切遲杜威 (CHD) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight third-quarter 2010 earnings conference call. Before we begin I have been asked to remind you that on this call the Company's management may make forward-looking statements regarding, among other things, the Company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the Company's SEC filings.

I would now like to introduce your host for today's call, Mr. Jim Craigie, Chairman and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Thank you, Cassandra, and good morning to everyone. I'll start off this call by providing my perspective on our third-quarter business results, which you've read about in the press release this morning. I will then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with his perspective on the financial details of the quarterly results.

When Matt is finished, I will return to provide some more detailed information on the performance of our key brands and to provide earnings guidance for the year. We will then open the call to field questions from you.

2010 has been a very challenging year for the entire business world, and Church & Dwight is no exception. We entered the year with strong momentum due to outstanding results in 2009, in which we achieved 5% (technical difficulty) revenue growth, 1,200 basis points of gross margin expansion, 190 basis points increase in marketing spending, and 22% growth in EPS. However, we immediately ran into strong headwinds in the first quarter of the year due to the continued weakness in the economy and price wars launched by our competitors across multiple categories in an effort to buy back their 2009 share losses.

Despite the fact that we were uncompetitive on price for most of the first half of the year in several key categories, particularly liquid laundry, our momentum coming out of 2009 and our strong new product pipeline enabled us to deliver solid business results as reflected in our 20% EPS growth in the first half of 2010. We were finally able to get fully competitive on price in the third quarter, as reflected in the fact that in the month of September our domestic share increase at the measured channels was the highest share achieved to date in 2010. Thus, we have strong momentum entering the current fourth quarter.

This momentum will be enhanced by increased marketing spend in the fourth quarter of between 14.5% and 15% of net revenue, which will be our highest quarterly spending level in 2010 and a higher spend than the prior-year fourth quarter, which was 13.9% of net revenue. As a result, we expect to achieve higher organic revenue growth in the current fourth quarter than the third quarter, adjusted for the six fewer calendar days in the fourth quarter.

This will enable us to achieve annual organic revenue growth of approximately (technical difficulty). This momentum should also carry into the first half of 2011, as we will not be uncompetitive on price as we were in the first half of 2010.

Before I turn the call over to Matt to take you through the specific financial details (technical difficulty) I would like to say that I am very proud of my organization for the superior EPS results and quality of earnings that we achieved in the first nine months of 2010.

Our new product team has delivered record incremental volume this year from innovative new products, which played a key role in more than offsetting the uncompetitive pricing. I will provide more details on some of these new products later in the call.

Our domestic marketing and sales teams have now achieved 14 consecutive quarters of consumption growth in excess of aggregate category growth across our product portfolio. While we reduced our advertising spending in order to increase our trade spending in the first three quarters of 2010, in reaction to the competitively driven price wars, our total advertising spending as a percent of net revenue was still higher than any of our key competitors.

Our combined advertising and trade spending for 2010 is projected to be approximately $50 million more than 2009 (technical difficulty) strong commitment we have to growing our shares regardless of the economic or competitive environment.

Our supply-chain organization has done a terrific job in lowering costs (technical difficulty) commodity costs and higher trade spending. In particular our new manufacturing facility in York, Pennsylvania, is exceeding its projected cost savings.

Please keep in mind that we (technical difficulty) our gross margins over 400 basis points in 2009, and we are holding on to all that gain and then some, despite higher commodity costs and price wars. Everyone in our organization is continuing to keep a tight rein on overhead costs, as proven by the fact that we had the highest revenue per employee of any major consumer packaged goods company.

Finally, we have done an outstanding job in squeezing every dollar out of our working capital to drive cash flow. Our cash flow conversion rate in Q3 was over 200% and the year-to-date number is over 100%, which is well above all of our key competitors.

(technical difficulty) always remember that our unique product portfolio consisting of both premium and value brands puts us in a position to drive consumption growth in excess of category growth in any type of economy, as exemplified by our strong (technical difficulty) growth over the past 10 years.

All these factors make me feel bullish about my Company's future despite the very tough environment facing all companies these days. We delivered exceptional EPS growth before the recession; we are delivering exceptional EPS growth during the recession; and we are taking actions to ensure that we continue to deliver top-quartile EPS growth moving forward regardless of the future economic environment.

I will now turn the call over to Matt who will provide you with greater insight (technical difficulty) financial results for the third quarter and year to date.

Okay, thank you, Jim. Good morning, everybody. I'm going to start with EPS. Third-quarter GAAP EPS was $0.96 per share compared with $0.98 in 2009. The prior-year quarter included a favorable legal settlement of $0.17 per share and a $0.05 charge for restructuring costs related to a laundry plant closing. So excluding these items EPS was up 12% from year-ago.

Reported revenues were up 1.7%. Foreign exchange, acquisitions, and divestitures all netted to zero in the quarter. The reported revenues were reduced by 1.1% by a customer pickup program which resulted in delivery costs being reported as a reduction of sales rather than as cost of goods sold. So adjusting for that item organic growth was 2.8% for the quarter.

