切遲杜威 (CHD) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight second quarter 2010 earnings conference call. Before we begin I have been asked to remind you on this call, the Company's management may make forward-looking statements regarding among other things, the Company's financial objectives and forecasts.

These statements are subject to risks and uncertainties and other factors that are described in detail in the Company's SEC filings. I would now like to introduce your host for today's call, Mr. Jim Craigie, Chairman and Chief Executive Officer of Church & Dwight. Please go ahead sir.

Thank you, Tasha, and good morning to everyone. It's always a pleasure to talk to you, particularly when we have good results to report. I will start off this call by providing you with my perspective on our actual and second quarter business results which you've read about in our 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 for the quarter.

When Matt is finished, I'll 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 and the quality of our second quarter business results. Delivering 3.7% organic revenue growth and a 20% increase in earnings per share would be great results in a robust economy. The fact that we delivered these results against major headwinds is even more impressive to me.

Despite the optimism of the economy by some economic forecasters, this is the most difficult business environment that I have ever seen. Major headwinds are striking the consumer packaged goods industry on every critical dimension including consumer demand continues to be weak as reflected by the fact that unit and dollar sales were down versus year ago in more than half of the 13 categories in which we compete. The weak consumer demand has resulted in share wars and several key competitors have increased their trade and promotional spending in an attempt to drive revenue gain.

Retailers are also in a share war with each other which is resulting in margin pressure on manufacturers, increased focus on private label and continued revisions to product assortments which can affect the sales and profits of brands. And finally, the cost of many key commodities will continue to escalate in the first half of this year.

All consumer packaged goods companies are flooded with headwinds. Church & Dwight has been able to successfully manage these issues in the first half of 2010 better than most other consumer packaged goods companies due to five key reasons.

First, we have the most unique product portfolio in the CPG industry. It consists of both premium and value brands which 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.

In particular, our value brands representing about 40% of our revenue base have largely experienced strong growth in this recessionary economy as consumers are making smart choices by trading down and staying with lower-priced brands. A great example of this is the fact our two value-based liquid laundry detergents, Arm & Hammer and Xtra, captured 80% of the total category growth in 2009.

These two brands delivered combined growth in the mid-single digits in the first half of 2010 despite a decline in sales for the total liquid laundry detergent category. Also, keep in mind that the combined growth of our two brands in the first half of 2010 was on top of 24% growth by these brands in the first half of 2009.

The second key reason why Church & Dwight has been able to better weather the industry headwinds is that we have smartly reinvested some of the increased profits from the strong growth of our value brands to significantly increase marketing support on our eight power brands by 290 basis points for $140 million over the past three years.

This increased marketing support has helped to drive the share growth on all eight power brands representing 80% of our revenue and profits over the past three years. In the first half 2010 we had to cut our marketing spending slightly by about $8 million or 5% to fund incremental trade spending in response to competitive pricing actions.

We expect this trend to continue in the back half of 2010 which will reduce our projected marketing spend for the total year by about 100 basis points versus year ago. However since we increased our marketing spending by 200 basis points in 2009, we will still be 100 basis points over 2008 levels.

I encourage you to do some work to see how many other CPG companies are projected to have a 100 basis point increase in marketing spending this year versus their 2008 levels. Also, I want to point out that if you combine our projected marketing trade spending for 2010, it's projected to be 100 basis points over 2009. Let me repeat that.

If you combine our projected marketing and trade spending for 2010, it's going to be 100 basis points over 2009 levels. We believe that that increased investment in our total spending against the consumer will support our goal of increasing share on our power brands.

It's working so far this year as we grew share on five of our eight power brands in the first half of 2010. And we expect to achieve that or better for the full year particularly since our marketing spending for the second half of this year will be significantly higher than the first half.

The third reason why believe that Church & Dwight can weather the industry headwinds better than others CPG companies in 2010 is that we have the best pipeline of new products this year in our Company's history. The majority of new products began shipping in the first quarter, so they began to impact our share result in Q2.

Most importantly, we've achieved distribution gains with these new products across almost every power brand category and expect that this should help drive sales and share increases over the rest of the year. Fourth, on the cost side of our business, our supply chain organization continues to work closely with our business team to deliver gross margin expansion.

In the first half, we started to reap the benefits of our new $170 million laundry facility in York, Pennsylvania. With this facility, we already lowered our manufacturing costs to record low levels and strengthened our competitive advantage.

After growing our gross margins by 430 basis points in 2009, we got off to a good start in the first quarter of 2010 with another 120 basis point improvement. The second-quarter gross margins were only 40 basis points above Q1, reflecting the higher trade spending and higher commodity costs.

We expect continued pressure on gross margins over the rest of 2010 and as a result, have revised our gross margin growth objective for the total year to 0 to 50 basis points above year ago. The fifth and final reason why Church & Dwight can weather the industry headwinds better than most of the CPG companies is that we continue to keep a tight rein on overhead costs as proven by the fact that we have one of the highest revenue per employee ratios in the entire CPG industry.

In the second quarter, we were able to reduce our SG&A spending as a percent of net revenue by an additional 50 basis points from the period in 2009. For the first half of 2010, our SG&A as a percent of revenue was 40 basis points below year ago.

When you combine these five factors, our unique product portfolio, the increased marketing support over the past three years, great new products, lower supply chain costs and lower SG&A, you get consistently strong share growth and EPS growth despite the very tough business environment facing all companies these days. In my biased opinion, no other CPG company is as well suited as Church & Dwight to thrive in any type of business environment.

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 can continue to deliver exceptional EPS growth going forward regardless of the future economic environment. I will now turn the call over to Matt who will provide you with greater insights on the financial results for the first quarter.

Thanks, Jim, and good morning, everybody. I'm going to start with EPS. The second quarter GAAP EPS was a $1.03 per share compared with $0.81 in 2009. The prior year quarter included a $0.05 charge for restructuring costs related to a plant closing and excluding the time EPS was up 20% from year ago.

Reported revenues were up approximately 3%. Foreign exchange increased reported revenues by 1.7% while revenues from divestitures net of acquisitions and other small items decreased revenues by 1.3%.

