切遲杜威 (CHD) 2009 Q4 法說會逐字稿

Good afternoon. There's still serving the entrees here, but I want to thank you all for coming to our presentation today. Our timing is quite precipitous. There's a foot of snow tomorrow, but we'll guarantee to get you out of here before the snow starts hitting today. We have a very full agenda. I have a few opening remarks on the second and then Matt will come up here and give you some more color on the Q4 and total 2009 financials. I'll then give you more details about the business in terms of share and what's going on with our competition and then I'll tell you about our outlook on 2010 and then we would be glad to take any questions from the floor.

What I want to say to you is our business results reflect an organization that's highly motivated and firing on all cylinders. Our unique product portfolio consisting of premium and value brands puts us in a position to thrive in any economy, as shown by our consistently strong EPS growth over the past 10 years. In the recessionary economy over the past year, our value brand, which are 40% of our portfolio, have experienced exceptional growth. We smartly reinvested some of the profits from that into increased marketing spending in our premium brands, behind some exciting new products to drive share growth in those brands, despite weakening consumer demand in many of our categories.

Now, on the cost side of our business, our supply team is working very closely with our business teams to deliver exceptional gross margin expansion. We also kept a very tight reign on overhead costs, as proven by the fact that we have the same number of employees today as we had four years ago, despite a 50% increase in sales during that time. And finally, we squeezed more dollars out of our working capital to drive a significant increase in our cash flow. That increased cash flow and a strong balance sheet has enabled us to smartly invest in our future, through investments in our supply chain, such as the brand-new laundry plan we just finished in York, Pennsylvania, that will further lower our cost structure and strengthen our future competitive advantage. All of these factors make me feel very bullish about my Company's future, despite the very tough, and I would say toughening business environment we face going forward. In my biased opinion, no other consumer packaged goods company 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're taking actions to ensure that we continue to deliver EPS growth going forward, regardless of the future economic environment.

Now, before I go forward, let me just say, that was my opening remarks, that's [our pretty product line], Safe Harbor Statement, we're going to make forward-looking statements today. They are based on our best intentions and our best forecasts, but they are based on factors that could be out of our control, so if you believe anything we say today, proceed at your own risk. With that, I'll now turn the podium over to Matt, who is going to come up here and provide greater insults on our financial results for the fourth quarter and for the total year. Did I say insult? Insight. He has insult, too. Hang in there.

Have to get that corrected in the script, Jim. Okay. I'm going to start with the fourth quarter. I'm sure everybody has read the release. One thing that's most remarkable about the third quarter is although we had 3% organic growth total Company that we had 5% organic growth for total consumer. And of course the difference between that is our specialty products business. Specialty products business had a really rugged 2009 after a great 2008, and that took our organic growth rate from five to three. Gross margin has been up all year long, so again, 400 basis points in the fourth quarter, and operating margin up 210.

Here's some of the numbers, just a couple of things to point out here. You know that our model is such that when we expand gross margin, we also spend back in the marketing line and you see marketing was up in the fourth quarter 120 basis points. Now, this is the fifth consecutive quarter that we've put marketing into overdrive. Jim's going to talk about that a little bit later on, what impact that's going to have on our 2010 call. Down the page a little bit more, SG&A, SG&A was a little bit high in the fourth quarter. Reasons for that is R&D. So we were up about $8 million year-over-year and SG&A, $92 million going to $100 million. And $4 million of that was R&D and another $2.5 million was FX. You can see the rest, effective tax rate up a little bit year-over-year and EPS up 26%. And then fourth quarter, five of our eight power brands grew share in the fourth quarter. As you know, we talk about our power brands all the time, because it's 80% of our revenues and profit. In 2008, we had eight out of eight group share and in the fourth quarter, we had five of eight. I'm going to show you a slide in a minute for the full year.

Full year number, so EPS up 22%, and organic up 5% for the Company, and 7% for consumers. That's domestic plus international combined up 7%. And I'm going to show you a chart in a minute that's going to show you the breakout between volume and price mix of that 7%. Remember, the reason it's 5% total company and 7% for consumer is because of the specialty products business drag. Gross margin is consistent with the fourth quarter. Full year is up 430 basis points. And free cash flow is up to $339 million. That number, by the way, excludes our new plant, with $85 million of spending on our new plant in York County, Pennsylvania. And we have set a legal settlement which after tax helped us by $12 million in 2009. That is also excluded from the $339 million. Here's the numbers if you roll down the page again, you get another appreciation for what our model is. If you have 7% consumer growth, so that's the backdrop for the call for 2010, which is 5%. So now going down the page, you see marketing as a percentage of sales, up 190 basis points. So it's about half of the gross margin increase. Operating margin up 220. And again, EPS and free cash flow up significantly year-over-year. And here's the slide I mentioned before. In the fourth quarter we had five of eight. On a full year basis, seven of eight power brands were up year-over-year and we have a similar objective for next year.

Here's how the quarter has worked out in 2009. You can see we're up double digit each of the quarters. The Southside analysts are consumed with the quarterly numbers, we're not. We're more focused on the full year, but if you look at how this, this shook out in 2009, the reason it's in here is because 2010 is going to look just like this. So we expect our very first quarter to be our biggest quarter. And Jim's going to talk about that call in a few minutes. And here's the last three, so the backdrop has been up 7%, up 5%, up 7%, so this is organic growth total Company, all in. But this is the backdrop for the 4% to 5% call for 2010. And here's a little more detail. If you look at what are the components of the 5% total Company growth in 2009, you see consumer on the far right is up 7%, but specialty was down 11%. So that's net down 5%. And the highlighted number on this slide is volume. So consumer volume in 2009 was up 5%. Now, price mix helped us by 2%, so that's how we got to 7%. You don't expect price to be helping you in 2010, but the important thing is volume. How did volume perform in 2009? So again, since 2010 is going to be more of a volume year than price, this also gives us a lot of confidence. And here's the gross margin history. You see 39.1 going to 44.8 for 2007, up 430 basis points in 2009.