Q3 is the third consecutive quarter with volume gains of 5% or greater. Of the 2.8% organic growth, approximately 5% is due to volume, with 2.2% negative price mix, which is largely attributed to an increase in trade spending in our US business particularly to address competitively driven price wars and to support new items.

Year-over-year price mix actually looks like it peaked in the second quarter at approximately negative 3% followed by the negative 2.2% that I mentioned in Q3. We expect Q4 to be approximately negative 1.5%. So those are all total Company. So we are seeing the price mix trend year-over-year improve each quarter.

The full-year revenue call is for 5% volume and price mix of negative 2% due to the intensified competition. Previously we expected 5% to 6% volume growth for the full year; so now we are looking at 5%. We expect to deliver approximately 3% organic growth total Company for 2010.

Now let's briefly review the segments. The domestic business reported organic growth of 1.4% with 4.7% volume partially offset by negative 3.3% price mix. That price mix number reflects a significant increase in trade spending which is largely in our household category. As you probably know, about 75% of our annual trade spend is in household.

This quarter we also had our most difficult comp of the year, since we posted a 9.1% organic growth rate last year in the third quarter. Looking ahead to the fourth quarter let's keep in mind we have six fewer calendar days in fiscal fourth-quarter.

Without any adjustment for fewer days, organic growth is expected to be negative. However, when you adjust for the six fewer days that we expect -- when you adjust for the fewer days we actually expect Q4 to be our strongest quarter of the year for the domestic business as the performance of the XTRA brand continues to improve.

Let's talk about international mix. International had exceptional organic growth of 6% in Q3 which was broadly based in a number of countries. This increase is driven by volume growth of 7%, partially offset by 1% negative price mix.

This is the fourth consecutive quarter of high volume growth, that means over 5%, in international. The volume pickup reflects NAIR gains across the division; ARM & HAMMER Liquid laundry growth in Canada and Mexico; and the successful launch of new products.

We have lower price mix internationally in comparison to the domestic markets. The reason for that is that international markets are heavy personal care products that are less promoted than household.

I'm going to turn now to Specialty Products, to our Specialty Products Division. Organic sales were up 9% with volume up 5% and price mix up 4%. Price mix being up is driven by price in the animal nutrition business, where we are recovering raw material cost increases from our customers.

The 9% organic increase is driven by a couple things. One is weak sales in the third quarter of 2009 due to soft dairy market in the prior year, and also the timing of sales this quarter due to announced price increases on certain products.

Turning now to gross margin, our reported third-quarter gross margin was 44%. Excluding the $6.7 million charge related to the shutdown of the North Brunswick laundry plant last year, the third-quarter gross margins contracted 110 basis points.

The decrease in gross margin reflects the benefits of our cost reduction program, the benefits of our new laundry facility, and as well as customer delivery arrangements. These benefits were offset on the other hand by higher trade spending and commodities.

As we indicated in the earnings release, we expect full-year gross margin expansion of zero to 25 basis points for the full year. The lower gross margin expansion is a reflection of higher trade spending. For the fourth quarter, the gross margin is expected to be higher than prior year primarily due to redundant overhead in our old laundry plant in the prior year quarter.

Marketing is next. The marketing spend was $90 million or 13% of revenues, which is 180 basis points below the prior-year spend rate. But I think everybody should keep in mind that it's 100 basis points higher than Q3 2008.

So on our end, we look at the trend in the quarter. So if we went back to 2008 we would see 12.6% spend in the third quarter. If we went to 2009 we would see 15.5%. And now 2010 we see 13.7%, so you can see we are still pretty high.

In Q3 we last year we increased our marketing spend by 290 basis points to a record 15.5% while most of our competitors reduced by 100 basis points or more. I think it is noteworthy that in spite of the lower spend rate all year long, in this quarter we grew unit share on six of our eight power brands. I think this is a reflection of the great execution by our sales and marketing team.

Looking ahead, we are dialing up our fourth-quarter marketing spend to 14.5% to 15% of sales. As you saw in the release we have momentum going into the fourth quarter, so we're taking advantage of that. This is significant as we expect to be up 60 to 110 basis points year-over-year, or if you look at it sequentially 80 to 130 basis points higher than the third-quarter spend rate.

Finally on a full-year basis -- you've heard us talk about this before -- our combined marketing and trade spending will exceed 2009 levels by over $50 million. As you can see we are continuing to support the business, but the spending has shifted to in-store programs where the consumer is making their purchase decision.

Okay, SG&A is next. SG&A year-over-year was down slightly, $1 million in the quarter; as a percentage of sales it was 13.1%, down 30 basis points from year-ago. The lower SG&A costs in the quarter reflect lower compensation costs.

SG&A as a percentage of sales is expected to continue to be favorable in comparison to 2009. For the full year we expect a reduction of approximately 50 basis points to approximately 13.6% of sales. Once again this is a reflection of our continuing vigilance on costs.

Operating is next, operating margin is next. The reported operating margin for the quarter was 17.2%. Excluding the legal settlement and the plant restructuring charges from last year, operating margin was 100 basis points above year-ago. We expect operating margin expansion to be positive every quarter and well exceed 100 basis points for the year.

Income from affiliates decreased $1.9 million due to lower income from a joint venture. With respect to other expense, other expense was flat with year-ago at $7.9 million.