Our reported revenues were also reduced by 1.2% by a new customer pickup program which resulted in delivery costs being reported as a reduction of sales rather than as costs of good sold which we've done in the past. Adjusting for those items, organic growth was 3.7% for the quarter.

Q2 was a quarter marked by big volume gains and trade spend. Of the 3.7% organic growth, approximately 6.6% is due to volume with 2.9% negative price mix which is largely attributed to an increase in trade spending in our US business particularly to support new items. As we expected, this year will be dependent upon volume growth and share gains to drive organic growth.

The full-year revenue call is for 5 to 6% volume and we have higher than expected price mix of negative 2% on a full-year basis and that's due to the intensified competition. Going forward, our evergreen, 3 to 4% top line growth target, is intact and our full year revenue call is consistent with that target.

Now let's briefly review the segments for the quarter. First, the domestic business. The domestic business had a strong volume quarter with organic growth of approximately 3% with 7% volume and approximately negative 4% price mix. Now that price mix number reflects a significant increase in trade spending which is largely in household categories. As you may know, three quarters of our annual trade spend is in household.

The price mix reflects heavy investment behind new items marked by three things -- introductory couponing, trade promotional investment and slotting. And I think it's noteworthy that this high negative price mix for the domestic business in Q2 is expected to be the peak for the year.

Now international. International had exceptional organic growth in Q2 which was broadly based in a number of countries. International had organic sales growth of approximately 9% due to higher sales in Canada, Brazil, Australia and the UK.

This increase is driven by volume growth of 10% and 1% negative price mix. It's the third consecutive quarter of high double digit organic growth in the international business.

And the volume pickup reflects the successful launch of new products. An example would be Arm & Hammer Brilliant Sparkle in the UK and the relaunch of Arm & Hammer liquid laundry in Mexico.

We have lower price mix internationally as it is heavily personal care, as many of you know, and it's less promoted than household. The specialty products organic sales were up 2% with volume down approximately 2% while price mix was up 4%.

The positive price mix is driven by price in animal nutrition where we are recovering raw material costs in sodium bicarbonate. The 2% organic increase is primarily due to growth in our animal nutrition business which was weak in 2009 due to the soft dairy market.

The year over year comps for the specialty products business are becoming easier and continued throughout the year, however, the dairy recovery has been less robust than expected. Now I'll talk about gross margins.

Our recorded second-quarter gross margin was 45.4%. Excluding the charge related to the shutdown of North Brunswick, last year's gross margin contracted 70 basis points compared to the prior year.

Gross margin increased 40 basis points from the first quarter. The decrease in gross margin reflects the benefits of our cost reduction programs, our new laundry facility in York, Pennsylvania and the customer delivery arrangements that I mentioned earlier.

These benefits were offset by higher trade spending. As we indicated in the release, we expect full-year gross margin expansion of 0 to 50 basis points for full year 2010.

Okay, now marketing. Marketing spend was $83 million or 12.9% of revenue and that is a 230 basis point decline from the prior year spend rate. In Q2 last year, we had increased our marketing spend by 170 basis points to a record 15% of sales.

I think it's noteworthy that we had an $11 million year-over-year decrease in marketing but that was more than offset by the dollar increase in trade spend. Looking ahead, our second-half marketing spend is expected to be approximately 14% of sales, so we are going to be ramping that back up. We expect full-year 2010 annual marketing spend will be approximately 13% of sales which is 100 basis point lower than 2009 but still 100 basis points above 2008 levels.

SG&A's next. SG&A year over year was down slightly in the quarter as a percentage of sales with 13.7% and that's down 50 basis points as a percentage of sales from a year ago. SG&A as a percentage of sales is expected to continue to be favorable for 2009 but for the full year should be a reduction of approximately 50 basis points. This is a reflection on Church & Dwight's continuous vigilance to control SG&A.

Operating profit is next. The reported operating margin for the quarter was an exceptional 18.7%. Excluding the plant restructuring charges from last year, operating margin was 190 basis points above year ago. We expect operating margin expansion to be positive every quarter this year.

Income taxes is next. As you can see in the release, our effective rate for the quarter is 36.2% compared to last year's 38.8%.

Last year's quarter was impacted by an increase in tax liabilities and then this year, we have the benefit of a higher manufacturing deduction rate. We're forecasting an effective rate of approximately 36% for the full year.

Now the acquisition. The Company completed the acquisition of Simply Saline in the quarter. You may remember that we previously announced this at the end of the first quarter.

The acquisition was financed with available cash. The brand holds the number one position in the nasal saline solution category and its annual sales were approximately $20 million.

The brand is gross margin accretive to the Company and we expect it to be accretive to earnings. This of course will offset the dilution of the Q1 divestitures that we previously announced.

The dividend. We're increasing our dividend 21% from $0.14 to $0.17 per share which is equivalent to $0.68 per share or approximately 1% annual returns to shareholders based on today's stock levels. The increase is consistent with our prior year EPS increase of 21%.

Free cash flow is next. We generated $103 million of free cash flow in the first six months of the year. Netted in our six month free cash flow is $21 million of capital expenditures. Net cash from operations is below last year by $71 million.

An explanation goes as follows. Working capital as a percentage of sales is approximately 11.4%. This is up 1% from the beginning of the year. Working capital by definition by the way is receivables, trade payables and inventory. So we have plans to reduce this by year end.

Cash taxes are about $25 million higher in the first six months of this year and that's largely due to one-time benefits of tax law changes which benefited 2009 and then the timing of tax payments in 2010. And then finally in 2009, our dramatic increase in marketing resulted in a significant increase in marketing accruals last year and of course that wasn't repeated again in 2010.

We have over $364 million of cash on hand and approximately $211 million of available credit through our revolver and asset securitizations facility. The Company has paid down $115 million of bank debt this year and we expect to pay $214 million on a full-year basis.

