切遲杜威 (CHD) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Church & Dwight third-quarter 2009 earnings 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.

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 my perspective on our excellent third-quarter business results, which you read about in the press release this morning. I will then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with his perspective on the financial details of the quarterly results. When Matt is finished, I will return to provide some more detailed information on the performance of our key brands and to provide earnings guidance for the year. We will then open the call to field questions from you.

Let me start off by saying that I'm very proud of my Company for both the magnitude of our results and the quality of our earnings. Our business results reflect an organization that is highly motivated and firing on all cylinders. Our unique product portfolio consisting of both premium and value brands 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. Our new product pipeline and increased marketing spending is driving share growth and strong organic revenue growth despite softening consumer demand. Our business teams and supply chain organization are working closely together to deliver exceptional gross margin expansion.

Everyone is continuing to keep a tight rein on overhead costs as proven by the fact that we had 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 the 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, to increase marketing spending to drive share growth on our eight power brands and investments in our supply chain through such actions as building new plants, to further lower our cost structure and strengthen our competitive advantage. All of these factors make me feel bullish about my Company's future despite the very tough business environment facing all companies these days.

As I said a few moments ago, no other CPG company that I can think of is as well-suited to thrive in any type of business environment as Church & Dwight. We were delivering exceptional EPS growth before the recession, we are delivering exceptional EPS growth during the recession and we are taking action to ensure that we can continue to deliver exceptional EPS growth moving forward regardless of the future economic environment. I will now turn the call over to Matt Farrell, our CFO, 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 will start with EPS. Third-quarter GAAP EPS was $0.98 per share compared with $0.69 in 2008. The current year quarter included a $0.05 charge for restructuring costs related to the closing of our North Brunswick complex and the prior year quarter included a $0.04 charge related to that closing. The quarter also included a favorable legal settlement of $20 million, or $0.17 per share. So excluding these items, EPS was up 17.8% from year ago to $0.86. The strong sales performance and gross margin expansion that Jim referred to were the drivers of our third-quarter earnings results, which once again included a significant uptick in year-over-year marketing expense.

Reported revenues were up approximately 3%. Foreign exchange reduced revenues by approximately 2% while revenues from acquisitions net of divestitures and other minor items decreased revenues by approximately 1%. So we arrive at a 5.7% organic growth rate for the quarter. And of the 5.7% organic growth, approximately 4.1% is due to volume growth and 1.6% to price mix.

So now let's briefly review the segments. The domestic business had a strong quarter and frankly volume is the big story. Organic growth was approximately 9% in the domestic business with 8% volume and 1% price mix. The organic growth was driven by seven of our eight power brands. This quarter, we saw continued strong organic growth for both Household and Personal Care divisions. The liquid laundry detergent accounted for a little less than half of our 9% domestic organic growth. So although liquid laundry is all always a big contributor to our growth, the US business, excluding liquid laundry, grew approximately 5% in the quarter and this growth is evenly balanced between Household and Personal Care.

And as you can see in the schedules attached to the release, the US Personal Care business grew 2%. But remember, this also reflects the sale of the Del minor brands, which we sold a quarter ago. So that means absent the divestiture, the Personal Care business in the US grew 4.5% organically. So a terrific quarter.

The international business also had good organic growth in Q3. Excluding the impact of foreign exchange and net divestitures, international sales increased approximately 6% due to higher sales primarily in Canada, Australia and the UK. And this increase is driven by volume growth of 5% and 1% price mix. So a consistent story both in domestic and international.

Specialty Products revenues were significantly below the prior year quarter. Organic sales for Specialty Products were down 15.4% with volume down approximately 23% and price mix up 8%. The decline is primarily due to lower volumes in our animal nutrition business. As many of you know, a significant decline in the US milk prices has weakened the dairy market resulting in lower volumes.

The silver lining is that the year-over-year comps for the Specialty business become far easier starting in Q1 2010. Actually Q4 is going to be our most difficult comp. That is Q4 2009, but things get far easier next year.

Regarding the impact of foreign currency, a stronger dollar reduced reported year-over-year sales by about 2% in the quarter. We expect FX will have a slightly favorable impact in Q4. Q3 EPS absorbed a 3% hurt from currency and this includes both translation and transaction FX.

Now gross margin. Our reported third-quarter gross margin was 44.1%. Excluding the $6.7 million charge related to the shutdown of North Brunswick this quarter and the $4.3 million last year quarter, gross margin expanded 460 basis points.