It is very important to note that the quarter included $4.3 million or $0.04 of expense related to the planned settlement of interest rate hedge agreements associated with the fourth-quarter refinancing of our bank debt. On the other hand, this charge was offset by $3.2 million or $0.03 reduction in an interest expense as a result of the settlement of federal and state tax examinations.

Now looking ahead to the fourth quarter -- and you probably saw this in the release -- the refinancing will also result in a $0.03 charge to earnings in Q4. This is due to the write-off of unamortized deferred financing costs.

Income taxes is next. Our effective rate for the quarter is 34.3% compared to last year's 37.8%. The lower effective tax rate reflects the benefit of certain tax settlements of $3 million (sic - see Press Release) or $0.04 per share in the quarter. We are forecasting an effective rate of approximately 36% for the full year.

Now another way to think about what is going on in taxes and other expense is as follows. For the full year we are expecting $0.07 of help from the tax settlements; remember, that is in the tax line and in the interest line. That is offset by $0.07 of hurt from the refinancing activities. So no net benefit for the year.

Okay, refinancing. In November we expect to replace our existing plant facility with the new facility which includes a five-year $500 million unsecured revolving credit agreement, which includes a $500 million accordion feature. The expected completion of an unsecured credit facility reflects our recent upgrade to investment-grade.

Free cash flow is next. We generated $250 million of free cash flow in the first nine months of the year. Netted in our nine-month free cash flow is $37 million of capital expenditures.

Net cash from operations is below last year by $20 million. But remember the cash taxes are up about $45 million compared to the first nine months of last year. That is largely due to higher earnings and the one-time benefits of tax law changes in 2009.

By the way, our definition of working capital is receivables, trade payables, and inventories. If you look at working capital as a percentage of sales, it is about 10.2% at the end of September, which is consistent with the end of 2009. So we are doing a nice job managing working capital.

We have $453 million of cash on hand and approximately $211 million of available credit through our revolver and asset securitization facility. The Company paid down $158 million of bank debt this quarter, and we anticipate paying off the outstanding term loan facility of $408 million with available cash and borrowings available under the accounts receivable securitization facility in Q4.

Our total debt to LTM adjusted EBITDA per our bank agreement was approximately 1 (technical difficulty) times at quarter end. So we expect to generate over $300 million of free cash flow in 2010; and remember that is after approximately $70 million of CapEx. The $70 million includes the $12 million investment to install cat litter production in our York plant as well as $13 million investment as part of our SAP upgrade.

One other thing, finally, just as a reminder. For the past 12 months we have been obtaining regulatory approval to wind down our US defined benefit plan, which was frozen many years ago in the 1980s. After giving effect to 2010 contributions, the cash needed to terminate the plan is roughly in line with our previous estimates, which are in our filings. We will continue to evaluate our options and update our 10-Q disclosures regarding the cash and one-time EPS impact of the termination.

So in conclusion, the third-quarter highlights include 2.8% organic sales growth driven by 5% volume. We had share gains in six of our eight power brands, and our operating margin expanded 100 basis points.

We are maintaining our annual earnings per share goal of $3.93 to $4.00 for the year, which is an increase of 13% to 15% over the last year. This would mean that we have a wide range in the fourth quarter.

There are three reasons for that. One is that there is uncertainty regarding Congressional approval for the research tax credit. Also we have some timing issues with the timing of the amount of plant restructuring charges at one of our international facilities, and also the timing of certain expenses related to our refinancing activities in Q4. I'm going to turn it over to Jim now.

Thanks, Matt. I will finish off our presentation today by adding a little color to the Q3 year-to-date business results which Matt just took you through, provide my outlook for the total year and our current perspective on 2011.

First, here are some highlights of our key brands in the third quarter. ARM & HAMMER, which is our largest brand with over $1 billion in annual sales, had an outstanding quarter. The total brand, which competes in many categories, achieved all-outlet consumption growth of over 10% versus aggregate category growth which was minus 2%.

The key drivers of the ARM & HAMMER brand's strong performance in the third quarter were, first, ARM & HAMMER liquid laundry detergent, which grew consumption over 20% versus year ago, driven by its new Power Gel line and increased distribution across several key accounts. And second, our cat litter business, which grew consumption over 15% versus year-ago driven by our highly innovative new cat litter called Double Duty, which delivers superior odor control for both urine and feces. In fact, both ARM & HAMMER liquid detergent and cat litter achieved record quarterly sales and shares in Q3.

Another of our power brands that had an outstanding third quarter was FIRST RESPONSE pregnancy kits, which achieved a record quarterly share driven by 10% consumption growth in Q3 against a category which declined about 2%. FIRST RESPONSE's growth is driven by our unique six-days-sooner claim, which no other pregnancy kit can claim.

Our condom brand also delivered another solid quarter of sales and consumption growth, driven by the success of our new ECSTASY and Fire and Ice product lines launched over the past year. ECSTASY, which was launched in the third quarter of 2009, is the most successful new product launch in category history. It has captured over 10% share of the total condom category.