Our total debt to LTM adjusted EBITDA per our bank agreement was approximately 1.3 at the end of the quarter. And we expect to generate approximately $300 million of free cash flow in 2010. And remember, that's after approximately $70 million of CapEx. The $70 million includes $12 million investment to install our cat litter production in our York, Pennsylvania plant and $13 million for the SAP upgrade.

In conclusion, the second-quarter highlights are 3.7% organic sales growth, 7% volume growth and increasing share in five of eight power brands with a 190 basis point expansion of operating margin. And we expect earnings per share to be evenly balanced for the remaining two quarters of the year as we increase marketing spend in the back half.

Thanks, Matt. I will finish off our presentation today by adding a little color to the second quarter business results that Matt just took you through and my outlook on the year. First we are very bullish about the innovative new products we are launching this year to drive our organic growth.

Let me share some examples I'm talking about. The Trojan brand had an excellent second quarter with high single digit sales growth and the brand increased its leading market share by 0.5 percentage points to 75.8%.

This was driven by the launch of the Ecstasy and Fire and Ice product lines and the continued growth of the Magnum line. Ecstasy which was launched in the third quarter of last year is the most successful new product launch in category history.

The Ecstasy sub line has already achieved an 11.8% market share. Now we built upon this strong growth in 2010 by launching another new sub line of Trojan called Fire and Ice.

This new sub line features unique lubricants on the inside and the outside of the condom to provide heightened sensations and increased pleasure. The early share results for the Fire and Ice line are tracking at the same pace as the record-setting Ecstasy introduction last year.

Finally, the Magnum sub lien of Trojan which is our largest sub line with a 14% market share also had a great quarter in which it achieved an all-time high quarterly share. The trifecta impact of the continued first-year trial of Ecstasy, the continued growth of Magnum and the launch of Fire and Ice should continue to lead to record business results for the Trojan brand in 2010.

Second, we're very excited about the new line of Arm & Hammer liquid laundry detergent called Power Gels. Our Power Gels detergent combines the 2-in-1 cleaning power of OxiClean stain fighters plus Arm & Hammer baking soda in a revolutionary new gel formula that delivers exceptional cleaning power at a great value.

This new product line has received excellent incremental distribution from leading retailers since it launched in the first quarter and early results reveal very strong consumer trial. This new product line contributed over 20% growth in the sales of the total Arm & Hammer liquid laundry detergent business in the second quarter.

Third, the OxiClean brand also had an entirely new product line launching in 2010 called Max Force. The Max Force line consists of seven new SKUs in powder, power gels, spray, stick (inaudible) product forms which combined four types of stain fighters to get out more tough stains the first time.

Despite the heavily supported launch of a major new competitor in the laundry additive category, the new Max Force line helped OxiClean to successfully defend its category leading share of 40% and delivered solid sales growth in the second quarter. The fourth and final new product that I'll mention is our newest introduction.

It is a new and highly innovative cat litter called Double Duty. It has that catchy name because it delivers superior odor control for both urine and feces. The total Arm & Hammer cat litter business has been the fastest-growing clumping cat letter in the past 13, 26 and 52 weeks.

The new Double Duty product started shipping at the end of the first quarter and initial consumption and sales results are outstanding. This new product is expected to support the continued strong growth of our Arm & Hammer cat litter business which has now achieved 26 consecutive quarters of net sales growth.

We have other highly innovative new products that I could talk about including the first ever pregnancy kit with a six day sooner claim for our First Response brand and new products for Spinbrush, Nair, Orajel and KaBOOM!.

However, in the interest of time, I will move on to other subjects. As I said earlier, I believe this is the best and most innovative pipeline of new products in our history and the incremental distribution and creative marketing programs supporting these new products should play a major role in helping us to achieve our annual organic growth goal of 3 to 4% in 2010.

As Matt said, the 3 to 4% organic growth goal represents projected volume growth of 5 to 6% offset partially by 2% unfavorable price mix. In this recessionary business environment which has resulted in share wars, we feel very good about 5% to 6% volume growth.

As I stated earlier, while our marketing spend for total 2010 is projected to be 100 basis points below last year, it's still 100 basis points above 2008 levels. Since most of our competitors projected 2010 marketing spending is below 2008 levels, our brand share voice or share of ad spending of category will still be higher than our brand share of market.

When this happens, usually it's the share growth which is exactly what happened over the past three years for every one of our eight power brands. As I said at the start of the call, this is the most difficult business environment I've ever seen. Nevertheless, we believe we have the best new product portfolio and the marketing power to continue to deliver solid organic growth.

Two last points before I briefly talk about our future business outlook. First, we continue to actively look for good acquisitions and improve our portfolio of non-strategic businesses.

We have the borrowing capacity as Matt said and a strong balance sheet to support these efforts. In terms of divestitures, we've quietly divested three non-core businesses over the past 12 months.

These include the June 2009 sale of five minor brands we purchased in the acquisition of Orajel, the February 2010 sale of our Lambert Kay business consisting of pet supplies and the most recent March 2010 sale the Brillo brand. We concluded these businesses did not fit well with our future plans and the divestitures served to reduce complexity in our Company.

In the meantime, as Matt mentioned, we acquired the Simply Saline brand of products including the number one nasal hygiene solution which is sold primarily in the United States. These products provide a natural alternative to nasal congestion for people of all ages including young children who are advised not to use OTC products.

This acquisition globalizes this category for Church & Dwight as we already own a nasal hygiene brand called Sterimar which is the number one brand in Europe and is sold in over 90 countries around the world.

Thus while the Simply Saline business currently has sales of only $20 million, it's a great bolt-on acquisition which we believe that we can grow and become a meaningful contributor to Church & Dwight's continued strong growth. The combination of these three divestitures and this acquisition will have a neutral impact on 2010 earnings and they'll be accretive in 2011 and we are actively working on other acquisitions and have the cash and leverage to do so.

My second and last point before I talk about our earnings outlook for the rest of 2010 is that some of you have raised concerns about risks to our future performance in relation to such issues as private-label growth, competitive threats and actions by retailers to reduce the number of brands that they carry. Let me assure you that we're fully aware of these issues and are continually managing them as demonstrated by our outstanding business results.