Our Q3 performance was better than we expected for several reasons. Volume growth created greater efficiencies in our manufacturing plants. We had better product mix. In other words, we had lower sales of SPD and higher sales of Personal Care and we also had greater benefits from lower commodities.

Looking ahead, we continue to expect a healthy expansion of year-over-year gross margins for the fourth quarter of 2009. We now expect to achieve approximately 400 basis points of gross margin expansion for the year, excluding plant restructuring charges.

Marketing spend was a record $100.2 million, or 15.5% of revenues, which is 290 basis points higher than the prior year spend of 12.6%. The increase behind our marketing spending is power brands and it is helping to drive our exceptional organic growth. We expect to increase our spending level again in the fourth quarter. Full-year 2009 annual spend will be approximately 14% of sales, which is 190 basis points higher than 2008. So we continue to stick to our business model of funding higher marketing spending through gross margin expansion.

We are frequently asked what is the right marketing spend level. We have had a step-change increase in marketing spend this past year. We are now nearing the high end of the range for marketing as a percentage of sales, but this is expected to sustain our long-term organic growth objectives.

Turning now to SG&A. SG&A year-over-year was up $1 million in the quarter. SG&A as a percentage of sales was 13.4%, down 20 basis points from a year ago. Last year in the third quarter, SG&A included a $3.5 million loss related to a divestiture. Excluding the loss last year, the higher SG&A costs in the quarter reflect higher compensation costs and information systems investments, which should provide long-term benefits to the Company. So all-in SG&A as a percentage of sales is expected to be 13.9% of sales for 2009, which would be flat with 2008.

The reported operating margin for the quarter was 18.2% compared to 13.6% last year. Excluding the plant restructuring charges in both years and the legal settlement this year, operating margin was 16.2%, or 200 basis points above year ago.

Next is income taxes. As you can see in the release, our effective rate for the quarter is 37.8% compared to last year's 34.4%. The prior year quarter included a benefit related to a divestiture of a subsidiary. We are now forecasting an effective rate of approximately 38% for the full year.

Now we will turn to liquidity. We generated $222 million of free cash flow in the first nine months of the year. Netted in our nine-month free cash flow is $87 million of capital expenditures, which included $68 million of expenditures related to the new facility in York, Pennsylvania. We have over $419 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 1.7 at quarter-end. We expect to generate over $280 million of free cash flow in 2009 and remember 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 $375 million of free cash flow in 2009.

So in conclusion, the third-quarter results reflect 5.7% organic sales growth, exceptional gross margin and operating margin expansion, continued reinvestment in marketing and very strong free cash flow. Back to you, Jim.

Thanks, Matt. I will finish off our presentation today by adding a little color to the terrific Q3 and year-to-date business results that Matt just took you through. First, as Matt stated, we made a significant investment in marketing spending in 2009. That marketing investment has both short and long-term implications.

In the short term, we have grown unit and dollar share on seven of our eight power brands in Q3, which represent over 80% of our revenue and profits. Here are a few highlights of the share results for the third quarter. The ARM & HAMMER brand, which has founded more categories than any other brand in America, grew in total consumption over 10% in Q3 versus 3.5% average growth for the category in which it competes.

OxiClean expanded its share leadership position in laundry additives and hit a record quarterly share with consumption up over 20% despite the unexpected death of our spokesman, Billy Mays and the introduction of a new laundry additive line by P&G.

First Response increased its number one share position and Q3 marks the 20th consecutive quarter of share leadership for Church & Dwight in the pregnancy and ovulation category. 10 years ago, we were a distant number three player.

Nair grew its number one share position in depilatories in Q3 behind the continued growth of a new product called Shower Power. SpinBrush expanded its share leadership in battery-powered toothbrushes and it was the only branded power toothbrush to gain share in Q3 with consumption up 20% from Q3 a year ago.

TROJAN returned to share growth in Q3 and expanded its share leadership position to over 75% of the condom category behind the launch of its new Ecstasy productline, which is also the fastest start of any new product in TROJAN's history.

And finally, the XTRA brand, which is our lowest-priced value laundry detergent, continues to achieve double-digit consumption growth as consumers see greater value in this recessionary economy.

Now this share growth of our power brands is helping us to more than offset category softness and delivering meaningful sales gains in both our Household and Personal Care businesses. Now despite the positive news that we've all read about the economy lately, the facts are that all outlet unit sales in Q3 were down in nine out of the 13 categories in which we compete.

Dollar sales in Q3 were up in eight of the 13 categories, but that was largely driven by price increases taken in 2008. There were very few price increases in 2009 and I don't foresee any price increases in 2010. In fact, the battle for share between competitors that drive revenue growth in a soft economy will, if anything, cause downward pressure on revenues due to more aggressive merchandising.