We built upon the strong growth of ECSTASY in 2010 by launching another new subline of Trojan called Fire and Ice. This new subline features unique lubricants on the inside and the outside of the condom to provide heightened sensations that increase pleasure. The early share results for Fire and Ice are tracking at the same pace as the ECSTASY introduction last year.

Finally, I would like to take a minute to talk about our OXICLEAN brands. When we bought this brand in Q3 of 2006 it was the leading nonbleach laundry additive, with a market share of about 25%. Within less than three years we have built this brand's leading share by 50% to over 37% of the total category by launching innovative new products, expanding distribution, and more than doubling its advertising spending.

Since the middle of last year several major competitors have launched direct attacks on OXICLEAN. The competitors have supported these attacks with high levels of advertising and trial incentives.

In response, we mounted a ferocious defense of the OXICLEAN brand, including a new subline called Max Force, which combines four types of stain fighters to get out more tough stains the first time. I am proud to say that in Q3 of 2010 our share of market on OXICLEAN is still 37%, which is twice the size of our nearest competitor and still 50% larger than we brought the brand four years ago.

These results exemplify the strength of our power brands, the innovation capabilities of our new product development team, and the ability of the entire Church & Dwight organization to defend our brands against much larger competitors.

We have launched other highly innovative new products that I can talk about on our SPINBRUSH, NAIR, ORAJEL, and KABOOM brands. However in the interest of time I will move on to other subjects.

As I said at the start of the call, 2010 has been a very challenging year for Church & Dwight. You all know the facts about the weak economy. In our case we continue to see macro weakness across the board as dollar sales were down in eight of our 13 core categories in Q3, and unit sales were down in 11 out of the 13 categories.

Those category trends were exacerbated by the price wars initiated by key competitors. Despite this difficult economic and competitive business environment, Church & Dwight achieved 5% volume growth in Q3, as Matt told you.

Those results reflect our unique product portfolio consisting of premium and value brands; the strength of our brands, as exemplified by the OXICLEAN example; our innovative capabilities, which delivered the best new product portfolio in our Company's history; and the strong marketing support and sales execution on our brands.

We enter 2010 with great momentum. We fought through continued weakness in the economy and competitive price wars, and we expect to exit 2010 with great momentum.

Now finally a few comments about the future. As stated in the press release, due to the strong EPS results of the first three quarters, as Matt told you, we remain confident in our ability to deliver our previously announced earnings per share estimate for the full year of 2010 of $3.93 to $4.00, which is an increase of 13% to 15%. We will achieve this goal despite a significant increase in marketing spend in the fourth quarter so that we exit the year with strong momentum.

As far as 2011 is concerned, we are still in the process of finalizing our 2011 plans based on the latest news concerning the economy and our competitors. We will announce our specific 2011 targets when we release our Q4 2010 results next February.

At this point in time I would simply tell you that we always strive to be in the top quartile of EPS growth within the CPG industry. Of course a lot could happen between now and February in terms of the economy, commodity costs, and competitive strategies and marketing spending and pricing.

Lastly, in terms of acquisitions, we continue to actively look for good acquisitions and we continue to evaluate the best uses of free cash flow, including dividend increases and share buybacks. We have a very strong balance sheet and the borrowing capacity to consider all of these efforts, depending upon the size of any acquisitions that we make.

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

(Operator Instructions) Bill Schmitz, Deutsche Bank.

Hey, guys. Good morning. Hey, I was reading the press release and there is a lot of talk now about unit share, and before it was always dollar share. Then you also made some commentary about XTRA.

So if you were to read between the lines, does that mean that XTRA is going to get a bunch of incremental distribution heading into the fourth quarter?

Bill, we did honestly lose a little distribution on XTRA in the third quarter, and we are getting some of that back in the fourth quarter. But I don't want to give any more details on that at this point in time.

XTRA is making a comeback. XTRA is our one brand that has had the most difficulty this year, and we have programs in place that are going to fix that starting in the fourth quarter, entering next year.

Okay, so is that a big driver of the 4% organic growth, if you normalize for the extra days? Is that one of the bigger drivers of that growth?

Yes, hey, Bill, with respect to -- this is Matt. The Q3 trends are better for XTRA than in the first half. You've got to keep in mind we were one of the aggressors on price and we compete in the value section. We were uncompetitive earlier in the year, so we have corrected that now largely through bonus packs and some other things we have done on shelf.

And we expect Q4 to be less negative than the prior quarter. So that is only one of a number of areas because remember September was a really strong month for us in a lot of areas, not just in laundry.

Bill, we also gained distribution on XTRA, one of the top five accounts in the country starting in Q3. So that is building and helping XTRA going forward.

Is that why you're talking about unit share now? Because I haven't heard you guys mention that historically.

Unit share to us is a better measure of the strength of your business. Because actually what is being sold, the dollar -- the mix going on out there with pricing and that to us sometimes confuses what the true consumption is of your product. So we're a little more focused on unit share as far as the strength of our business.

Got you. Can I just ask you a question then? I know you probably don't want to talk too much about it, but it seems like Purex is kind of getting destroyed.

I mean if you look at who is gaining share, it looks like Procter is coming back a little bit; even the guys at Sun doing okay. I mean is there a big distribution shift that you guys are benefiting from there?