Private label is a threat in only five of our 13 categories and we have successfully implemented programs to ensure that the private label brands do not deter us from achieving our growth objectives. Our competitors have launched new products and increased trade spending.

But we've launched our own great new products and have increased our trade spending to ensure we achieve our growth objectives. And we are working closely with retailers as they rationalize their categories to drive a win-win outcome for both of us.

With respect to our new products, the retailers have been so positive about our new product launches that we have been awarded incremental distribution in every one of our power brand categories in 2010 that more than offset any SKU losses that we have incurred. I also want to mention that we are leveraging the high consumer appeal of our value brands in this recessionary economy to drive incremental distribution of those brands as exemplified by the fact that our Xtra laundry detergent brand recently achieved distributions at one of the top five food retailers in the US.

The strong business results that we have consistently achieved over the past several years would not be possible if we were not on top of these competitive and economic changes that you have raised with us. In closing my discussion on our second-quarter performance, I believe that no other CPG company is as well positioned and managed to not only survive but thrive in any business environment.

Our unique product portfolio consisting of both premium and value brands puts us in that position. Our experienced and motivated management teams knows how to leverage that portfolio to consistently deliver superior results and we've given our team the tools and money to make the investments needed to develop and support our new products and to help our supply chain manage the overhead costs 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 as a result of our strong first-half results, we remain confident in our ability to deliver our previously announced earnings per share estimate for the full year 2010 of $3.93 to $4.00 which is an increase of 13 to 15% excluding plant restructuring charges and the favorable litigation settlement with Abbott. As I predicted at this year's Cagney conference, 2010 will be an ugly year, driven by weak consumer demand, rising commodity prices, increased pressure from the retailers and competitive price wars.

But when things get ugly, you should place your bets on the company that has a product portfolio that thrives in such an environment and a management team that has a track record of knowing how to successfully leverage that portfolio to deliver strong EPS growth. That company is Church & Dwight.

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

(Operator Instructions) Bill Chappell, Suntrust.

Can you just kind of talk about -- certainly on the trade promotion environment it's gotten more competitive in the past few months. Have you seen it continue as we move through the quarter or has it stabilized and do you feel like now the step-up of I guess of at least another 100 basis points to the top line is enough or are there chances that you will have to step this up again as we move to the back half?

Bill, we were clearly hurt in Q1/Q2 by the higher competitive trade spending and expect -- and some unexpected deep discounting of competitive products by some retailers. You know, in our opinion, we had strong momentum coming out of last year. We didn't want to start price wars but the competition did.

It took time for us in Q1 and Q2 to adjust our spending to deal with the competitors. It takes leadtimes for both trade spending and ad spending. We have done that and across Q1 and Q2 we have leveled our spending between trades and advertising.

We actually feel our organic sales are showing momentum. You know, in Q1 we reported 8% but we had six extra days. The Q2, 3.7% is more of a pure quarter for us and we feel like it was stronger than Q1.

So you asked me -- in response to your question, I think trade spending, we have dealt with it now. We're going to be more competitive in the back half of the year versus competition. And also keep in mind, some of our competitors are going to lose the benefit they got from some retailers who funded some features in Q2 that aren't going forward.

We have also told you we're (inaudible) increasing our ad spending in the back half. Our great new products are in full distribution going forward. So that will be good too. So I think we're in much better position on the trade spending. I don't think it necessarily will get worse in the back half.

Hey, Bill, this is Matt. You saw in the release and in our remarks that we said that we had negative price mix of 2% for the full year.

So if you think about total company, the first quarter was a minus 2 and the second quarter it's minus 3. It was actually minus 4 in the domestic business. Remember it's only 1 internationally.

So total company was minus 2 in the first quarter to minus 3 in the second quarter. And then it abates in the second half to average 2 for the year. So you would expect Q2, Q3, Q4 to go like this; minus 3, minus 2, minus 1.

And the reason we're thinking that way is because we had as I said big spend in the second quarter for the new items with introductory spend couponing, trade promotions and slotting. And that then falls off a bit in the second and in the third quarter.

Okay, thanks for the color.

And then also, just trying to understand on liquid laundry detergent, I think I understand the growth in Arm & Hammer comes a lot from some volume gains at one retailer. But surprised by the weakness in Xtra.

I would expect in this environment that Xtra would hold up probably a little bit better but it seems that Xtra, private label and even Sun all are seeing some weakness in the channel. Can you give us any color on that?

Xtra was clearly a drag on our Q1/Q2 results. We had some pricing issues versus the competitors but I would tell you we have fixed that in the back half of the year.

And also as I told you, we have gained distribution at actually two major accounts, one of which is one of the top five accounts in the country. We've already received over 25 emergency orders from that account to keep up with demand in the account. So we're feeling much better.

Xtra was a drag in the first half. In fact, I just saw the July shares are the highest shares of the year for Xtra. So, Xtra was an issue. We fixed the issue and it's definitely going to be a big improvement for us in the back half of the year.

Thanks so much.

Chris Ferrara, Bank of America.

Can you parse out if possible at all the portion of the incremental domestic -- the consumer domestic business, I guess the incremental piece of the promo spending that was allocated to I guess slotting and new products and trial buildings relative to what you might have ramped up because you saw more intense competition? I know it's kind of hard to break those out, but can you just try and give a sense of that?

Chris, this is Matt. We never get into that level of detail with respect to the dollar amount of slotting or couponing or our trade promotions for the introductory items. I think suffice to say, it's a big negative price mix for the quarter.

And as I said, if it's 2% for the year and given the answer to Bill, you have to say at least we've had 1% drag as a result of the new items will be the logical conclusion. We had 3% drag in the second quarter.

Got it and I guess one of the things I guess, Jim, I think you said that going forward, you weren't going to see retailers discounting some of your competitors on their own as much as you saw in the first half of the year. Are you seeing that play out?

In other words, is Wal-Mart not driving these retailer funded deep discounts of the Tide brand as much now as they were before? You think that's kind of cooled off and done for now?