I'll stop on this one for a minute. This is a little bridge. Where did the 430 basis points come from? So, we, like all PPG companies had the benefit of lower raw material prices in 2009. That helped us by 200 basis points of gross margin. We have our good to grade program, which we talk about all the time. This is a program where we have hundreds of products that are directed towards improving the efficiencies within our Company and year-over-year, it's a contributor to gross margin expansion. And then price mix, you knew we took lots of price up in the fourth quarter of 2008. We got 130 basis points net help from that. And then finally, Orajel, we acquired Orajel in July of 2008, so we have a full year benefit of that in 2009 and that added 50 basis points. So that is the math to get to 430 year-over-year.

Free cash flow, we're very focused on free cash flow within the Company. 25% of our incentive comp is tied to free cash flow targets, and so if -- our definition of free cash flow, by the way, is operating cash minus CapEx. So we just used base CapEx in this equation. That's because we spent $50 million in 2008 and $85 million in 2009 on new plant. So base CapEx around $50 million, so we go 200, 289, 339, and free cash flow conversion again, that's a comparison of free cash flow, so your net income, again, well over 100% each of the last three years. And we're targeting a similar result in 2010. And here is the CapEx slide. So you can see the 2007, 2008, 2009, base CapEx, 49, 47, and 50. And you can see what we spent on the new plant in 2008 was 51 and 85 in 2009. But we typically are around, you know, 2% to 2.5% of sales per CapEx. And looking ahead to next year, you may have noticed in our release that we are doing an SAP upgrade, which we expect CapEx to be around $60 million to $70 million in 2010. So the lion's share of that increase is the SAP implementation.

And then here's our balance sheet. Jim talked a lot about our strong balance sheet. This is the reason why we're always on the hunt for new acquisitions. You can see we've been improving that markedly over the past couple of years. Just to give you some statistics, we have $450 million in cash on the balance sheet right now. And we have $180 million of undrawn lines and you can see our net debt to EBITDA is 0.7. So strong balance sheet. And I'm going to end on this slide here.

This Company is totally focused on total shareholder return. These, these items here are in order deliberately, so number one is CSR accretive acquisitions. The acquisitions, we acquire something generally about every 18 to 24 months. So we bought Orajel in 2008. We bought OxiClean in 2006. New product development, biggest one there, you've seen it more recently is Arm & Hammer with OxiClean. CapEx organic growth, obviously we spent a lot of money in that plant. Debt reduction, we're very vigilant about our total debt to EBITDA ratio, our target is 2 to 3, but we've been well below it for a good period of time. Return to shareholders, is last on the list, something that we and the board reevaluate just about every board meeting, but we've concluded that the best use of our cash is the number one use of our cash would be TSR, accretive acquisitions. With that, I'm going to bring Jim back up.

Thanks, Matt. I'll try to give you some insights on the business right now going forward. I'll save the insults when you ask about my competition in the Q&A. Here's my favorite slide. I always want to show this. What a great Company we have. We are involved with 688 trillion chocolate chip cookies. We have 7 billion-gallons of milk coming from the animal division business. We have 5 billion teeth brushings every year from our business. We have 740 million loads of laundry done with OxiClean. And 520 million sex acts. Don't necessarily happen in that order. It's a fun Company to be involved with on an everyday basis. We have over 80 brands in our Company, but we have eight power brands we call them that do 80% of our sales and profits. That's where we focus the bulk of our marketing spending and our success heavily rides on those and those brands are premium brands and market leader across the board as you can see from that chart.

Now, this is the part you always think of Church & Dwight, you have to think of this. Our Company is very unique. Nobody else that I know of has this kind of a portfolio. 40% value of our revenue base, 60% premium. Now, okay, you call us lucky, whatever you want to call us. In a recessionary economy, value brands are thriving. I always want to show you, what does that mean? That's not $0.10. That's a lot of money. In the longest category, our biggest business, a very big driver with consumers, constantly purchase, here's the index if you look out there comparing the key brands within the marketplace. Tide, the most premium brand out there, you give that a 100 index. How does everything else compare? As you can see on this chart, Arm & Hammer would be a 48 index to Tide. XTRA would be a 32 index to Tide, half to one third the price of Tide. I want to make a point. You've heard a lot about price declines by one of our competitors. Cheer and Era were taking price declines on. Cheer used to be 100. It's now at 86. Who cares. Era used to be about a 70. It's now a 54. A little closer, a little more to worry about, but you're talking about a 1.5 share brand, maybe 2 on its best day, a third of our size. So don't get overly worked up about what is going on with the competition. We still have significant price advantages in the market place versus the bulk of our competitors, which is why our brands have done so well.

Folks, this is what's going on. Makes total sense. Consumers have shifted from premium and mid tier brands to premium brands. This is Nielsen Homescan data from the market place, we didn't make this up. It's hard core data. You can see the kind of shift going on from the premium brands and mid tier brands to value and extreme value. Get this number. We have captured 90% of the growth in the value tier over the last year. Better yet, we have captured 80% of the liquid laundry growth in 2009 for the total category. We've had a great year. People are coming to value. It makes total sense. It's a recession, folks. 17% of this country is unemployed. You're going to ask, I'll beat you to the question, hey, Jim, is the economy recovered? Is this going to stick to the ribs, or is this going to flow back to the mid tier and premium tiers. I won't answer the question, I will let two credible sources answer the question. Adage in May of this year did a whole study, whole point was that consumers are now trading down, making smart choices. In their own research, we had nothing to do with this, they saw Tide, they picked it out, God knows why, 19% of Tide users were trading down. They said 80% of those people are likely to keep trading down. Better yet, a little known consulting firm named McKenzie did a study in August and November of this year, talked about the new normal for consumers. Two things they saw, two shifts going on. Changes in ability to pay. Okay. No kidding. People don't have as much money as they used to. And better yet, changes in perception. And as a result of both shifts, quote from McKenzie, majority of consumers claim they will stick with lower price brands. What does that mean? Question? What about liquid laundry? McKenzie did this study across many categories. I'll give you the ones on laundry, most important to us. McKenzie's numbers, 20% of consumers have traded down in the laundry category. 48% of those consumers have better experience than they expected. Net, 10% of the business they see shifting down in the business. We love that. We're the ones that are there waiting for it.