I think you should call Arizona to talk about that.

They don't talk to us. All right. Thanks very much.

Bill Chappell, SunTrust.

Good morning. I guess first, just looking at the fourth-quarter expectation of the 100 basis point gross margin, what would that be excluding I guess the hit from last year's -- or I guess for the redundant inventory of last year?

Bill, we don't get into that much detail with respect to year-over-year. It is probably half of it.

So I mean gross margin would still be up year-over-year?

Yes.

I'm just trying to understand that with regard to -- for the past couple quarters gross margin has been down year-over-year as you have shifted from A&P to trade promotion. Is this a shift back where you need to step up the marketing and more traditional-type advertising to support the brands and cut back on some of the trade promotions?

Yes, but remember the trend in price mix, right? So Q2 was the worst quarter for price mix. So remember we trended down from Q2, Q3, to Q4. So Q4 the price mix is expected to be 1.5%, so that is the lowest for the year.

Okay. I guess that leads me into another question on the mix. If I am looking at what you are saying of 4.7% volume and then hit by 3.3% price mix; and I think you said price was negative 2%.

That 1% to 2% hit from mix seems a little odd, because I would assume that the laundry business, which has lower margin, has had the toughest comp and some of your higher-margin businesses were growing a little bit faster. So is there other consumer trade-down, or am I missing something?

Which? What? Are you referring to a quarter?

To this current quarter, yes, this current quarter. It seems like the mix is having a bigger detrimental impact to the margin -- or to the sales number than I would have expected.

Yes, Bill, we have seen a little bit. Some of our higher priced categories like power toothbrushes and pregnancy kits, the categories are soft. So there is some price mix issue going on there, as some higher-margin businesses are facing tough times in this economy.

Okay. So there is this trade-down within your own portfolio?

Yes.

The other thing too, Bill, is when we talk about -- even though we might be up in unit share, a lot of those categories' units are actually flat to down.

Got you. Then --

So in other words, and obviously the personal-care stuff just being down year-over-year in units is going to hurt your mix.

Okay. Then last one, Matt. Just with all the moving parts on the balance sheet, I assume it is a net benefit to interest expense in 2011. Any way you can give a range of what this will do?

Bill, it all depends on acquisitions, where that interest is going to hit.

Let's assume you are not making an acquisition tomorrow. I mean interest expense should go down $5 million, $10 million next year?

Yes, it would be in that range. Probably the midpoint of that range probably makes the most sense.

Great. Thanks so much.

Andrew Sawyer, Goldman Sachs.

Thanks, guys. I was wondering if Matt could talk a little bit about the commodity cost outlook. I think we talked about resins and surfactants being flattish; but now it seems like some of those things are perking up a bit. I was wondering if you could frame up how you are seeing the basket move.

Yes, well, the big ones for us -- just to remind everybody -- is probably almost in this order, would be you have surfactants; your resin would be biggest for us; followed by then paper, soda ash, diesel, palm fatty acid distillate, and then latex.

As you correctly point out, surfactants and resin are the biggest ones. Keep in mind that they are ethylene based, and ethylene really has not been moving up. It is more flattish to down.

If you look at what the chemical associations have been predicting, they actually have been predicting for a while that resins will be stable to down in 2011 in spite of what you might be seeing today. So it doesn't necessarily look like that is going to be very ugly in 2011 versus 2010 if that comes true. But you have to watch ethylene.

With respect to some of our other ones -- paper, you are right. Paper is up, so that is obviously worrisome.

Soda ash is up. Diesel is up quite a bit. Palm fatty acid has skyrocketed. And latex is also up because of heavy rains in Southeast Asia.

So a lot of things are up. As a basket, if you had to call it today, you would probably say you would expect about 5% up in 2011 versus 2010. That is on a market basis.

However, we have programs in place to mitigate those increases. You have probably heard us talk about in the past that to some extent we have long-term contracts; sometimes we buy forward; and we also have financial hedges.

So I have given you the picture with respect to the market, but I also think that we hope not to be up that high because of the actions that we plan to take.

Then beyond the mitigating actions on the purchasing side, I guess you talked about price declines moderating. But, Jim, is there any visibility at all to anybody backing away from some of this aggressive pricing action?

Yes, good question, Andrew. Liquid laundry detergent is the key issue, because that is our biggest business and the bulk of our trade spending. If you look at market data you would see a slight decline in Q3 in volumes and on promotion. But the actual feature prices in Q3 were the lowest of any quarter in the past two years.

So I hear our competitors who started the price war now waving the white flag; but I haven't seen enough proof in the marketplace to convince me yet that the price war is over.

So if it is not over, how are you guys thinking about -- if you don't have pricing flexibility, how are you guys thinking about managing commodity inflation into '11?

We would -- as I said before, Andrew, we have a very active program with respect to mitigating the cost of commodities. And keep in mind we also have our Good to Great program where we are always focused on efficiencies in our plant, and we have very robust plans for 2011 on cost savings.

So it'd principally be a productivity (multiple speakers)?

Yes, yes exactly, which is the backbone of the Company.

All right, well thank you so much, guys.

Doug Lane, Jefferies & Company.