Now as I stated earlier, our response to this situation has been to aggressively increase our marketing spending to drive share growth and organic sales growth now. In Q3, our consumption in units across all categories was up almost 7% while the categories in which we compete were down 1%.

This investment will also benefit us in the future as we expect that our higher shares should lead to continued strong organic sales growth when the economy recovers and the category start to grow again in terms of unit growth.

A similar situation is happening in relation to our gross margins. Church & Dwight has achieved significant gross margin improvement in 2009 for all the reasons that Matt mentioned. But at the same time, we've made significant investments across our entire supply chain to be able to continue to deliver a least a 100 basis point improvement in 2010.

One prime example of that is the new laundry detergent plant in York, Pennsylvania that we have constructed over the last 18 months. This new plant is already producing and shipping products. It will be fully operational in the first quarter of 2010. We expect it to be a major driver of our gross margin improvement in 2010.

Now we told you about this new laundry plant and its impact on our future gross margins for some time now. What you don't know is that we have dozens of other cost-saving initiatives underway which will positively benefit our gross margins in 2010 and future years. For competitive reasons, I cannot reveal the nature of these initiatives, but I want you to know that our strong earnings growth and cash flow has enabled us to invest in these future gross margin improvement initiatives.

Now last but not least, we will continue to keep a tight rein on our SG&A overhead costs. Again, we have added over $1 billion in sales over the past four years without increasing headcount. We have the highest revenue per employee of any major CPG company and we have done all of this while paying our employees extremely well and without cutting back on other benefits like 401(k) contributions or having morale issues caused by layoffs. We are very proud of this accomplishment and intend to keep operating this way.

Two last points before I briefly talk about future business outlook. First, we are actively looking for good acquisitions and we have the borrowing capacity and strong balance sheet to support our acquisition efforts. Based on what I have seen and heard, I am confident that there will be more acquisition opportunities in the CPG industry in 2010.

Second, some of you have raised concerns about risk to Church & Dwight's future performance in relation to such issues as private label growth, competitive threats and actions by retailers to reduce the number of brands they carry. Let me assure you that we are fully aware of these issues and we are successfully managing all these issues as demonstrated by our outstanding business results.

Please remember that over 80% of our revenues and profits are driven by eight power brands that have leading share positions in their category. We achieved share growth on all eight of these power brands in 2008 and on seven out of these eight brands so far in 2009. These results would not be possible if we were not on top of these competitive and economic challenges. I have said it before and I will say it again, no other CPG company is as well-positioned to manage to not only survive, but thrive in any business environment. Our unique product portfolio of both premium and value brands puts us in that position. Our experience and motivated management team knows how to leverage that portfolio to consistently deliver superior results and we have given our team the tools and money to make greater investments in marketing, gross margin and overhead to continue to deliver strong organic revenue growth, gross margin improvement and EPS growth.

Finally, a few comments about the future. As stated in the press release, our solid business results and momentum through the first three quarters of 2009 have led us to once again raise our EPS estimate for the total year from $3.35 to $3.40 per share to $3.40 to $3.43 per share. This new EPS forecast represents a 19% to 20% increase over our 2008 results, excluding plant restructuring charges and litigation settlement. So 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. Melissa, please go ahead.

(Operator Instructions). Nik Modi, UBS.

Yes, thanks. Good morning, everyone. Just a quick -- I know there is a lot of focus on the laundry business, but can you just talk about, on the Personal Care side, the magnitude of some of the share gains? And in terms of category growth rates, what you are seeing this year just generally versus what you kind of expect to happen next year?

Nik, I don't want to -- we will be glad to give you a chart or give you stuff out of Nielsen on the share gains, but they are meaningful. As we said to you, the categories in terms of unit growth are not in good shape out there and that is what we really judge the economy by and by unit growth because, as I said, I don't expect any pricing actions next year given the state of commodities and that. The good news, as I said to you, we, threw our share gains, have grown both unit and dollar growth in our businesses this year and both our Household and Personal Care business is growing. So we are more than making up for that category softness right now and when those categories rebound when someday the economy recovers, we will get the benefit of that, having a higher share in a growing category. So we feel good.

As I read to you, we have got -- we are the only battery-powered toothbrush growing out there. We are growing our condoms business again, which has a superior 75% plus share. It is tough, Nik, but we are just in good shape and that marketing spending being up over 200 basis points is really driving it.