Here's other good news. Not only are value detergents growing. What? That's driving the growth of laundry additives, like OxiClean, Shout, things like that. That category is up 10% in 2009 and 65% of that growth is coming from the growth of value laundry buyers. Hey, why? That's just not, again, being stupid. That's being very smart. If you take a value laundry detergent like our XTRA, it costs about $0.065 a load. For a really tough stain, you can throw in scoop of laundry additives like OxiClean and it costs you $0.11 a load. For a total of $0.17 you can get the cleaning power of a premium detergent which costs you 29% more. So really smart consumers are realizing they can get the same performance of a premium brand for almost 30% less by buying a value detergent and a laundry additive. I told you many times before, for everyday sweat, all you need is a detergent. You don't need a laundry additive. For really tough stains, blood stains, grass stains then throw in the laundry additive or buy the premium brand, but smart consumers are realizing they can save significant dollars by buying a value detergent and when necessary, tossing in a scoop of a laundry additive. Guess what brand that benefits. Thank you. OxiClean. Our number one brand of laundry additive category, our sales were up 16% last year. Our share is up to a 38, almost up three points last year. Keep in mind, we bought this business three years ago with 26 share of market. We've grown that with our marketing power and sales power to a 38 share. You might also wonder, somebody else entered this category this past year. Now you know why. Hey, that's our value business. Value business has been doing great.

Let's talk about the premium side, 60% of our business. We have smartly taken the growth we've had in the value side, taken some of that, taken some of the gross margin growth, and poured it into higher marketing dollars on our power brands. Why? You can only go back to [Maguay Hills] Research years ago, back in the 1980s, last big recession. Companies in this case just held their marketing spending, didn't cut it, versus companies that cut it, did hugely better in the years after the recession ended. It makes total sense, research proves it. What have we done? This past year we increased our marketing spending by $60 million and two years before that, was up $77 million in total for $137 million total over the last three years we invest in our business.

What have we done with that money? Look, we've done a lot of studies. In our eyes, when your share of voice, your share of the advertising in the category gets to an index of 150 over your share of market, it really drives your business ahead, results in share increases, and we show in all the categories we've done that in the past two years. What's the result? Hey, this past year, Arm & Hammer liquid laundry detergent grew eight times faster than the category. XTRA grew six times faster than the category. OxiClean, two times faster in the category that had good growth past year, as I just told you. Arm & Hammer clumping cat litter grew three times faster in the category. Condoms, not too much growth, but we grew 1.5 times faster in the category. I got a really good success story on that one coming up. SpinBrush, top category, premium tooth brush, you are paying $6 as much as $100 for a tooth brush, a category that was hurt last year in the recession. We actually grew. Same thing in diagnostics, very expensive, pregnancy tests cost any where from $8 to $20, category suffered this past year. We grew because we increased the marketing spending in the category. Across the board, our increased marketing investment is paying off. We are growing faster in the categories and we're gaining share. In fact, if you look over the last three years over our eight power brands, that's 24 opportunities over three years, eight times three. We have beaten the category growth 20 out of 24 times. I defy any other CPG company to show that chart for their power brands. I can't believe they will even come close to that.

Let me talk about 2010 for a minute. Hey, business environment, folks, it's going to be even tougher than 2009. You got four things going on. You got a minimal economic rebound. Do the numbers. There is going to be more unemployment over the course of 2010, even if it stays where it is right now, than there was in 2009 where it was building. You got a rough economy. Two, you got companies spending more on trade spending, try to buy their share back. Add that to the fact there won't be any pricing in 2010, which helps businesses out there. So no pricing, increased trade spending. Three, you got continued SKU rationalization. You saw the news the other day. I thought it was quite shocking, but it's very typical. Glad and Hefty were thrown out of the sandwich category in one of our major customers. It's that big. It's not just the little guys. That pressure is across the board. Four, commodities, which were favorable in the past year, are headwinds. So you've got, in my mind, is a much tougher business environment out there in 2010 than even 2009. Yet we will be very successful in that environment for all the reasons I've told you and more to come here.

First, we have, and I'm serious about this, the best new product pipeline ever out there. We're going to continue strong marketing support. We're going to continue our gross margin improvement and we're positioned well for acquisitions. I'll tell you about each one of these here. The pipeline is great. It's the best I've ever seen. In laundry detergent, we're launching what we call power gels, which have the new formula in the detergents and is much more powerful in the cleaning of these laundry detergents going out there, better than watery liquids, launching shortly in our Arm & Hammer line. In OxiClean we have a whole line called Max Force, which gives you better stain fighting than ever before across the line, will come in every form, including a new little powder puck going out there that's been successful. So -- one of our competitors. It's better cleaning line than OxiClean going out there.

Condoms, I don't want to fall off the podium here. Hang on a second. This is so hot, I can't stand still here. This story, condom business is on fire, literally. About the second quarter of last year we launched Ecstasy which is a new shaped condom, more sensitive. This is already, in six months, the number one selling condom in America. It's the best new product launch we've ever had. In fact, we couldn't keep up with demand on this until late in the fourth quarter of this year. We're finally catching up with the demand for this product. We're going -- that's going to ride into 2010. On top of that, we're about to launch a new product called Fire & Ice. It's in the lubricant category, it's been very successful for KY Jelly. We're leveraging off of that idea with our own version of it. It's got very interesting lubricants on the inside and outside of the condom, very unique experience. Literally this business is going to be on fire. We just hit an all time record share in the latest four weeks, almost 77. I honestly believe this business could hit an 80 share in 2010 based on the success of these two new products.

SpinBrush, the number one battery tooth brush for the past 17 quarters. We had a huge success in 2009. We launched the Sonic battery powered SpinBrush. Sonic SpinBrushes spin much faster than a normal SpinBrush would. Better cleaning power out of it. Highly successful, the fastest growing brush in the category. Just in this past month, got a Best Buy rating by a top consumer magazine. I'm not allowed to say their name, but you think of the top consumer magazine out there, just got a Best Buy of all tooth brushes out there, which is their top rating. We're leveraging success, we're launching a rechargeable version of that out there in 2010. You get all the benefits of rechargeable brushes out there at about 65% lower cost. So great technology at a low cost. Had a great success in driving our SpinBrush business. Again, we were one of the only guys in the whole tooth brush category who were up last year in a down overall category.