Yes, hi. Good morning, Jim and Matt. Can we talk a little bit more in depth about the cat litter business? Noticing pretty substantial share gains in that category, and it is one of your top three or four or five categories.

So who are you winning against? And how are you going to carry that momentum into 2011?

Yes, Doug, we have had an outstanding record there. I think we are now onto 27 or 28 consecutive quarters of growth in that business. Our growth has been driven largely by innovation.

We have had great product innovation, and that innovation has helped us drive increased distribution. And that has all resulted in higher consumption out there with the consumers. So it has not been price at all on our point; it has all been innovation and distribution driven.

I think if you look at the share results right now, our friends in California, Northern California, are the ones taking the hurt. They reported that.

But I think it is just -- we just had -- I give kudos to our new-product machine for -- Double Duty is our latest venture which is doing outstanding. And we have more items like that up our sleeve. So it is innovation, distribution, and marketing driven on our point, not price.

So it sounds like the innovation is helping win retailers over and getting distribution expansion, as opposed to really targeting one of your competitors specifically.

No, we are all concerned about the consumer. That is all we care about. We keep making the best cat litter out there and consumers keep buying it.

Okay. Also separately, have you seen any change in the retail landscape with Durex now that it is part of Reckitt?

Nothing yet.

Okay. Thank you.

Chris Ferrara, Bank of America.

Hey, guys, I was wondering if you can talk about where price gaps in liquid laundry are relative to say three years ago. Because I guess it looks like when compaction went on, it feels like you guys -- there were escalating raw materials prices. You guys didn't price much; everyone else did; so price gaps got a little wider.

Then there was a lot of competitive price wars that you called out, and now you have gone back the other way. So where do you sit today with ARM & HAMMER versus the other major brands as far as price gaps go relative to three years ago?

Yes, Chris, I don't have exact numbers in front of me; but the price gaps have narrowed a little bit between the premium and midpriced zones and in the value zone which we are in. Some of our competitors took as much as 23% price declines in their brands to close the gap.

But ARM & HAMMER liquid continues to do great because the innovation is there. The brand of ours that has been hurt the most is XTRA, just because of some of the price compression going on. But we're working on fixing that starting in the third quarter really, but more going forward in the fourth quarter in 2011.

Thanks. I guess just on the initial 2011 outlook you gave you mentioned top-quartile EPS growth, I guess, and noted a lot could happen between now and when you actually give the guidance.

I guess, what are you saying? You didn't actually give an outlook but you brought it up and noted that a lot can happen. I guess can you just give a little more color around what you're thinking or at least what you meant by bringing it up in the first place?

I just want to say, Chris, in my six-year tenure as the head of this Company we have never delivered less than double-digit growth. But I don't want to call an exact number right now because there's too many signals coming out of our competitors as far as what they are planning on doing going forward.

Most of them to date to have only called single-digit growth on EPS, but they are talking a lot about increased marketing spending and whatever. So we need to sort that all out because the EPS number we call will be driven on what the competitive landscape is like and what the economy is like, and we are still dotting the i's and crossing the t's on our plans to figure that out.

But as I said we always have been, we always plan to be in the top quartile. Exactly what that number is, stay tuned.

Okay, thanks.

Alice Longley, Buckingham Research.

Hi, good morning. I guess this is a follow-up on an earlier question about wanting to look somewhat at value and not just volume. Can you tell us some of your major brands in this quarter that were up in dollar terms and some of your major ones that were down in dollar terms?

I know these may -- some of the ones that were down in dollar terms may include ones where you gained share, and it is just the categories now. But it would be helpful to know which ones, as I said, are up and which are down in value terms.

Yes, Alice, our big winners this quarter were ARM & HAMMER liquid which I told you consumption is up over 20% and sales were up in a similar range. Cat litter was up big.

And KABOOM, one of our cleaning brands, had an outstanding quarter. It was driven by some product innovation.

The three items that were hurt the most this quarter were XTRA, which we said, which we are fixing. OXICLEAN got hurt a little bit on some sales as the category has gone soft a bit.

And the other thing is the dental category has been highly competitive also, and we have lost a little bit there. But again we are coming back on that. So those are the three biggest winners and three biggest losers in our portfolio.

Dental means SPINBRUSH and the toothpaste?

No, mostly the toothpaste.

Okay. Again to try to push you a little bit for next year, do you think you can get gross margins up next year?

Absolutely.

All right, that's good. I think about a year ago you said that within six months you would do something with all that cash and cash flow that you have got. If you couldn't find an acquisition you would do some major share buyback program.

But it's been longer than that. Can you comment on that? Why not buy back shares or hike the dividend some more or something?

Well, I would just say we are right in the midst of a lot of activity on the acquisition front, and depending how that sorts out will affect our position on both dividends and share buybacks. But I will just say we are more actively than ever looking at those latter two in the environment, just because we have so much cash and generating so much cash.

But again, it all depends on the size of acquisitions we make; and we will know more on that in the next few months.

Are you just as interested in acquisitions offshore as acquisitions in the US, or less so?

Any acquisition that meets our criteria, which is a number-one or -two share brand; margin accretive; growth accretive; asset-light -- we will take anywhere in the world.