Great, and any thoughts, Jim, for some of these categories in terms of the unit growth maybe picking up next year? Are you expecting that or planning for that or are you still expecting weakness?

I think, Nik, there might be some slight improvement, but we are not expecting any major improvement next year. I certainly -- you have seen the numbers. Unemployment, while it is slowing down, it is still growing. I think most people are expecting pretty low single digit GNP growth out there and I think that is going to lead to a fairly continued weak economy. And I worry about share wars going on out there between competitors and that is why, in my eyes, I think you are going to see more acquisition opportunities as some of our competitors and certainly we will look to buy some good businesses to help drive our EPS growth out there.

Great. Thanks, Jim.

Chris Ferrara, Bank of America.

Hey, guys. Just wanted to see if you can give an update on the promotional environment? I guess what we have seen across the space through earnings season seems to be an increase in promotional level plans as opposed to three and six months ago. Like relative to what you thought and how you viewed the world three months ago, do you think promo is going to be a bigger piece of the mix than you had anticipated or maybe about the same?

It hasn't been a huge increase so far. It has been a little and it has been in certain categories. I don't think it is going to get heated up that much more. I think you might see a little more, but nothing significant. I think everybody is kind of realizing -- going out with more promotional activity is not a competitive advantage. Everybody can match that pretty quickly and then everybody loses as far as margin pressure on that stuff. So I think everybody -- all the competitors are being fairly rational. You are seeing maybe a little bit more competitive -- a little bit more merchandising spending in some categories, but nothing that is out of line with what we have seen in past times when things got more heated up. So I don't expect that much more, maybe a little more in 2010.

Great. That helps. And then I guess on the laundry category, I mean, look, obviously, you guys are at a significant price discount with ARM & HAMMER within liquid laundry. But trying to get a sense for the real deep levels of promotion that you have seen on Tide, right, across Wal-Mart and now Target now. It's been basically a $3 discount on a 100 ounce SKU from what we had seen traditionally. And I guess can you just go through a little bit what the impact is of that on the category? Like can the mid-tiers sustain the levels of pricing with the premium brand, Tide, at that low level and does it eventually ever trickle down into the lower tier of the category if you see mid-tier price movement?

Yes, Chris, you said it earlier. Keep in mind, our two brands, ARM & HAMMER, are one-half to one-third the starting price of Tide and that is a significant advantage. That is -- on a 100 ounce bottle, that is a $9 advantage on ARM & HAMMER and a $12 advantage on XTRA. So when you talk about a couple of dollar discount by the big guy, that is still -- we are way still below that.

So as you kind of alluded to, that kind of action is going to have more pressure on the mid-tier than it will have on the lower tier and that is what we have seen so far. That is what I expect to see continue going forward. And the good news is the laundry category overall has held up very well during the recession. And the gross margins in the category have improved over time, so I think you're going to continue to see pretty rational actions by the competitors. There will be some share shifting going along, but I don't think some of the discounting you see will have -- it will have, as it has had, very minimal impact on the value tier where we are the big player.

Great. Thanks a lot. I appreciate it.

Bill Schmitz, Deutsche Bank.

Good morning. When do you kind of figure out when the planograms are set? I was just kind of wondering what distribution looks like for next year or if it is just too early to talk about it?

It is really too early, Bill. Most of those actions happen in the mid to late first quarter of the year. Although I will say these days, the retailers in their efforts to try to help drive their business have gone from sometimes an annual change to more frequent changes through the year. But traditionally, a lot of that happens end of first quarter, beginning of second quarter of next year. So we really don't have a clear picture on the next round of planogram changes yet.

Got you. And obviously, the share trends are great. So I mean do you have sort of a view headed into the season how distribution looks relative to last year, just kind of like percentage change in your facings?

No, I don't have a number for that, Bill. We are very happy. Laundry in our business everybody kind of focuses on. We are strong now as we were at the beginning of this year. And what happens in the future really is out of our control, but we feel we have great relations with the retailers and we certainly presented them with a new product pipeline. I will say our new product pipeline, in my opinion, for next year is the best new product pipeline we have ever had. So I feel that, along with our increased marketing spending, puts us in a very good position to, at minimum, hold our distribution levels and hopefully grow our distribution level.

Okay, great. And then Matt, just one quick one. As you keep squirreling away cash until you find an acquisition, I mean what if nothing comes up? Will you kind of look at dividends and share repurchase again?

