands to grow out there, as consumers come to like them more and more and try them more and more. So I don't see any reason why our business shouldn't continue to grow at good rates -- maybe not double-digit rates, but very strong single-digit rates -- as we get into next year. And we have a lot of new products up our sleeve to come out that way, and we've been increasing marketing support.

So we feel very good about the liquid laundry detergent category. There is still a lot of room for Church & Dwight to grow in that category.

And then when you talk about -- your gross margin expansion for the back half of the year is obviously very impressive. How much is netted in there against increased promotional spending, whether offensive or defensive, offensive for new products but defensive against the likes of some of the other competition that is getting a little more aggressive in some of these categories?

The thing to understand about trade spending is that is something that is typically planned many months in advance. So when we planned the year, we expected a tough second half. Remember, when we called the year back in February, unemployment was 7%. We expected it at that time to rise to 10%, and it has happened. So we did plan for higher trade spending in the second half. So it is more or less business as planned.

Okay.

Jason, also keep in mind, in the laundry detergent category, as I said, our products are a half to one third the price of the leading brands. That is not $0.50. I am talking that is $5.00 to $10.00 a jug of laundry detergent. So when some of the leading brands are offering an extra $1.00 or $2.00 off versus their normal prices, there is still a huge price gap. And in this economy, consumers are very sensitive to that and very attracted by that.

(Multiple speakers) Yes, and that I understand. I was talking more about you are seeing a little bit more competition more at the value side. So that one brand that is kind of priced in between [XTRA and Hammer], that is getting a bit more aggressive. But that is kind of directionally where I was talking.

Not a problem.

Okay. And then just last question and I'll jump off. Clearly, as we get to the second half, you are seeing the shift -- or with your spending, the shift from more price mix to more volume, with the guidance that you've given. Can you talk about when do you have some of those conversations with the retailers for next year with the shelf resets for some of your tertiary brands? I mean, the brands -- kind of the tail brands, maybe that 10% to 20% obviously outside of kind of the power eight. Thanks.

Jason, those conversations are always going on. It has gone from almost an annual discussion to almost a monthly discussion with many retailers. I would just tell you to keep in mind that a good number of our tertiary brands are value-oriented brands. We are enjoying growth this year on brands like Aim, Close-up and Pepsodent. So we are not in a weak position at all on any of those brands. We are in a very strong position to have discussions. And overall, our distribution results across the Company have been up this year.

Okay. Great. Thanks, guys.

Andrew Sawyer, Goldman Sachs.

I was wondering if you could talk a little bit about -- I guess if you take a step back, from the beginning of the year to now, you've raised your full-year marketing budget by $50 million or $60 million. And I know, Jim, you mentioned that you are increasing your resources behind Trojan and Orajel in the second half.

Can you give us a little broader perspective on where those resources are going, both from the incremental A&P spend as well as any potential increase in your trade spend budget versus what you expected?

Yes, Andrew, A&P-wise, we have been for a while; we will continue to focus that money behind our eight power brands. It's been very successful. Like I said, it grew share in all eight last year. We are off to a great start this year. It's the best spend for our money, and that's, again, with 80% of the revenue and profits of the Company riding on it, that is the place we will put that money.

As far as trade spending, trade spending is up a little bit, but nothing significantly. We are very aware of what is going on with the competition. And honestly, there hasn't been that much of an increase in trade spending out there, as much as people might think there has been.

So our focus will continue to be on the marketing side of the world. We will be very competitive on the trade side. But we are, like you said, you're in the ballpark of about a $50 million increase in marketing spending this year. And keep in mind, that is in a world where most of our competitors are spending and where marketing costs out there for advertising are down. So that is buying a heck of a lot more impressions out there in the marketplace.

And then on the trade spend side, I guess you are saying it is not up much. We've heard some people say that you had to increase that to kind of maintain shelf space, but that is not the case, is what you are saying.

That's true.

And then, I guess, kind of the last -- along those lines, the last topic is -- and I think we had also heard that some retailers looked that you guys and said, you guys have a lot of incremental laundry capacity coming on next year, and we're using that as a negotiating tool versus you guys. Is that not something that you've seen either?

That's true.

Okay. And then kind of shifting gears, on the discount laundry portfolio, as you've seen some of the competitors get a little more aggressive tactically -- I know you mentioned you've seen some small buydowns on things like Tide -- have you seen any change in the competitive interaction across those brands?

Andrew, we don't comment on specific competitors. I would just say we are fully aware of what they are doing. We feel our plans are extremely competitive in the back half of the year. And as you've seen, we've raised our forecast, we've raised our organic growth call for the year. So we feel very good at this point in time.

Our product portfolio is perfectly positioned for this marketplace from the value side and also the additional money we are pumping behind the premium side. So I don't think -- as I said, I don't think you've seen any better numbers from any CPG company out there as we've had.

I guess finally, Jim, in your prepared remarks you mentioned that with Arm & Hammer that it seems like you've held onto your distribution a little bit better across the breadth of the portfolio. Can you give us any little anecdotes in maybe some of the smaller categories where you've maintained shelf space with a retailer, or in the case of maybe retailers that pulled the brand what they see and what wound up happening to the category when that brand wasn't there and why they brought it back in?