My final question is, we are hearing that because of all the cash around and a little bit more reassurance in the market, that prices on companies that might be bought have been going up a lot. Can you comment on that?

I would just say that anytime there is a premium quality business out there it will get a premium price. And any time there is junk out there it will get a junk price.

I haven't really seen much change for that rate, much change in that. The premium quality businesses really in my mind have not changed at all in terms of the multiples they are getting over the last two years.

Great. Thanks a lot.

Jason Gere, RBC Capital Markets.

Okay, great. Good morning, guys. Hey, I guess I was just wondering. Net of some of the losses on XTRA I was wondering if you could disaggregate between maybe -- on the volume side between the distribution gains, because I know you had some wins in ARM & HAMMER earlier in the year, versus just general sellthrough driven by innovation.

And I was just wondering when you anniversary some of those distribution gains into 2011.

Jason, there is so much going on, honestly -- like I said to you in the third quarter we gained distribution on XTRA, one of the top five accounts in the country. We have lost a little distribution in one other account to some degree.

The price compression certainly hurt on the brand; and we have a lot of plans going forward Matt mentioned to you as far as promotional items we are doing on the brand, some new product news on the brand.

So it's a mixed bag. But I would just tell you we are much more positive about XTRA going forward in our portfolio than the first three quarters of this year.

Okay. Then I guess -- and I liked the commentary obviously about the momentum in the fourth quarter going into 2011. Look, we can't blame you for not giving guidance at this time.

But just following up on Chris's comment, I guess looking at the top quartile of your peers obviously is not all that aspirational. Everybody has been missing numbers. You guys have really driven 13%, 15% earnings growth out there.

How much does the lack of an acquisition weigh down? Is that one of the big factors that is in there? Or are you looking --? Can you just maybe provide a little bit more color maybe that you didn't say before?

Chris, the biggest issues weighing on our mind about next year are, first, the macro environment. The categories continue to stay soft or get softer.

Two, competitive spending for both -- will the price wars abate in Q4? If we see that, that will be very positive to us going forward next year.

And then just both those factors together will make our assessment as to where we come out next year. But we feel very good on our new product pipeline next year. Our marketing program is doing great.

And we will give you a call in end of January, early February as to what we see as EPS growth. But I told you before I have always delivered double-digit growth in this business in my six years.

But I need to see more out of the competitive spending. They're also talk -- the competitors are talking a lot about increasing marketing spending right now. I need to get a better handle on that coming in Q4 and be able to see the whites of their eyes in the first quarter of next year.

Okay. Just as we look at the international expansion, obviously Mexico and Canada. How much of that is done? Is there still more opportunities there?

I mean if you look at where you have -- you're building a presence, those are two of the markets that really stood out. So how far along are you done there? Should we see those continues on the international side really kind of continue as we saw this quarter?

Yes, our international market has been doing great and I think it will continue in 2010. We have been building our household business in both Canada and Mexico with some terrific results.

The UK has been doing a terrific job on their portfolio, a lot in the dental area. Our little subsidiary in Australia has just been kicking butt like crazy over there with their product portfolio.

So actually trail -- we got a little business in Brazil that is up over 20% in the latest quarter. So I am really very proud of our international group. They delivered some great numbers for us.

And like Matt said earlier, it is almost all personal care, so it is higher margin and not affected by pricing wars as much.

Okay. Then just the last question. Talking about the new plant, and obviously you moved the overflow for cat litter into there. What percentage are you at capacity right now there? To just put it into context about -- thinking about an acquisition, leveraging that plant over the next couple of years. Thanks, guys.

Yes, Jason, keep in mind we built that plant and the building today has 50% excess capacity. Cat litter will pick up a little piece of that.

Then we have the ability to expand the plant on the land another 50%. So there is a ton of room in that great plant to put either some of our current businesses or more importantly to bring acquisitions into that building. We built that for the next 10 years.

Knocked you right off your chair, huh? Everybody still on the line?

John Faucher, JPMorgan Chase.

Thanks. Just following up on that last question. You talked about people talking about a return to marketing, but not really seeing it from that standpoint.

Can you talk maybe a little bit about the categories where you think that that potential first step-up is most prevalent, given where it has fallen off the most over the past couple of years from a competitive standpoint?

Well, John, again I go back to it's mostly the liquid laundry category which is most crucial to us, and as far as pricing in that category and the price wars which were started by competitors earlier this year.

Again, we're starting to see a slight declines in the volume done on promotion. But the feature prices are the lowest in third quarter of the last two years.

So again we hear them talk, but we want to see them do the walk before we get convinced that pricing is going to go up there. But I hear the right things, so let's hope they are good on their word.

On other categories, there is a lot of competition in other categories. But again, I said earlier, our new product pipeline has been major winner for us this year. Because of it we got expanded distribution in almost every category.

And then our marketing again, even though we cut back a little bit on marketing this year, we are still well above our 2008 levels. If you compare our spending today versus 2008 and competitors versus 2008, our spending is up and almost all the competitors are down versus 2008.

So we are still spending at very strong share of voice levels to drive our new-product innovations, which is resulting in, as Matt said, share gains on six of our eight power brands.