Well, we increased our dividend a few months ago, we doubled it. It didn't have a big dollar effect actually on the yield. It is a little bit less than a 1% yield now. But as you know, our number one destination for free cash flow historically has been TSR-accretive acquisitions. And our history is that we tend to buy something about every 18 months to 24 months. So our last acquisition was in July 2008, so it will be 18 months by the end of this year. But we are still sort of in the window where we would have built cash, knocked down our debt to EBITDA ratio, which you see now is 1.7. But with respect to returning cash to shareholders, we haven't bought back shares since the year 2000. Although that is something that is evaluated regularly by both management and the Board.

Okay and are you still thinking like eight times EBITDA synergized as kind of the right valuation multiple for the deals you are looking at?

Yes, that is one of the -- fully synergized, eight times EBITDA. That is one of the measures that we use, but obviously IRR is another important one as well. So we are not slaves just to that one.

Okay, great. Thank you so much.

Jason Gere, RBC Capital.

Hey, good morning, guys. Just two questions. One, I mean can we just talk a little bit about the Specialty business, lower margin, the sales have been really weighing down what has been a great performance in the rest of the portfolio. So other than -- I mean I know vertical integration is obviously a piece of that, but can you just talk a little bit about your commitment to the business maybe over the next couple of years?

Yes, we are very committed to it. It is a long-time historical part of the Company. It goes through cycles and it is in a downward part of the cycle right now. But I think as Matt said in his presentation, starting in Q1 next year, things will get more favorable in our eyes going forward. We do get benefits from having that business and while it is not -- it is about half the Company's gross margin on the gross margin line, we don't spend much on marketing. So on a bottom-line profitability basis, it is very comparable to other parts of our business. So it is not as much of a drag as you think it is on the bottom line. Matt, do you want to add anything to that?

Yes, that is the right way to think about it. It is not really a capital-intensive business and we do look at it from an operating margin basis as opposed to gross margin. And as Jim said, we do get an advantage in our domestic business by having the chemical business where we can source the bulk sodium bicarbonate.

Okay, so you would expect the organic sales next year to be positive?

For that business?

Yes, easy comps?

Yes, we would expect that, beginning in the first quarter, we would be flat to up although single digits and improving thereafter.

Okay. And then just a second question just on the gross margin. Clearly, this year, you guys have been reinvesting even more than 50% of your gross margin upside back into marketing. Is the right way next year to think about more gross margin upside and I think, Jim, you said that you would do over 100 basis points next year. More of that will flow to the bottom line to EBS?

Well, one of the things you heard me say, Jason, was that we are nearing the high end of the range for marketing. So there is no cookie-cutter percentage that we are really targeting. So we do have to react to where are we with new products, what are competitor actions, what does the economy look like. So we are probably -- it is probably 50 basis points higher or lower than where we are right now is probably the range. And remember, we went up almost 200 basis points in one year.

Yes, Jason, the good news, as Matt is saying, is we expect to deliver at least another 100 basis points of gross margin next year and that gives us the flexibility, depending on the competitive situation, the retailers and whatever's going on out there, to spend if we want to at least 50 basis points of that back. Whether we have to or not, we will look at it, but it really depends on what is going on out there in the business environment in terms of competition and the retail environment. But the great news is we have the flexibility to spend more if we need to because we are doing so well on the gross margin line.

Okay, great. And actually one last one and it's just a clarification. Just in terms of laundry in the past, maybe you guys have talked about high single digit type of shipment growth for next year. Are you still sticking behind that as you look into 2010? I know the planograms are not -- you are still working on that, but I was just wondering if you are still comfortable with that assumption out there.

Well, I don't think we have given any specific number yet. Keep in mind, we are lapping enormous growth rates in this year, but we still feel very well. Our new product pipeline, as I said, I'm very excited about. We're spending a lot more marketing dollars. We certainly expect to continue to grow our position next year and I think, in my mind, the economy will continue to be a friend to us as far as people seeking value in that. So we will give you clearer numbers on the first quarter when we come out projecting here, but I certainly expect to continue to grow our laundry business next year.

Okay, great. Thanks, guys.

Doug Lane, Jefferies.

Yes, hi, Jim and Matt. One question on laundry detergents on two other topics. Can you talk about any impact from the 13% price reduction of Cheer across the board and also any update on the impact of the private-label strategy to your largest retailer?

Yes, Doug, no, I really don't want to get into what our competitors are doing. I think our great business results speak for themselves and I suggest you call Cincinnati if you want to ask them why they are doing things like that. But our business -- if you watch our share trends on that, our business just continue to do exceptionally well.