That's what we understand.

Okay, okay. And I guess just one last one. The change in shipping and who's handling the shipping costs I guess that caused that move up to the net to sales. Matt, is it right? I'm getting that that added about 60 or 80 basis points to gross margin this quarter that changes that. Does that make sense?

Yes, it's too high (inaudible) 50.

50, okay, great. Thanks guys.

Alice Longley, Buckingham Research.

Your shipments in the US in dollars organically you're telling us were $3.8 million. Is that about how much -- how fast you grew at retail too? I'm just trying to figure out whether SKU additions by retailers might be helping your shipments, there might be some pipeline fill in there or it might be just the reverse?

Yes, the 3.8, Alice, that's the number for total consumer. So that's domestic and international for the second quarter. So the way to think about it is it's 9% for international and 3% for domestic just round numbers.

I guess I'm not being clear. I'm looking for the difference between your shipments and your sellthroughs at retail in the US.

Alice, there was no real meaningful impact on inventory, thus you're getting a pipeline fill on that. We did launch a little bit more new products but the impact was not meaningful. It's truly more -- it's consumption driven numbers.

Okay, thank you. And then detergents alone in value terms, did you gain share in the second quarter?

Yes, we did.

I just saw the July results. We gained shares in July also.

And did you gain share more in July than for the quarter overall?

I think it was marginal. I don't have the exact numbers right in front of me but I think it was a marginal improvement in July, mostly because Xtra came back strong.

Could you elaborate a little bit on what you might do with cash? I know you've said you're always looking for acquisitions. Any interest in more aggressively buying back shares?

Alice, no, we've concluded that still the highest and best use of cash is acquisitions. We do get that question fairly regularly.

Big acquisitions tend to come about every two years with (inaudible) in 2006, Oragel in 2008 (inaudible) around 2010. But you know, we're very aggressive looking at the the properties right now.

Doug Lane, Jefferies & Co.

Okay, can you give us your initial impression of the Reckitt Benckiser acquisition of SSL-International and what that might mean domestically in the condom market?

They paid a humongous price. They are promising tremendous synergies and that's all I can say. I don't run the Reckitt company. It's a great company but you saw the numbers and I just told them to you.

What do you think they'll do?

I think they have got a lot of integration ahead of them right now. Call Bart back. You want his number?

No, that's okay, thanks. Turning to liquid laundry detergent, where do you see the pricing going for there? Is that where you are seeing most of the competitive issues in particular? And when we talked about the Xtra brand and the Arm & Hammer brand, is there further price adjustments on the horizon there?

Liquid laundry is our biggest business. Liquid laundry is the most merchandising intensive business as it always has been.

Like I said in the first half of the year we held back a little bit because we came out of last year with great momentum. We didn't want to start price wars. Our competitors did.

We responded over the course of Q1 and Q2 which hurt us because we waited (inaudible) we're now going to be fully competitive. Arm & Hammer has still been fantastic.

Arm & Hammer growth in the first half of the year was roughly 20%. Xtra offset some of that because of some pricing issues and things like that. But we fixed all that now.

As I told you, we just gained distribution on Xtra, two accounts, one of which is one of the top five accounts in the country which will really help In the back half of the year. So, we feel laundry business is in very good shape in the back half of the year as we took some shots in the first half from our competitors.

Fair enough. Lastly, can you give us an update in York? Have you moved in -- what brands have you moved in there so far? Are there any additional ones that you're prepared to talk about that perhaps will move to the York facility?

No, the only things being produced in York right now are liquid laundry and we're transitioning part of the cat litter business into that plant. That won't be happening until the fourth quarter of this year and the benefit will happen in 2011.

Andrew Sawyer, Goldman Sachs.

Quick one for Jim. I just got at the tail end of your prepared remarks, it sounded as though you had a decent number of deals in the pipeline. Can you just give a sense of whether or not the asset margin has started to loosen up at all yet?

We are definitely seeing more opportunities out in the marketplace. I think it is loosening up from both the changes in tax laws for the private equity world. I think portfolio rationalization by some big companies and families continue to be concerned about tax law changes in the future.

So, there's definitely an increase in books as you would say about deals. But I will remind you that we're extremely diligent about the kind of deals we look for.

They must be number one or number two share brands. They must be margin accretive. They must be asset light and they must be growth opportunities.

So if they meet their criteria, we actively pursue them. And if they don't, we don't. But I definitely think the environment is heating up especially too as you see organic growth be difficult for a lot of companies. It's a recessionary economy. I think more companies are going to look for M&A and as I said, other guys are going to look to get that the hell out.

Would you say it's fair to say that there's a greater likelihood of something coming to fruition in the next six to 12 months than maybe there has been over the last year or two?

Yes, but deals are deals and they're never done until the deals are signed. So I definitely think you'll see more activity in the total universe in M&A over the next 12 months than you've seen in the past 12 months.

I hate to beat a dead horse but on the laundry side, could you just give us a sense of how as Proctor has taken the promotional price points on Tide down, what's the ripple effect been down the chain? How is that interacting with some of your brands in what [Sun Hewish] is doing with their price points and what's kind of been the cause and effect of what Proctor has done?

I would tell you in general, and I empathize in general, that what Proctor does with Tide has more of an impact on the mid-priced zone than the value zone. Although certainly there's some impact.

I would tell you it's just -- every zone, the value and the mid tier and premium tiers have battles going on within them. I think to an earlier question asked, I think the prices have stabilized pretty much now going into the back half of the year.

And whereas we were somewhat uncompetitive in the front half, we will be fully competitive in the back half, then we will be stepping up advertising spending plus our new products are out there plus the new distribution we have gotten. So our back half will definitely be better on laundry than the front half of the year for those reasons.

That was very helpful. And just one last one for Matt. On the gross margin side, I guess we talked a lot about the promo spend portion. Could you also talk a little bit about both how the commodity outlook has changed if at all over the last three or six months and then also what product mix effects are having on gross margin especially with the pretty healthy growth out of Trojan?