First Response, this is a business, again, had a tough year last year. If you know the history of pregnancy kits, every day sooner you can get a reading before the missed period counts. When the world has four days, then it went to five days, big jump in the business. We're the first guys coming out with the test will read six days before the missed period. A day doesn't sound like much, but if you're pregnant or you don't want to be pregnant, that day is an eternity. We're the first folks out there with it just launching into the market place. Last year we're still riding the success, we launched a fertility test out on the market place that's been very successful. Big new news on First Response.

Last, but not least, Nair, we had great success last year with a product called Shower Power. 90% of women love to shave their legs in the shower. Until that product was launched, you couldn't use a depilatory with a wash clothe before it had its effect. With this product, you can apply it to your leg, get in the shower, scrape it off and have all the benefits of a depilatory which takes the hair off right at the skin level, where a razor blade leaves nubs and that and also it last twice as long as shaving. We did that last year. We are launching a new form this year with a pump. Again, continued good success for that business.

And there's more to come. We have one or more major product innovation to launch in the back half of the year. I can't tell you what it is. I don't want to tip off the competition, but it is big and you'll hear about it as soon as it's ready, as soon as we announce it to the trade.

Strong marketing support. What I'll tell you on this, we're going to be 14% plus or minus of sales. Again, we went up 190 basis points in the last year. Extra $60 million in spending. We'll be in that neighborhood in 2010, very strong levels. And keep in mind, our share of voice, that will give us share of voice, greater than share of market in almost every one of our segments, and not just slightly bigger, but way bigger. Again, we're going to have that share of voice out there and continue to drive share gains in the marketplace. Again, as Matt showed you before, four to five, I think I'm a little surprised. Some of you look like that's something new for us. That's not new four us at all. We've done 5,7,5 in the last two years. In fact, 2009, as Matt told you, the consumer business, which is 90% of our business, did seven. So actually we're stepping out a little bit to four to five. SPD, which was a drag last year, is no longer a drive. Middle markets come back around and SPD will be a growth side this year. We feel very comfortable coming out with a number that you might think is pretty aggressive. Our history says that's not aggressive and we feel very comfortable coming out in a very tough environment with our great new product pipeline and with our marketing support. And sorry, I have to brag a little bit, if I haven't already. We're going to have our first billion dollar brand. Arm & Hammer will cross $1 billion dollars in 2010. I know some of our competitors have 21 or 22 or 23 of those, but we have our first one. We're crossing into the big leagues on this one and we're very proud of it as this brand continues to grow.

Gross margin improvement is going to continue. If you look what's going on with gross margins it's interesting. We've got a new a laundry plant. We've been bragging about it. We commissioned it a couple weeks ago. It's incredible. It's out in York, Pennsylvania. If anyone wants to visit it, we'll set up a day to go see it. I've seen a lot of plants in my time, but I've never seen a plant as incredible as this plant. It's pumping out laundry bottles like crazy. It came out ahead of schedule and ahead of budget. It's going to deliver significant savings to us and keep in mind, this is our biggest business, laundry, so it's very important. Cost savings from the good to grade program, Corning name will continue. Lots of projects going on in all of our businesses to save money. The three head winds, raw materials, which were up, favorability coming into this year, we think are going to be a drag on the year. Trade spending, you're reading about it, we're seeing it out there. Competitors are spending more in trade lines to try to win back their business. And business mix. This is kind of a funny one. SPD will have volume growth, but because it's margin is grower, it will be a slight drag on gross margin. Net-net, we'll be up on gross margin. We always target about 100 basis points. We did 100 the prior four years up until 2009. We just did over 400 in 2009 itself. We're targeting 100 basis points. It will be plus or minus. If things go on out there with promotional spending we will react to it. We are not going to let anyone have an advantage from us. So, we'll be in that ballpark. A little early in the year to call it exactly. It will definitely be up. It will be about that range, whether it's a little less, a little more, wait till you see what happens.

That's a picture of our new plant, 1.1 million square feet out in York, Pennsylvania. Incredible facility. Over 200 trucks a day go flowing out of there with products. It's just unbelievable automation with this plant going on, that it gives us the ability to compete even more effectively in the laundry business going forward and help continue to drive our gross margins up. And it all ends up with continued strong EPS growth. At this point in time, we're coming out a little aggressive, 13% to 15%, so you can honestly see that's not unusual for us in the past, having done 19%, 16% and 22%. I would tell you to try to put together your pro formas, put 4% to 5% on the top line, put 13% to 15% on the bottom line. You figure out the rest in between. Things will flow around. I'll guarantee you those two numbers.

And finally, we're positioned for acquisitions. Matt told you we're sitting on $450 million in cash. We have $180 million in undrawn facilities. Our debt to EBITDA is very low. And we got $300 million more of cash flow coming in this year. So we're actively working on that. You can't count them until you sign the papers. There's opportunities out there. But you never know what happens until the day comes. We're well positioned for that. As Matt said to you, we've had a great history here. Keep in mind, we're not going to buy junk and we're not going to over pay for anything premium. We want businesses that are primarily number one or two share brands. We want higher growth, higher margin brands. We want asset light. I don't want plants, I don't want headquarters, we want totally integrate into our current business. Leverage that capital base of ours and manufacturing logistics and purchasing, and delivers sustainable competitive advantages and we've had a great track record. This chart shows our track record since 2000. You've heard us say before we have eight power brands that do 80% of our revenues in profits. We acquired seven of those in the past 10 years. We hope to add to that going forward. Love to buy in another power brand to add to our portfolio that fits the dynamics I just told you. We're working on it. I do think the M&A market is heating up. Good or bad, there's now, because of the capital markets have opened up, people who wanted to sell are now going out to try to sell. I will tell you the competition is a little fiercer. I think a lot of other companies who don't have the organic growth we have are seeing acquisitions as the only way they can drive EPS accretion on the bottom line. So I think you'll see more competition out there. Again, we're actively working on it. We're well positioned for it. We're in a great position money wise and we hope it happens this year.

However, let me make it perfectly clear, all the numbers I quoted to you, 4 to 5, 13 to 15 EPS, there's nothing built in there for acquisitions and there's nothing built in there right now for any use of our cash other than it sitting in the bank. Okay. Now, I guarantee you over the course of this year, if we don't make an acquisition, we're not going to sit with money in the bank. Whether we buy back stock or do something, we'll figure that out, but right now we're actively working on some acquisitions, keeping our powder dry, and if they don't happen sometime this year we're likely to take action with our cash. But right now we prefer to find a next great acquisition to add to our power brands out there.