And the private-label side, again, we are very aware of what retailers are doing out there. Keep in mind, private label as a percentage of the laundry category is still a very small factor; it is less than 5% share of the category. While it has seen some growth, it really has not been a major factor in the category because there are very strong value brands, including our two, which keep a tight rein on private label in that category.

And I ask about it because I know six, nine months ago, it was kind of an unknown and now that you have been out there with a lot of these retailers executing on the private-label strategy, there has been nothing that has really taken you by surprise?

No, nothing.

Okay. Shifting gears, I noticed J&J has a big restructuring and a 7% workforce reduction. Does that portend portfolio rationalization there three years after the Pfizer deal or what are you seeing in terms of possible properties from big pharma?

Yes, I mean I can't get specific, but as I told you, I think the environment is going to be right. We are seeing a lot more books on opportunities right now. I expect to see that going forward. I think you're going to see all types of companies, whether it is big pharma or CPGs, look to rationalize their portfolio. We ourselves are doing the same thing, looking at some of our smaller businesses. And I think you are going to see family business possibly decide it is time to get out with possible tax law changes coming along. And just the weak environment, the retailers looking at some of the weaker brands. I think there is a lot of reasons why you are going to see a lot more businesses put up for sale next year.

Now I will be very clear to you and have been consistent on this thing. We will only, only, only look at number one or two share brands in categories. We want -- we are agnostic between Household and Personal Care. We look for businesses that have growth opportunities and we usually like businesses in the $100 million, $200 million, $300 million range of sale to plug into our portfolio and drive synergies. That formula has been magic for us. It has driven tremendous accretion in our Company. It has driven us -- again, nine years ago, we only had one of our eight power brands. We have acquired seven of our eight power brands over the past nine years through acquisition, but that is because, when we stick to our formula, it works.

And I am just telling you, from what I see right now, I think there is going to be an opportunity to pick up some more power brands like that over the next 12 to 24 months because of all the reasons I have stated about what is going on out there that makes sense.

Okay, so just to wrap that up, Matt, it sounds like we are seeing substantial cash balances being built here. With the acquisition environment being, it sounds, relatively robust, we should just look for continued cash builds over the next couple of quarters?

Yes, if you look at our balance sheet or footnotes, you will see that we have mandatory repayments of our debt beginning next year. So we have $184 million we will be paying off of our debt in 2010. So we do have a destination for the cash coming up.

Okay, fair enough. Thanks.

Joe Altobello, Oppenheimer.

Thanks, good morning. First question I guess is in regard to 2010 and I know it is early and the planogram has not been set and everything, but is there anything structural in terms of category softness or the competitive environment that would keep you from achieving your evergreen targets next year?

Not from what we see right now, Joe.

Okay. And then in terms of a follow-up to that, I mean how are you guys thinking about the Pennsylvania plant? Is that going to be incremental to your gross margin target or is that within your evergreen target?

No, that is absolutely within our target of trying to get at least 100 basis points a year. It will be a major driver of that next year.

Okay. So it sounds like then that that is essentially within your numbers and it is not going to be anything additional to the evergreen that you are thinking about next year?

Joe, we are not calling 2010 today. We have always said that the new plant in Pennsylvania was going to be a big contributor and we will contribute the lion's share of 100 basis points increase in 2010, but we said that a long time ago. So we knew there was going to be big savings. As far as what else we will get from our normal Good to Great program and our work with our suppliers, we won't rack that up frankly until the first week of February.

Well, that is sort of my question. If you guys have other programs going on outside of the York plant --.

We always do, but remember, those programs, those continuous improvement programs are in place so that we can always overcome cost inflation. So there is a lot of variables involved, but as Jim points out, we feel good about the 100 basis points next year.

Okay, but you guys are not ratcheting back any of those programs?

No.

No, not at all.

That is part of the culture here.

Keep in mind, Joe, it took -- a lot of energy of our Company was focused on that York plant more than usual. So that York plant wasn't just a lucky strike extra. That did take a lot of our energy out of our cost saving initiatives. We do have lots of other programs going on there. So just stay tuned, quit licking your chops, just stay tuned until next February.

Okay. And then lastly I guess in terms of the charges, are you guys still expecting a charge in the first quarter of next year for the plant?

Yes, we will have some residual in the first quarter, but that is not something we will probably be calling out, it won't be big enough. It will be substantially done by the end of December.

Got it. Thank you.

Andrew Sawyer, Goldman Sachs.

Hey, good morning, guys. Just I have two quick ones. First, on some of your premium brands, you are hearing about -- talking about First Response, TROJAN, SpinBrush getting a little bit stronger. Do you feel like that is almost entirely being driven by the step-up in marketing or are you actually able to translate the two or is there any sense that the consumer is starting to move back towards these higher-priced products again?