Yes, as far as commodities go, the big ones for us are things like resins for bottled surfactants which goes into liquid laundry and of course paper for corrugated and liner board. There has been a -- if you look back, you'd see an increase in resins and surfactants.

But going forward, we don't see that as the case particularly in the second half because of actions that we've taken. So we don't have concerns with respect to resins or surfactants for the second half of 2010.

If you look at some of the indexes (inaudible) you'll see projections have actually declined in 2011 for PE and polypropylene. As far as paper goes, paper is more of an outlier as far as gone up, but that also seems to have abated. And once again, it was actions taken by our supply chain. We're not concerned about movements in the second half.

And as far as mix goes, yes, you're right with respect to the success of Trojan but then we have other personal care brands that even though they've grown share, their sales have gone the other way and they're also high margin businesses. So they're kind of offset.

Joe Altobello, Oppenheimer.

Just wanted to follow up on that last comment you made, Matt, regarding commodities. They do seem to be coming down or at least looking to come down next year but I think they're still at pretty elevated levels as we head into the second half of the year.

You mentioned earlier that retailers are starting to pull back a least on their promotion activity. Are you hearing or seeing any evidence that maybe some of your competitors given the still heightened level of commodity prices are looking to maybe roll back some of the promotion activity they've done the first half of this year?

No, I wouldn't count on that. There's no feedback from the trade or from our sales folks with respect to the trade pulling back on price. You might expect that it won't go any lower though.

I'm sorry, that commodities don't go lower?

No, no, no. You're talking about pricing at the retail level?

Right, exactly.

Yes, I don't see that -- pricing going necessarily lower. It may stay where it is right now.

Got it, okay. In terms of the organic growth number you put out this morning, the 3 to 4%, I imagine international is probably at the high end or slightly above that and the US is probably toward the low end of that range. What impact does that have on gross margin?

Well international is a positive because it's personal care. But if you look at the division apples to apples, the domestic division US is still actually higher gross margin than international.

Okay, so that's actually putting some downward pressure as well?

Yes, a little bit. But I mean, they're doing a great job on the top line.

Okay, great, thanks.

Jason Gere, RBC Capital Markets.

Just a question just on the domestic consumer. When you look at the volume, were you able to -- can you parcel out the difference between maybe the distribution gains you've been talking about and then just innovation?

That's a big debate always as sales guys [think about] and products guys [think about] and very difficult to parse that out.

I mean, well I know this has been the biggest year for innovation but at the same point, I know you guys have been talking about some big wins. Just wondering, maybe can you put it into context of how you see it playing out the rest of the year, especially in light I guess you're saying that the promo negative 4 is at the peak. So I'm just trying to put into context how we should think about that going forward, that business.

Let me take a crack. Obviously the new products were the key enabler to getting the increased distribution but we are seeing share gains already which is reflective of consumption on five out of our eight power brands.

Actually there should be -- we call it six. OxiClean sales have been up because the category has grown so much that the share is off just slightly. So really on six out of our eight power brands, we are doing exceptionally well.

And I see that going forward because we're going to be increasing marketing support in the back half. We kind of held off a little in the front half of that as we were adjusting the mix between trade and ad spending.

Now we feel comfortable on the trade side. We'll let loose on the advertising side. So with an incremental marketing support behind the new products in the back half, with extra distribution out there, I feel very good.

I'm very thrilled we have all that firepower this year in this kind of horrible economy out there that's caused havoc with the retailers and our competitors. But we've got the firepower even bigger in the back half of the year to drive those new products and continue to get strong share gains on our power brands.

And just a second question on gross margins. If you look at how much gross margins were down this quarter and put into context the promotional environment, the slotting piece, etc. as you look to the third and fourth quarters, I mean was this kind of the peak decline in gross margins?

Could it actually turn positive by the fourth quarter if you are assuming that promo gets a little better, if the plant -- the efficiencies of the plant starts to really ramp up? Can you put that a little bit in the context to kind of parcel that out?

Yes, the way to think about the four quarters is this. The first quarter was up, so you had an up arrow in the first quarter, we were up 120 basis points. So down 70 in the second quarter.

Third quarter is also a down arrow. But you are correct in that the fourth quarter, we do expect gross margin expansion not only for some more normalized trade spend, but also the fact that last year we had redundant overhead in our North Brunswick facility which we are no longer absorbing because last year we were running two facilities. So, yes, up arrows in Q1 and Q4, down in Q2 and Q3.

Just with that, just in terms of the new plant, is it on plan, ahead of plan? And then just with the cat litter coming in in I think is it September where that gets added on? I'm just trying to think of what kind of flows over to 2011 versus 2010?

Actually, we're over the moon with respect to the success of that investment. You know, when you build a new plant like that, you make some estimates with respect to conversion costs.

And of course conversion costs are how much you're spending on labor and overhead per case. You convert raw material into finished goods. And our conversion costs by the fourth quarter this year are going to exceed our projections in the economic when we built the plant.

So, what that -- that bodes well for 2011. So we will also see some modest additional incremental gross margin happen in 2011 from the York plant.

And the last question is kind of a bigger picture question. As you look to 2011 and clearly this year, you're getting a lot of distribution gain. The plant -- maybe three quarters of the savings are coming through but it sounds like maybe there is more coming through than you initially anticipated and I guess the belief that marketing spending has to go up.

Do you still have the confidence, and I know it's early right now with only half the year done, but the double-digit EPS growth, your evergreen target, do you have the confidence behind that without an acquisition, a more sizable acquisition? Or does that put more pressure that you need to add something over the next six months?

No, Jason, I would just -- I'm not going to give you any numbers because we're not going to call 2011 yet. But we still feel great about the organic growth of this Company. Don't forget, the new products we've launched are -- have little impact on the front half, a big impact on the back half of this year but that means they'll have an impact in the front half of next year.

There will still be benefits out of this new plant and other actions we are taking on the supply chain next year. So we - and the distribution effects again were mostly back half of this year impacting the business. So the front half of next year will benefit.