Andrew, I really don't want to give any specific comments about retailers out there. Just like I said, I try to make people aware. I think they don't realize the power of the Arm & Hammer megabrand with $1 billion in sales and the spending power behind it. And in cases where some retailers have made decisions on that brand to reduce the support, they were amazingly surprised by the consumer appeal of those products, and that support at retailer was restored in that.

So it is truly an amazing brand and that mile wide and inch deep categorization of it is very true. And I think it is one of the most unique brands in the CPG industry, and it's showing its power right now with outstanding performance across almost every category it competes in.

Thank you very much, guys.

Doug Lane, Jefferies.

I noticed in the release you moved some of the spending on the new facility in York out of 2010 into 2009. So I was wondering if you could update us on the progress. It sounds like things are running a little ahead of schedule there.

Also, could you walk us through, since we are getting close now to this transition, how that impacts the P&L, the cost of goods sold, the SG&A? Is there going to be some quarter-by-quarter lumpiness in the December and March quarter from this transition, or what should we expect on the P&L?

Well, the P&L, if you look in the outlook section of the release you will see that we updated the charges this year from $0.25 to $0.28. What that has to do with is there is about $3 million more equipment that we are not going to take with us that we are going to leave behind and destroy. So consequently, a bigger charge.

As far as the -- in that $0.28, we do have the transition costs associated with ramp-up of that plant. And we do expect it to be lights out by the end of December. It is on schedule. I mean, it is a tribute to the company, that is $170 million investment that is on budget, on time. We are ramping up now, hiring people, going through the training process, have all the racking in the warehouse and equipment is delivered and installed. So we are in great shape with respect to this investment.

As far as could anything spill over to the first quarter of 2010, it is possible, just from an accounting standpoint. With respect to the treatment of warehouses, it's a function of when you have your last case out the door as far as when you can actually take a charge. But we would call that out separately and we don't expect that -- right now, we don't expect that to be a number we're going to spend a lot of time talking about. We'll update everybody in November.

Okay, thank you.

Joe Altobello, Oppenheimer.

Just a couple questions on the M&A market. You touched on this a little bit earlier. You guys do have a lot of cash, you have a lot of dry powder, and you've made no bones about the fact that you want to do acquisitions. And I think -- correct me if I'm wrong -- but your view of the M&A market has been that while there are sellers out there, I think they are waiting for some of the credit markets to loosen up to get more bidders before they start to divest of some of these brands. Is that still the case, or are things getting better for the back half of the year?

Joe, I would tell you, the M&A market is more active than people think. We've already been working on two deals this year, and a third right now. What I would tell you, though, is what I've told in the past. Sellers are a little hesitant right now. There is not a lot of buyers at the door because of the credit market that has made for a very scant audience of potential buyers. And in some cases, the sellers have backed off on us. But there is activity out there, we are fully engaged in it and I would hope we can pull off an acquisition before the end of this year.

Are the valuations reasonable?

Yes, they are reasonable.

Okay. And then secondly, in terms of potential divestitures, you mentioned some of the Coty brands this morning as being sold. And obviously, you've talked about some of the non-power brands out there. Are there portions of your portfolio that you could see further sales?

Yes, I think you could see it. It will be very minor, nothing significant, very minor.

Okay, so no major changes in terms of the --

No.

Okay, perfect. Thanks, guys.

Connie Maneaty, BMO Capital Markets.

Most of my questions have been answered, but I have two small ones. Who did you sell the minor brands to? And would there also be $0.03 of dilution in the first half of 2010?

Yes, the $0.03 is times two, is $0.06, so that is correct. That is the full-year impact, had we held it for a full year.

As far as who we sold to, we don't disclose the terms or who we sold it to. The only thing we would disclose is what we are required to disclose, which is the proceeds from the sale, which is in the statement of cash flows.

Okay, and then on the new plant, will it be able to provide years of gross margin expansion, or is it a big contribution in the first year, with more minor flows in the future?

Connie, we will get the benefit of that from the laundry side in 2010. But the plant has the ability to expand another 50% in size, either to handle additional capacity in our laundry business or to bring in other business to the plant, either through acquisitions or other actions. So it definitely has the ability to have a big impact in 2010 and the ability to have additional gross margin impact beyond that.

So the additional gross margin would come from either adding new product lines or bringing in acquisitions, right?

That's correct.

Okay. That's all I had. Thanks.

Bill Schmitz, Deutsche Bank.

Just looking at the Specialty Chemical business, have you thought strategically about holding on to that or getting rid of it? I mean, besides the sort of sodium bicarbonate scale, is there any reason to keep that business?

Yes, Bill, there is good reason to keep that. And you may be hearing in some future quarterly reports some very interesting opportunities we have in that business to drive growth in it. So I would tell you to stay tuned on that, but we like that business.

Okay, great. And then Matt, can you just give us some granularity on the gross margin, piece by piece, like commodities mix, etc.?

I think the best way to think about it is that on a full-year basis, if we have 350 basis points that we are looking for, if you assume that Del is 45 basis points and FX is going the other way, 45, so let's call that a wash. So then you are left with 350, and two-thirds of it is largely commodity/concentration. But in that two-thirds, mostly commodities, and the other one third would be price mix.