No, Andrew. I would say it is almost totally due to our new products in those categories and our increased marketing spending. So in every one of those cases, we have had great new products come out and we have jacked up the marketing spending. In fact, on TROJAN and SpinBrush, we saved a lot of our marketing spending for the back half of this year behind the new product launches within the marketplace. So I wish it was due to more category strengthening, but we really haven't seen that yet at all.

Okay, but you are seeing a very nice return on your marketing dollars.

Very nice.

And then on the second question. As we think about scenario planning especially around these planograms, we had a company yesterday, Clorox, report and it sounds like in garbage bags where one of the competitors is starting to get a little bit of pressure on them and maybe at risk of losing shelf space in key retailers.

You are starting to see them act a little bit more in desperation mode. And I know you said that you haven't really seen that yet, but there are rumblings of some pretty nice movements in laundry detergent. I guess how are you guys thinking about when you approach these negotiations and when you come in with thoughts on promotional investment, etc., what are you thinking about in terms of managing those negotiations with competitors that could be in that type of a mode?

Andrew, I mean what I would tell you is the retailers are still very rational. I mean they want great new products; they want to see you supporting those new products with marketing spending. That is what is most important to them, honestly. They are not looking for somebody to come in and throw a lot of money on the table. In fact, that is usually a sign of, as you are saying, desperation by brands that are in trouble.

And the retailers are what they have always done, they want to give their customers the best new products in America at good values, but also the ones supported by marketing spending. So that is our strategy. We are going in there. I tell you, I am so excited about our new product pipeline next year. It's the best I have ever seen. As you have seen, we've jacked up our marketing spending by more than 200 basis points to all-time highs. That is very competitive if not more than competitive with most of our CPG competitors out there and that is driving share growth and the retailers want the guys who are growing their shares with new products and marketing spending. That is first and foremost in their mind. They honestly, from what we have seen when you walk in there, with share declines, no new products and you throw a bunch of money on the table, they honestly throw you out of the room. So that is -- we are on the other side of the table, making them excited and that is where we continue to be.

All right. Thanks a lot, guys.

Alice Longley, Buckingham Research.

Hi, good morning. My question is about gross margin expectations for next year. You are still guiding to a 100 basis point or more expansion and this is off of a base for this year that is higher than we all thought before and may be higher than what you expected because of the favorable commodity costs. And we know that commodity costs have now turned and they are going to become more of a pressure for next year. So I am trying to find out, figure out how I should be confident in this 100 basis point further expansion next year off of a higher base with commodity costs working against me or you. Have you come up with more cost-cutting programs over the last six months to make you confident that you can keep expanding gross margins from this higher base?

Alice, this is Matt. I think one thing to keep in mind is that we don't have guidance out, specific guidance for 2010. So absent that, you know we have an evergreen target of 100 basis points of gross margin expansion. And if you go back to the last five years, every year, we have either had flat or increasing gross margin year-over-year. So we have done it for a long, long time. And when we plan a year -- so when we look ahead to 2010, we assume that there is going to be commodity inflation and we assume that for 2010, 2011 and 2012. And that is why we put these programs in place and literally there are dozens and dozens of fees that affect our entire manufacturing footprint to try to figure out how we are going to be able to become more efficient and you can't do them all at once so you do have to plan when you were going to do them and sometimes some fall off the table, sometimes you get better savings than you thought.

But the Company is a continuous improvement company. That may be lost on some people, but when we talk about our Good to Great program, that corny name for our continuous improvement program, it is really the cornerstone of gross margin expansion annually.

So we have lots of programs in place for 2010. We do assume that we are going to have commodity inflation. And as Jim said, we put all of our energy into making sure this plant came up on time and on budget, which it has and that is going to be the biggest cornerstone for next year, for 2010, but there will be other things as well. So we are not -- we have our eyes open about commodity inflation next year, so we don't have the worries that you have.

Alice, let me add to that too. You are right. We see, if anything, potential upward pressure on commodities next year, but our secret weapon is that plant. We have lots of programs with that plant. Don't forget, our largest business is liquid laundry. That new plant is going to be much more efficient than the plant we are closing down. It is up and running. It was a great time to build a plant and we did it. So having that major capital initiative gives us the confidence, despite the upward pressure on commodities and everything else, that we can get to that 100 basis point improvement next year.