First quarter, little guidance for you. Organic, up 5%. And EPS, as Matt told you, first quarter historically is our strongest quarter. So don't get funny here on me and say take your calculator out or your brain out and do four times this is 420 to 440. You only called $4. There is about $3.90 to $4, Jim. It's always our strongest quarter. Don't go crazy us on. We're telling you right now we think we'll be in that range. We'll come down a little bit off it off the other quarters like we do every year.

That's about it. Would be glad to open the floor now and Matt and I will do our best for Q&A. I would just tell you I feel great about our business. We're in great shape. We just had another great year. But it's going to be tough. It's going to be even tougher than ever out there in 2010, given the economic environment that all companies are facing. But again, I think we are well positioned, if not the best position to take advantage of it because of our unique portfolio, because of our great new product pipeline, because of our increased marketing spending we've been spending out there, and I think it will continue to pay off, but it will be tough. Take the numbers I gave you and put them in the bank. Alice?

(Inaudible)

It will be the largest driver of gross margin. I won't give you a number. No. No. Next? No. It will be big. I don't want to quantify. The plan actually came up a little faster than we scheduled, so we got a little benefit and a little tiny benefit in 2009, but still the bulk is coming in 2010.

(Inaudible)

But we have other cost saving projects, too. We have a whole slew of other stuff going on with the [clause state] and the plant by far will be the biggest benefit to it. There are other positive benefits and then there's a drag. Net it out, we'll be in the ballpark of 100. I don't want to get into quantifying every one of those that go on. As you go through the quarters of the year, you watch. Alice how do I -- promotion activity by competition, it changes every day. I get news on that, I have to react to it. That's a drag. Commodity, look at oil. Oil's been popping up and down like a cork out there in the ocean, as we hear things going on in foreign governments. There's a lot of balls in the air right now juggling. I think we know enough about our capabilities in this plant. We feel comfortable saying target around 100. Could come in a little less. Could come in a little more. Feel confident enough to give that ballpark right now, but there's probably more balls in the air right now than there have been in any year right now. Thank God we have new plants.

I would tell you, too, I should have said when I mentioned that plant, that plant has space to integrate other businesses. We already have one project. We're bringing another business to that plant, which will generate savings more in 2011. We have land next to that plant, with that plant. We can expand that plant another 50%. This is our new super plant that's going to help us not only this year, but in future years drive future gross margin improvement and already actions are under way to do that for years to come. So it's, it was a big new thing. Big -- we talk about it as an acquisition. It was $150 million we sunk into the ground out in York, Pennsylvania and it's having the kind of benefit that an acquisition would have to us. But I will not give you a number. Bill?

Two questions. I guess can you talk a little bit more about the commodity front, where we stand today? Typically you do some hedging for core buying, where you're locked in and where you're more exposed. And then also, I know in the past on acquisitions you said you don't care whether it's Personal Care or Household. How about in terms of value versus premium? Is there a strong benefit after going through these past two years that you would like to have more exposure beyond laundry and pregnancy kits in terms of being value exposed?

I'll take the second one first and I'll let Matt answer the one on commodity hedging. We are agnostic between Household and Personal Care. I would tell you we probably -- we prefer more premium than value side. Not that I wouldn't look at a value business, but I already feel we have very strong value side of the equation in a lot of the categories. We have, again, value laundry, we have value toothpaste, we have value pregnancy kits out there. So we already have a good value side. I don't think I would buy into a large value based business out there at this point I would be much more prone to buy -- we want higher margins, higher growth, so that's kind of where are heads are on buying more premium power brands out there. Matt on the hedging?

Yes, with respect to our commodities, you probably know, Bill, that the big ones for us would be resin, surfactants and you have things like fatty acid distillate, latex, diesel, and paper. Every one of those is red arrows right now, is up, some as much as 7% year-over-year. We have hedge, we have physical hedges and we also have financial hedges. Financial hedges typically on diesel. So right now we have 25% of our diesel need that's locked in for next year. And for a number of the other ones we have higher locked in for physical hedges in our contract. So we acted a little bit earlier with respect to 2010 and it's going to pay off for us. You can see that in our call. Yes, Jason.

For 2009, I guess it was more share gain than category growth given destocking, can you talk about the four to five. What are you assuming in terms of share gain, maybe the planet gram resets that were out there, and then on the same context, category growth, do you see that really as more second half weighted or do you think the innovations you're seeing from your competitors is going to try and get people to start spending again?

Yes, well, let me try to answer that. If you look at 2009 at just FDMX, excluding the big guy in Bentonville, Wal-Mart, only six of our categories showed dollar growth. Only one of our categories had unit growth. Pretty scary. That's pretty typical what's going on out there. Think forward 2010, there's no pricing by anybody, anywhere almost. So pricing would benefit a dollar growth in 2009 if it isn't there for 2010. So 2010 to me is the year of units, and some of you have been very wise and said that in your reports. It's all about unit growth next year, so it's all going to be about if you want to gain, grow revenue, you got to grow your share. And I think you see companies realizing that and getting more aggressive on the promotion side, because they are not going to be able to lay back and take price increases and have the price increase flow through. The general economy, where people are trading down and actually honestly buying less, shown by the unit growth in 2009. I don't see that getting better as far as first half, second half. I don't -- I think overall the year is going to be a pretty sucky year, as far as, that's the technical economic term, as far as if you're counting on dollar growth in your category, you better have a pretty good reason for it.

It's going to be a unit growth year. It's going to be a share war year. And companies -- therefore, how do you win that? Great new products, increased marketing support, whether it's on the ad line preferably or the trade line if you have to, and you better be out there battling for it. It's going to be tough. When you get the retailers getting tough on SKU consolidation, it's a really tough environment. So I think, again, we didn't wake up yesterday. We invested in the marketing, as you saw the last three years, a lot in the past year, pipeline, new product line has been pumped up. You know me. I'm usually conservative start of the year. I wouldn't be this bold coming out the door if I didn't feel good about it. I feel good about it, that you mentioned distribution. I'm not going talk accounts at all. I will just tell you so far, it's positive for us on what we know about shelf sets, replan out there. So again, I feel good about that. We had some blips last year that we had to deal with. So far no blips this year and so far the shelf sets that we've been told about is positive for us. So that's good for us going forward, because he who owns the shelf generally does well on the share side. So -- but tough. It's going to be a tough, tough year. Yes?