Okay, great. And then just on the concentration front, haven't you already lapped it? So why does it continue to benefit gross margin?

No, it doesn't in the second half. In the first half, it does, because the country wasn't fully concentrated until June of 2008. So you had an incomplete concentration during the first six months of 2008. So it declines with each week, as you go from January through the end of June.

Okay, that makes good sense. And then it seems like consumers are overfilling with compaction. Does that change? Do people learn to use the compacted format better, or do you think they're going to keep filling the cap all the way to the top? I know it is sounds like a stupid question, but it actually has big implications for volume.

Yes, Bill, I think that issue has been oversold in the marketplace, quite honestly. I think there might have been consumer confusion at first, but consumers are pretty sharp. And we feel pretty much they've adjusted to that. So I wouldn't expect any meaningful impact from that going forward.

Okay, great. Thanks, guys.

Alice Longley, Buckingham Research.

Hi. Good morning.

Alice?

One moment please.

We know Alice is just speechless based on our business results. So we will give her a second to recoup there and ask her question.

Hello. Oh, I don't know. I got cut off. Just to clarify, you're still holding to gross margin expansion of 100 basis points in 2010?

Well, keep in mind that is our long-term model. So every year, if somebody asks us, okay, preliminarily, what are you thinking about for the next year, we are always going to go back to the model -- 3% to 4% top line, 100 basis points gross margin expansion.

Yes, Alice, we are just beginning our detailed planning for next year, but I would tell you at this point in time, based on the knowledge about our new plant and that, we would feel very comfortable with that in 2010 at this point.

Since the last time you gave guidance, commodity costs have gone up further. So what has gotten better to offset that?

Are you trying to do the math on our cost base? Because that's a little bit difficult to do, unless you have the data that we are looking at.

The resins, surfactants, paper, PFAD, are all down. There is some inflation; as I said before, we're cautious about diesel. But there doesn't seem to be a big catalyst out there for a broad-based increase in input costs.

And by the way, when we plan the next year, we assume commodities are going up. We always assume inflation. So we set a high bar for ourselves and then we work back from there. And we go to -- first stop on the train is always our good-to-great program, which is the program of continuous improvement, where we find lots of ways to expand gross margin.

Alice, I really want to emphasize Matt's point. I think people don't understand how aggressive we are in this Company on gross margin improvement. As I said, two years ago, we built that into the bonus calculations. Every one of my employees has 25% of their bonus based on gross margin improvement. And that is a key driver.

We just don't sit here and have big plans to do the changes or wait for commodities to fall in our lap. We have hundreds of programs going on within this Company to cut gross margins, and that is why we are up more on gross margins than any other CPG company that I know about.

Okay. And then how much -- I'm not sure I got the number right -- liquid laundry detergent, your shipments of liquid laundry detergent in the US year-over-year were up how much?

I think what we've been quoting --.

We've been quoting approximately over 20%.

And I can try to run some calculations, but if I assume those were flat, was your -- were your shipments otherwise up or down?

Say again -- if what was flat?

If liquid laundry detergent had been flat, with your sales in the US, would your shipments in the US, have still been up?

They would have been up, yes.

I'm just trying to figure out how everything else is doing.

Everything else is doing really well. In fact, here's a good fun fact -- and we won't update this every quarter. But as far as gross margin goes, we didn't own Orajel this time last year in the second quarter. But of the other seven power brands, six of the seven power brands all expanded gross margin in the second quarter year-over-year.

Okay, and when you said mix was a positive in the quarter, one would think that the liquid laundry detergent is negative for mix, or has it become positive for mix because of the cost situation?

The way to think about mix is Personal Care business was up in the quarter, so it was even stronger than we had expected. We had a lot of value products, toothpaste and Sonic toothbrushes etc.

And then the other side of the coin is the SPD business, Specialty Products business, it is our lowest-margin business. So that is way down year-over-year. So Personal Care and Specialty Products is what I was referring to with respect to business mix.

Okay, and one final question, and that is milk. I've heard some scenarios whereby milk prices are going to start churning up within the next six months. Do you have any opinion about milk prices going ahead?

Yes, there has been some -- there has been a lot done by Congress to support milk prices and cheese. So the effect that could have is potentially slowing down the culling of the dairy herds in the United States, which is frankly what needs to happen in order for milk prices to completely recover. But we are still expecting it to recover in the first half of 2010.

Meaning Specialty should be up in the first half?

Meaning that your question with respect to milk prices; we expect that to recover in the first half of next year. But certainly, the comparisons are going to be so much easier, Alice, because we are way down. We are like down 10% year-over-year right now, '08 to '09 top line. So if things start coming back to, then we could be up next year. That could be a plus for us in 2010.

Okay. Thank you.

Okay. If there are no other calls, I would like to thank you all for taking the time to listen to our call today. If you have any further questions, please feel free to call Maureen Usifer or Matt or myself with follow-up questions. And again, I want to thank everybody in my Company for a great quarter, and we expect great things going forward. Thank you.

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