But we are dealing with lots of stuff out there that we have to offset and that is what all those other programs help us do and the new plant helps us do. But I think it is going to be very hard for a lot of companies to grow gross margin next year, but we, again, for the last 18 months, have been working on this new plant and it is up and running. It will be fully operational in the first quarter of next year and that combined with all the other programs we feel will enable us to offset the commodity pressure and deliver at least 100 basis points of gross margin in 2010.

All right. And then my other question is about organic growth. As you said for this year, your marketshare gains are being driven a lot by the intensification of the advertising ratio, which isn't going to happen next year. And the markets are going to be slower because there is no pricing. So I am trying to figure out with no incremental advertising ratio expansion and the categories maybe flat, how are you going to get organic growth?

Well, Alice, the way I would answer that is if you studied our share of voice and share of market, you would see right now that our share of voice is well in excess of our share of market in almost every one of our categories. That is driving our share growth. That ratio we expect to continue -- even if we just hold marketing flat, and I didn't say we are going to, we may increase a little, but even if we just hold marketing flat, our share of voice will continue to exceed our share of market in the marketplace, which traditionally drives share gain. So again, we are going to have the advantage in the marketplace through the kind of spending we are doing right now because we are outspending our share of market in terms of advertising, which is driving share growth and I see that happening next year.

Thanks.

Bill Chappell, SunTrust.

Good morning. This is [Mike Schwartz] filling in for Bill Chappell. My first question, not to beat a dead horse here, but with regards to the early startup of the new laundry facility, can you quantify how much of an impact, if any, that had on gross margin during the quarter and do you expect any of that 2010 benefit that you guys are looking at to shift in 2009 with the early startup?

Appreciate your bluntness and the answer is no.

Okay, great. Thank you. And then my second question is with regards to Wal-Mart's new store setups under Project Impact, are you seeing any shelf space additions for some of your products, particularly in the laundry category?

Are you talking round one or round two?

Round two.

No, nothing has been decided on that yet by Wal-Mart as far as I know.

Okay. Thank you. That's all I had.

John Faucher, JPMorgan.

Yes, thank you. So just to follow up on the organic revenue growth question, I guess what we are looking at here is you guys are actually putting up units although the categories are probably seeing units decline here. And I guess as we look at the organic growth next year with basically no pricing, what drives the category improvement from a unit perspective? Is it simply that consumers have taken down the inventory too much? Is it that retailers have taken down the inventory too much or do you need the economy to bounce back in order to get the units moving again? Thanks.

The economy to bounce back.

Okay.

Connie Maneaty, BMO Capital.

Good morning. I was curious about the comment you made -- maybe it was just in passing, I am not sure -- that you were giving your own portfolio a look for the divestiture maybe of minor brands. I think we are all clear on what your criteria are for acquisitions, but what would your criteria for minor brand divestitures be?

Connie, this is Matt. As you know, we haven't divested too many businesses. We divested the Del minor brands recently. We typically are going to be selling something that creates a lot of complexity in the Company that would have marginal profitability that we don't see has a future for -- a future drive of either gross margin expansion or top-line growth. So if you have got a flat grower, if you have something that has gross margin that -- especially if they are lower than the corporate gross margins, which is the inverse of what we would want to buy, we acquire things that have higher than average gross margin, we like to sell things that have lower than average gross margins and something that is going to be growing at less than 3% to 4% or maybe even flat.

And just to expand on that a little, as some retailers go to a more efficient assortment, for that small portion of your portfolio that might not qualify for more shelf space or might even get cut, even if it is profitable, would those products be considered divestiture candidates?

Yes, I think we are no different than any other CPG company. We are fortunate that 80% of our revenues and profits come from eight brands, which is actually a strength of this Company. So the [tail brand] thing is not a phenomenon to Church & Dwight. I do think you are correct in saying that the whole trend towards clarity of assortment and fewer brands and SKUs is going to make all CPG companies evaluate their tail brands to see which ones would be the survivors. So we are no different. We would look at it the same way.

Okay. And do you expect to make some divestitures next year?

No, I wouldn't comment on that right now.

Allrighty. Thank you very much.

(Operator Instructions).

Operator, I think we have had a thorough round of questions. If anybody else has any more questions, I would ask you to contact Maureen Usifer in our Company. We would be very glad to help you out and I want to thank you all for taking the time to participate in our call today. Again, we really are feeling wonderful about our great results. We are feeling as bullish as you can feel in this kind of economic environment out there and I think we are going to hopefully pleasantly please you going forward in the future as this Company continues its great momentum and thank you for taking the time today.

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today's conference. You may now disconnect. Have a great day.