Yes, hi. In this morning's release, there was a remark about a decrease in trade spending being behind the decelerating growth in laundry.

Right.

And I was just wondering if you could comment quickly on any other reasons, be they competitive or environmental that might have been behind that. And secondly, something you maybe don't talk about as much is any differences you see in the performance of XTRA over the Arm & Hammer brand in that category.

Right. No. What happened was, as you know, we were starting up our new plant in York, Pennsylvania in the fourth quarter and shutting down our plant in New Jersey. We didn't want to flag to the world, but we were literally taking lines out of one plant and switching them to the next plant. We were concerned, we had great schedules, great people working on it and in the end, it all came up ahead of scheduled. We were concerned if there were any blips we wouldn't be able to supply merchandising set up to our customers and the last thing you want to do is upset a customer by having them set up a promotion and you can't supply it. So we intentionally pulled back a little on laundry merchandising into Q4 of this year. We didn't want to tell anybody that because competitors would take advantage of it. We pulled back a little bit. Of course it had an unfavorable impact on our volumes in the fourth quarter. As I said, the plant came up actually a little ahead of time, ahead of speed, producing great. We restored all of our promotion in the laundry business. I think especially as you see the first quarter coming along, you'll see us come back very strong on the laundry side of the world. That's what that was all about.

It was an intentional move to avoid any out of stock risk in case our new plant had blips starting up. It didn't happen, but we wanted to be cautious because we didn't want to upset customers because we were doing so great in the business, they've been big supporters of us. So we didn't want to short them on any supply going out there. Everything's back up to speed and doing great. And XTRA and Arm & Hammer, they are both doing fine. We pulled back some what, [plots a little different on the two], I don't want to get into the details of that, but you saw the value advantages. XTRA, you can't get better value in the marketplace than XTRA and Arm & Hammer's been doing great. New power gel line in Arm & Hammer is getting us increased distribution out there, which I think will lead to a terrific year on Arm & Hammer and XTRA continues to do fine with the huge pricing advantage out there. Connie?

Hi, I have two questions. First, can you describe a little bit more about the SAP implementation? You called it both an implementation and an upgrade. So I forget if you're already on SAP, but if you are, what's the upgrade, and if you're not, could you talk about the timing now versus some years ago?

Yes, thank you for asking me that. We already are on SAP. What we're doing is a major upgrade across the world on that. It will be a lot of work behind the scenes in 2010. It will have -- it will not start up until sometime in 2011. So I know one of our competitors has recorded some blips on that thing, but there's no way that project will have any impact on 2010, because none of the work will actually go into implementation during 2010, it's more 2011. And it's just to enable us -- we honestly consider one of our great advantages to be speed to market and right now our systems don't talk to us, especially worldwide as quickly as we wish they would in getting data in house, and this will be an upgrade to increase the speed and the depth of knowledge out of our system today. Actually should minimize any kind of issues we have on volume forecasting, getting the building materials, correct the plans, things like that. So our systems were a little old and antiquated and now we're bringing them up to light speed, just like we built a new plant that gives us a state of the art plant. But nothing, nothing, nothing will impact 2010.

Okay. Then secondly, on the quarterly flow of earnings, is the reason that the first quarter's growth is so high, does this have something to do with the timing of shipments, so you ship a lot in the first quarter and advertising doesn't start until later on?

Yes, Connie, where are you? Oh, okay. Yes, the first quarter, one of the anomalies in the first quarter is when our quarter ends. So last year it ended on March 27. This year it ends on April 2. So it's a number of days in the quarter is an influencing factor as well on top line and bottom line. That's one. Second thing is obviously the marketing spend. Of course our lowest quarter for marketing. And the third thing would be timing of shipments. We have less new products going out -- also in Q2, so it's a question of when they go out the door. And some of that can -- that may -- we have plans for that, but sometimes that can shift between Q1 and Q2.

Just one more question on the flow of earnings. In the way you've mapped out your budget for this year, given what it would look like tough comps for the Q2 through Q4, are you budgeting for any other quarters to decline?

Yes, there's kind of a flip side to this. Just as Q1 is a longer quarter, Q4 is the shortest quarter. So that's one of the reasons why Q4 year-over-year would be tougher.

Thank you.

First question is on the international business and where that sits, particularly looking into 2010 and beyond in terms of the acquisition priority list, if you will. And then second question is on laundry compaction. Do you think there's another wave coming, and if so, how far out is that?

Yes, our international business actually got stronger over the course of the year. We're particularly doing very well in Canada, Australia, Brazil's had a nice quarter. We're doing a nice job of building our laundry business in Canada in particular and got a lot of new gains up there in distribution and merchandising, so we're very happy with that. As far as acquisitions on that, again, we're agnostic. I would love to grow the international business, about 17% of our total business right now. But I'm not going to intentionally go out there and only say the first priority is international businesses. We generally, whenever we've done acquisitions, part of the acquisition pickup has the international, sometimes more, sometimes less, but honestly we're still largely a North American business. There's no joke about that. But if I found a great business outside that met the criteria I listed before, I would buy it. It's got to meet those criteria. I'm not just going to buy to grow Western Europe or grow Asia, buy anything out there.

Sorry, what's the second part of your question? Oh, compaction, laundry compaction. I believe one of our competitors has announced compaction coming in the powdered side of the world. Thank you. We like that. We will be glad to follow that. On the liquid side of the world, it's possible. It's a little more difficult from one of our competitors because of the composition of their product. I believe they are smart enough to figure around that and I believe at some point in time in the future you'll probably see one more, at least one more compaction of the liquid side of the world. There's still a lot of water bottles and there's no need for that, especially in the sustainability environment. So -- but that as in the past, nobody wants to lead that because smaller bottles generally means consumers view that as being cheated. So in the past action, one of the key retailers drove everybody in the same time frame, we all followed. It was terrific. We all liked it. Consumers won. They get to carry home less. Retailers won. They get to save money on shipping. We won, less plastic, less shipping for us. So it was a win-win-win, but it has to be coordinated across the industry and it's very possible. And if that happens, we would be very glad to follow that, too.