So we feel good. I told you how a major account's just taken on Xtra. That's only a half-year impact this year. It will be a big impact next year. There's other things going on I don't want to get into details on.

So I still feel good about the organic growth. Do we love acquisitions? Sure, but we're not going to make a dumb one. We're going to make a smart one, we're going to use our money smartly and it will be accretive to this business and we do it.

So that's been our history and we are just being patient until we find the right one. But the organic growth in the meantime is just fine and we will be -- you know our evergreen targets organically and I don't see any reason there's any problem with that going forward.

Lauren Lieberman, Barclays Capital.

I had one question about sort of the -- I guess the EPS delivery in the quarter. I mean, one thing that you guys have obviously done really well was to reinvest so heavily in 2009 to give yourself the flex for this year.

What I don't really understand is why there wasn't frankly either more investment in trade promotion as you cut marketing or that the marketing came down less than it did. It just feels to me a little bit confusing why EPS growth would have been so robust this quarter with sales coming in a little bit light, the known pullback in investment. But I don't know, it just feels like a little bit of a disconnect to me when you have been very consistent with keeping investment levels at a high level and delivering just kind of what you need to do.

Lauren, I would say that timing is a lot of the issues going on there. Again, we didn't want to start a price war this year. We waited.

It took us time to adjust our advertising trade levels and also, we were just getting our new products out the door. So we wanted to save our powder for the back half of the year in the advertising which we did.

So, yes, if I could sit here -- if I could've sat on June 30 and redone all of Q2, I probably would've spent a little bit more on advertising because the earnings came in very strong. But I also was very happy that I kept my powder dry for the back half of the year.

I would say I think some of you out there are overreacting to our reduction in ad spending. I just have to remind you again, we spent 14% of net revenue on ad spending in 2009. That was up 200 basis points versus 2008.

And 2009 was the year when most of our competitors were cutting spending to make their bottom lines. So we're reducing 100 basis points this year we told you. But again, we also told you our total ad and trade spending is going to be up over 100 basis points versus last year. So we are investing which still I remind you, we're still well above our competitors.

Our 13% rate -- you know the numbers. Proctor and Colgate are about 11%, Clorox is less than 10%. Reckitt is only 12%. And keep in mind, we don't spend against all our brands.

We have big brands like Xtra, value brands we don't spend advertising against. So our share of voice is still going to be stronger than our share of market. That leads to our power brands growing and we really feel our ad and trade spending right now is well balanced to compete in this world which is very intensive pricing in that.

But we will get the share growth. So it just was adjustment timing. We were waiting for the new product to get out there in full distribution to save our powder. Yes, I can't manage earnings to the penny over the course of a quarter and I'm very happy to deliver 20% earnings growth; beat the (expletive) out of most of our competitors. So we'll have a great year.

Okay, let me just -- another thing on the quarter was, I noticed in the press release actually a little bit more of an emphasis on unit share is what was discussed rather than value share which isn't the way you typically write about your business. So, is there a gap or sort of is there a difference or divergence in trend in your unit share trends versus your value share trends?

No, it's just a change of terminology. Volume and units are the same things to us (multiple speakers)

I'm sorry, Jim, I said value, so meaning dollar share versus unit share.

Yes, actually, Lauren, sometimes the price, it can confuse whether or not you're actually gaining share or not. So units you're actually -- and many believe it would the pure way to look at share growth.

Okay, so are you gaining dollar share as well as unit share?

Yes.

And is it to measure it during the last six months?

Yes, we didn't mean to confuse you. We gained share both units and dollars on five of our eight power brands in the second quarter and the first half of the year.

Okay, great. And then I'm sorry, just one last thing. With all the promotional activity in the marketplace, so not just you guys obviously, but the overall marketplace, do you feel like there is any real positive impact on consumer behavior or consumption? Or is a lot of the spending just kind of not getting any -- moving anyone forward, not [a comment about] profitability but about kind of consumer demand and consumption?

That's a great question. I think we certainly learned, I think our competitors are learning and I think retailers are learning that all this additional price promotion is not delivering the same bang for the buck that it used to.

So it's being wasted to some degree and I'm hoping you'll see the marketplace pull back a little bit. It's hurting the categories. Categories are down, 11 of the 13 categories we are in are down and a lot of that is due to lower pricing which isn't generating the kind of volume growth in the past.

So I think it's people went out there thinking the old way, that lower prices would drive volume and it's really hasn't happened to the degree they thought. And now I think you'll see some potential pullback in the marketplace to get pricing levels back to higher -- let's say the feature price may creep back up a little bit because the lower prices really aren't driving the volume out there that people expected.

Connie Maneaty, BMO Capital Markets.

I would just like to follow up on that question because the -- Lauren's question -- because the headline that everyone is worried about is deflation. And I'm wondering about your perspective on it, whether or not you think we are in a cycle of deflation which we really haven't seen in a couple of decades or you think the pendulum over the last unit 18 months has swung too far to price discounting and some more rational thinking will come into play over the next year.

There's definitely been price deflation. As I said in answer to Lauren's question a minute ago, I think people are realizing that it hasn't helped stimulate consumer demand as much as they thought. So I think at this point in time, the price deflation has stabilized.

I don't think it will get worse and I'm certainly hoping that both the retailers and other manufacturers will realize that maybe this is a better world of taking pricing back up again, not necessarily to price increases but just less trade spending out there because it's not efficient right now. So again, the good news I think is the deflation has stabilized, so it won't get any worse in our eyes. And hopefully, retailers or manufacturers will work together and realize it's a happier world for everybody out there by raising future prices somewhat from where -- the levels they got to right now.

What would you see in the marketplace that indicated that that was happening? Would it be retailers focusing less on private label or allocating more shelf space to major brands and letting some of the little ones just go by the wayside? What would you look for?

I think you have seen a major retailer out there realize that deep discounted price points, that they subsidized didn't work. And I think you're seeing that for other retailers too who are realizing they're just not seeing the response. Because again, the bottom line is categories are very weak and declining out there right now and people didn't expect that when you get cheaper price points out there, you'd expect consumers to respond and they haven't.