Coming back to laundry, you talked about not being overly concerned about Era and Cheer. How do you scenario plan around Proctor perhaps doing something more agressive with Tide and what are your pricing models look like, at what thresholds of price reduction would they have to do to really move the needle against you?

Andrew, there again, they are hundred and we're what, 48 and 32. Hey, obviously as they do, as they have been doing more aggressive stuff on laundry, there's some impact, but we're still so far away from them. Are you going to have more impact in the mid price tier, which they've had for a long time, which is why the mid priced tier has suffered the most over the past 10 years. So I'm not to say I don't watch what they do. I have the highest respect for that company out in Cincinnati. I recognize their marketing power. I live every day thinking about them and what they do. I don't fear them. I think our results speak for themselves as far as in the market place and I think on the laundry side, we have such a huge advantage in pricing and we've been very aggressive on our new product activity. I feel pretty good. So we watch them. A little stress, not just stress, but couldn't believe this past weekend, they ran a buy one get one free coupon on their number one brand. Speaks for itself. I guess they are feeling some pressure. But I think we're well positioned. I'm, again, our new power gel line I think is going to do terrific. It's gaining incremental distribution, we've got great marketing plans behind it. Consumers want value. McKenzie, Adage, all tell you consumers are trading down and realizing what a great experience it is and are going to stick with it. So I feel good. Trust me, I watch all competitors, especially them.

Just a quick one on the financial leverage side. You made it clear you're not building much of anything into the model this year. How should we think about financial leverage as it contributes to earnings growth looking into 2011?

Well, I think you're always going to find us, we're always going to be M&A oriented as far as looking for accretive acquisitions. As you know, we usually buy one every 18 months and then pay it off over the next 18 months and then we're ready to buy again, depending on the size of it. That's always going to be our first priority.

Andrew, are you trying to get at interest expense?

(Inaudible)

Oh, okay. We wouldn't be public about that.

Goldman Sachs stocks, sorry. What are you doing with all of those retained earnings? Anyway. Doug?

Yes, staying on -- well, really talking about pricing, I guess the assumption here is that pricing is neutral in 2010, and we've already seen --

Well, neutral from a price increase line. I wouldn't say it's neutral from a promotional line, but go ahead.

Well, that's what I'm getting at. We're probably going to see negative pricing in laundry detergent, that's already started to happen in the category. I just wondered, if assuming you follow and have to be more aggressive on pricing in laundry detergents, where would you offset that?

It's all part -- it's all built into our gross margin expectations. We do expect there will be some additional promotion activity across laundry, maybe across other categories, too. But that's why we still -- we have built some of that thinking already into our gross margin assumptions and that's why we keep saying to you, thank God I got into this new plant. We somewhat -- I wouldn't say we saw this coming, but we always knew we wanted to do something to help the margin along the laundry side. And because of that, other cost savings will be able to afford -- there will be a limit to which we can afford and a limit to which will cut into gross margin. I don't know. I am fearful. I am fearful folks who had lost share out there may do stupid things, excuse me, on the promotion side. I will not let anybody have an advantage from us. We fought too hard to get where we are. We have the capability to fight full force. We will. That may have somewhat of an impact on gross margin, but I think we have so many other things in our wicker on this one, and don't forget, we've increased marketing a ton. If I had to shave that a little bit to deal with competitive activities on promotion, I will and still have share of voice, share of market advantages out there, because we're so high above that right now. But I hope sanity rules the day here. If not, I'm not going to be the one left standing behind and watching my shares erode.

But if you don't take a list price reduction, the kind of promotions you are talking about will come off the top line, won't they?

Yes, our trade spending comes out of the gross margin line, yes.

Okay, and what you're getting at, Doug, when we say 4% to 5% top line, we've baked into that an expectation is this going to be higher trade spend. Remember, is there gross margin, that's a negative gross margin year-over-year. It's also baked into the call of 4% to 5% top line. So we've thought about it.

So do you think volumes are going to be more like 7% to 8%?

No, I'm not going to qualify a number.

Doug, I do think if you watched, we -- yes, liquid laundry is our biggest business, but you just saw in the fourth quarter where we intentionally pulled back and it wasn't a big grower for us. Our premium other businesses did fantastic. We had a terrific quarter on things like cat litter and condoms and other businesses. And in fact, our Personal Care portfolio had very strong performance. And we've even got brands like little old AIM grow in double digits and things like that, value toothpaste doing good. So liquid laundry is our biggest one. It's very important to us, but Church & Dwight is much more than liquid laundry detergent. I think we're proving that with the results right now because we've invested and now we've got great new products we've had and now we're going to continue to have great new products. So liquid laundry will always be number one in my head, but it's not the only one and we've got a whole portfolio working to our advantage right now. Yes.

(Inaudible)

Specialty side, Stephanie, will be better. Matt's my cow expert, so I'll let him talk about this for a second.

I've been prepping for this one all morning. Actually I -- some of you know that I did spend four or five years in a chemical business once upon a time, so specialty products, half of that business is chemicals and half is animal nutrition. So the business that's been dragged down is animal nutrition and that's tied to dairy. So the story with respect to animal nutrition is there are way too many cows out there, so there is an over supply. And the price of milk has plummeted in 2009. So the way to think about it is the price of milk in 2008 was about $17.30 per hundred grate, that's 100 pounds of milk. Last year was like $11.25. So it just went way down. The futures right now, the average for 2010 is about $15. So dairy farmers are going to start getting healthier in 2010 and that's good news for us. Remember the slides we looked at earlier how SPD was such a huge drag year-over-year. We no longer have that drag. When you look at 4% to 5% for next year, that means domestic, international, and specialty products business are all going to be pulling on the rope. So that's going to be a healthier business. First quarter is probably going to be flat to up on a top line and then thereafter, you're going to see organic growth quarter over quarter, quarters two, three and four.

I would also tell you we're working on some exciting new adventures in the specialty products group. I can't tell you any more about it right now, but I hope over the course of 2010 we'll tell you some new things that we're doing in that business to help drive growth in that business as well. Very exciting stuff.

So you cited in the press release some investment you are making in 2010. Is most of that capitalized, or is there some S&A implication referring to the P&L?

Cow man, get back up here.

Yes, Chris, say the first part of that again.

The investment you had, I guess it's mostly SAP or maybe it's not -- in the release you cited some investments in 2010.

Yes. The SAP upgrade, think about around them is 16 of CapEx and about $4 million to $5 million of expense.

You're right. It's not always all CapEx. So that -- we're going to be picking it up mostly in SG&A.

Thanks. And I know -- I guess in the environment you're facing now, doesn't seem like it. I know Jim, you're saying there's no pricing out there. Right. So -- Sorry.

There was a bit of static there.

So what does it take, it doesn't seem likely now, right, there is no pricing out there at all. If commodities were continue to run up, is it possible that the entire category has a real tough year, or do you think you would see promo ease a little bit if commodities were able to continue to move upward?

Great question. I think what you would expect to see is promotions ease up first, because there's more spending going into the market place in promotion. I think you'd see people pull that back. I think you would see pricing second. I have a sense, though, that the big guy in Bentonville is not going to be taking kind to any kind of pricing, unless it was really out of this world. That's just a guess. And so I would think promotional spending would come back first and, yes, we're not counting on anything on pricing up as far as in 2010, and we think there will be some pressure from promotion side down, as we're already seeing in the market place and we've already baked into our plans. Whether there's more, again, we'll deal with it. If there's more, we're not going to lead it, but we're not going to lag it if it happens. Alice?

(Inaudible)

Yes, it's been a pretty volatile market place. The upfront had certainly declines in the double-digit range, if you saw it. And then as always happens on the ad market, it's supply/demand is crazy. Players came into the market place, like the [Kindels and that] who had never even been players in the ad spending rate and came in and sucked up a lot of spot very quickly in Q4 and somewhat in Q1. When everybody thought with the weak up front that the spot market would be weak, just the opposite happened, at least short term, the spot rates have sky rocketed. It's even harder at this point to buy spot. It was hard in Q4 and somewhat still in Q1. Whether that will continue, it's supply/demand coming up, but it's -- it was always that way in prior years. It's not -- the Olympics are there, but I think the Olympic stuff hasn't been that big of news. Right now it's still, you're still getting benefit versus prior years overall with the upfront buy, but it's just weird. Again, this is an unexpected jump in the market place by some West Coast players with the new electronic stuff which drove up spot rates. Whether they continue that or not, we'll see. But I think generally you're going to see some savings on the immediate side of the world from the rates. But that could change. Bill?

In the fourth quarter you commented that R&D is up $4 million year-over-year. Is that a specific project, or was that part of your planned spend that you were -- was that a one-off or were you expecting --

There is a bunch of stuff, Bill. We just had the opportunity of a bunch of projects to invest in, had the money, so we let it loose and those projects will be helping us more in 2011 on that.

And then did you say, I might have missed it, the number of new products launching this year, how it compares versus the prior years? And also, as we're looking at the growth being largely in unit, is there any way to look at how much of that growth is coming from new shelf space versus new products?

On your first one, we're still in the camp of less is more. I believe I recall my staff about two years ago, we launched about 50-plus new products. This past year, 2009, we did about 35. We'll be in that same ballpark this year. We are literally trying harder and harder every day to only launch stuff which is truly going to have a meaningful impact in the business. No more ideas that are just a couple million dollars. We're looking for stuff that's at least eight digits type impact on the business. We're just doing that. I feel a lot of the projects that I talked about today are almost all in that camp. What was the second part of your question?

(Inaudible)

I -- I couldn't even give you the answer to that. We definitely believe we are going to get some gains from shelf space, and we're definitely going to get gains from new products out there. Like I said, shelf space so far, in its -- the thing about shelf space you have to understand, the world is no longer once a year resets. Almost all the retailers out there are trying to find the best answer to drive growth. They are struggling, and so if they do a reset and it works, great. If they don't, they are rethinking it on the fly. So nothing is set in stone for a year anymore. Right now, what we know it's a plus and we're happy.

Second half of the year, things may change in the retailers head, but I'm certainly going to do everything we can to stay on the positive side of the equation. I think our new product pipeline will do that, but you never know. And then so the new products, again, I told you I think they are the best new product pipeline ever. I'm thrilled with this new product pipeline. These are winners across the board. The Trojan stuff is awesome. First Response, we've been working -- I can't tell you how many years we've been working to get that six-day claim. That's a very tough thing to get through the FDA and it's taken years to get there and prove that to them and we've got it. That was huge. The SpinBrush, leveraging the Sonic thing, which was a big winner last year, which is great. We actually had a positive year on the tooth paste business, the whitening booster, which is over here was a big winner for us. Or is it in your bag? In the goody bags we have here today. Again, the laundry stuff, power gel line is huge, the Max Force line in OxiClean is huge. We just -- and then I just feel great. Every one of those, my new product team which went into effect in 2005 just keeps getting better and better and better and we're putting the money there to the R&D side and we're forcing them to kill the little puppies and focus on the big stuff and it's really paying off better every year.

The Q1 organic growth rate, what's the impact of the six extra shipping days in the quarter? Do the straight math on that, looks like you're guiding to no organic growth, which I know isn't the case. I want to make sure I understand that.

We won't know until we get there. The quarter ends can vary from one quarter to the next with respect to the last week and how much we ship, but it is going to be an influencing factor. So in other words, when you call 4% to 5% for the year, it won't be higher than 4% to 5% in the first quarter.

Yes, right. So it says 5-plus for the first quarter, because I'm uncertain to how high is high, right.

I wish I was in the food business. Snowstorms are good for the food business. I was in a store yesterday, I couldn't get in the parking lot outside of my supermarket. People were in there buying like crazy. So having been -- I had 15 years in the food business, snowstorms are good, really good. They are bad for restaurants, good for food businesses. Check your food stocks out there. More snowstorms like this, people are going to load those pantries up and eat at home. What else we got out there? Any questions? Listen, thank you for coming today. I appreciate it. If you have any further questions, give Maureen a call. We'll be glad to help you out. Just want to tell you I feel great about my business. Thank you. And by the way, there is goodie bags for all of you and you're welcome to take the free samples and the other things --

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