So I think everybody is reading those numbers right now and realizing that these deeper price points just aren't driving category growth. And I think that's simply because you've got basically 20% of America out of work right now. They just don't have the money to load their pantries and buy more products.

So I think everybody right now is rethinking this. I don't necessarily see -- think you'll see necessarily improvement in the back half of this year but I think it'll take a little time to adjust. But I think by 2011, I think you'll see people realize that these deep cut feature price points, deeper than they have been in past, aren't working and also because it takes time to adjust stuff.

Usually most manufacturers like us are six months out with their trade programs. So that's why I don't necessarily think you'll see improvement in the back half of this year but as we start to work on the first half of 2011, I think you'll see retailers and manufacturers rethinking price points out there.

Okay, great. Then a different question on this change in customer deliveries. What was that and why did it move delivery costs from one line of the P&L in the other? Is it a one quarter event or should we build it in for the next three quarters and then it all normalizes?

Correct, this is something that will just be with us for the next three quarters and then it will normalize. So what happens is instead of you paying a carrier to deliver your products, you essentially have an allowance given to a customer where you pay them to pick up the product. So that expense now will be with us for the next three quarters and then it will normalize.

Are you doing this across your customer base or was this with one particular customer?

Connie, we would love to work with our retailers and respond to what they think is best and I'll just leave it at that.

Okay, that takes care of my questions. Thanks.

Bill Schmitz, Deutsche Bank.

Just on the organic growth targets, how much confidence do you have in the 3 to 4%? The only reason I say that is it's nothing you are doing, but you already said this the worst competitive environment you've ever seen in your career.

If I look at the [scanner data and your monitor data] it looks like no category growth this year. The fourth quarter is short, right, because you had the long first quarter. So do you have a great deal of confidence at 3 to 4%? Because that's your long-term target. So that would be amazing if you actually pulled it off. But is there any sort of comfort that we can have on that number?

We feel pretty confident, Bill. Honestly, we entered this year with the momentum we had and the great new product pipeline and everything.

As you know, we came out a little -- about a point above that thinking that now because of the economic environment, the competitive pricing environment, the retail reactions, we've gone back to our historical growth rate of 3% to 4%. And with everything we've got going for us right now and our knowledge of the back half of the year, I would say we're very confident in that number.

Bill, it's Matt. Actually I'm glad you brought that up because we had the six extra days in the first quarter. We have six less days in the fourth quarter and then we're saying 3 to 4% on a full-year basis.

So the way to think about it is, the first quarter organic growth was 7.7% and the second quarter is 3.7%. So what would have to happen for us to average 3.5% for the year, even though knowing you have these six less days in the fourth quarter while essentially you would have to be in the 3 to 4% range in Q3. And then because of the six less days in the fourth quarter, hypothetically it would be a negative 1 and then you'd average 3.5 for the year.

Okay, guys. That's great. And then just in terms of -- everybody's kind of putting up these huge volume numbers. What do you think the industry implications are as you kind of lap this stuff?

Because retailers you said aren't really taking extra inventories. So is this sort of like a big pantry loading environment and consumers are spending, they're just kind of filling up the pantry on these really good deals? So what happens when that the industry has to lap these sort of mid to high single digit volume numbers?

I don't think it's pantry loading at all. In fact, I think it's part of a lesson we're learning out there with these prices. I think it's truly those competitors who have the appealing products, the new product news and the marketing programs are winning and those that don't are losing.

So no, I really don't think it's pantry loading at all going on out there. People just don't have the money and I think they're buying payday to payday right now. I think it's truly the guys in the companies with the new products are winning and the good programs are winning and the guys that don't are losing.

Bill, I don't think you're seeing a lot of CPG companies in the US with 7% volume growth. Everybody can't be winning.

Yes, no, that's fair. And then just this one last brief one on this Wal-Mart customer pickup stuff. You know, longer term, does this kind of help your gross to net? Because do they take all those sort of risks associated with like crush rates and things like that?

What pickup net from what customer did you, say, Bill? We didn't register that, sir. Next question.

I was saying like longer term, does it kind of help the gross to net because you are not longer liable for what happens once it leaves the factory?

No comment.

Okay.

Chris Bamman, MTB Investments.

Congratulations on a great quarter. Let me see if I get this straight.

All things equal, if you take money out of advertising by the same amount that you increased promotion, several things happened. One is, it decreases the revenue and decreases your gross margin and it decreases your SG&A as a percent of sales. If we took that out, would you then -- would that be offset completely so you wouldn't have to change your organic sales by 1%? Is that just this effect and the gross margin by 50 basis points?

Number one, we report SG&A separate from marketing. So it goes from -- so it's geographies. It goes from the marketing line up to the trade spend line. So you are correct.

So we have a dollar for dollar reduction in marketing and an increase in trade spend. So marketing last year was 14%. This year it's going to be 13%. So 1% of a $2.5 billion company, $25 million. That's essentially 1% drag on top line when you move it up.

Right, and then the same basically being true with gross margin there?

Let me just qualify that for what Matt said. Yes, we moved advertising to the trade line and then some. Our total advertising in trade spending was up. So trade actually went up more than we cut marketing down. So, yes, it directly had an impact on the gross margin line for us.

There are no further questions. I would like to turn the call back over to management for closing remarks.

Okay. Hey, look, I would like to thank everybody for taking the time today. Again, it's a very crazy environment out there. I'm very proud of my Company for the great results we turned in.

I definitely think as I've said repeatedly here, we kind of were laid back in the first half a little bit and felt a little bit of pain from it but everything is in place right now. We delivered great earnings but could have had probably stronger organic growth had we been out the door but we didn't want to start to price wars out there.

So in the back half of the year, we feel great. We're going to be competitive on trade. We got increased marketing spending. Our new products are out there, our new distribution is out there and there won't be any disadvantages that Church & Dwight faces versus competition out there.

So stay tuned. If you've got any questions, give me, Matt or Maureen Usifer a call about the things today and thank you very much for your time again.

Thank you. This concludes today's conference call. You may now disconnect your lines.