Okay. You guys talked a little bit about category units remaining weak. Obviously higher levels of competitive spending creates different issues. Do you think that is what we need to get -- or that is what you need to get the categories moving again, or --?

No, we need people being employed in the United States and the rest of the world. Unemployment is the key to being -- I am pretty much expecting the economy to remain sluggish in 2011. I'm not expecting any major improvement in the economy.

Okay. Thank you very much.

[Henry Cappion], Oppenheimer.

Hi, great. Thanks for taking my questions. I guess just talking about your consumer in a little bit greater detail, is there any way to talk about the divergence of your value brands versus your premium brands and how those have changed perhaps over the last year?

Our value portfolio, which again is about 40% of our volume base, for the most part continues to be doing exceptionally well. ARM & HAMMER liquid is a big winner there. Our value toothpastes have also done exceptionally well.

So value is still king in this economy and it's going to be a big plus for Church & Dwight. It has been in the past and I see it going forward.

The premium side, it's almost a linear correlation. The higher price the category, the more difficulty it's had in the economy. Our two highest price categories are the SPINBRUSH business and the pregnancy kit business, and there we have seen category softness in those categories out there.

So consumers are trading down there where we have premium price, just as our competitors who have premium prices. And our value categories are suffering.

So value is king and I think value is going to stay king for a long time. Thank God Church & Dwight has a unique portfolio, having 40% of our business on the value side.

Okay, great. Then in terms of the trade promotion spending, it sounds like you are expecting that to moderate a bit. Is that how we should think about that as we look towards 2011?

That is certainly our hope. Like I said, we are seeing the beginnings of some of that, but we need to see more to be convinced that we are going to get back to, say, 2009 levels.

Great. Thank you very much.

Connie Maneaty, BMO Capital.

Morning. Could you (multiple speakers) talk a little bit about the new products you have already shown to the trade for the beginning of 2011 and what those might be?

No. There is nothing -- I have told you about everything that we talked to the trade, the latest thing being Double Duty which is out there doing great. The rest of those -- most of new items get revealed in the first quarter of next year.

So by the time I get to CAGNY you will hear more. But honestly you know about everything that has been talked to for the trade so far.

How would you characterize the new product flow for next year compared to this year, when there were so many products?

It is on par. It is on par. We are still finalizing a few things, but this year was incredibly outstanding.

We will do about $0.25 billion in gross sales on our new products this year. And that is a pretty incredible hurdle, but we have a great new product pipeline going forward. So I feel very good.

Also, it seems to me that a lot of the price wars in liquid detergent, especially of some of the more minor players, have been funded by widening margins from compaction. Correct me if that is not right.

But at some point unless everyone is generating even higher margins now, wouldn't you expect that money from some of the players to dry up and have them be perhaps a little bit less able to throw money at the category in liquid laundry?

Connie, I wouldn't necessarily say there is a cause and effect there. Liquid laundry is a highly merchandised category out there. It is one of the top 10 categories in stores as far as drawing people in, because they buy it frequently.

I think it is simply a case that some competitors were losing share and they dropped their price trying to get the share back they lost to the value side of the equation. Whether or not there had been margin expansion or not in the past, I think they would have dropped prices anyway.

So I don't think that was -- the benefit of any compaction I don't think was the reason why they felt they could drop prices. They had to drop prices in their eyes to get their share back. So price wars are price wars, and we didn't start it, and those who started it need to end it.

Okay, great. Thank you.

(Operator Instructions) Lauren Lieberman, Barclays Capital.

Thank you. Good morning.

Happy birthday, Lauren.

Oh my God. Thank you.

We have not got an invitation to the party yet, so want my e-mail address there?

Word is really spreading fast. Anyway, okay, so just on liquid laundry. I wanted to follow up on Connie's question actually.

I hear you on the price war discussion. The only thing that stands out to me is by the second quarter list prices that were going to change changed. I think your comments around promoted price points being the deepest they have been yet -- was that on lower list? Or is that the depth of promotion?

Because they're two different things. There is the list price has changed, that is part of a price war or not; and then there is the promotion on top of it.

Yes, Lauren, only two brands I am aware of dropped their list price in this war. The rest of it has all been increased trade dollars in the category.

So it is much easier to pull that back than to pull back a list price change. But the bulk of the money has been as a result of higher trade spending.

Okay, so when you are talking about those value price -- those, sorry, feature price points being the lowest, it is not just an absolute comment. It is also about the depth of promotion?

It is all about the depth of promotion. Just as I am talking about feature prices not the shelf prices, the feature prices that I was talking about they're the lowest in the past two years in the third quarter.

Okay. Then the other thing was just -- you did end up effectively for the full year lowering the revenue outlook. I just -- we talked about the things that were really good in the quarter and I know the things that were a little softer didn't really strike me as much of a change in trend.

So from your perspective, what came n a little bit light versus where you thought it would be two, three months ago? Or same question carrying into the fourth quarter.

Yes, Lauren, it is just a macro issue. The categories are just continuing to be soft or a little softer than we expected, and the price wars have not abated as we might have hoped would happen.

But it was mostly the economy. It is just remaining weakness in the economy and consumers just aren't buying much, as much as they have in the past. And trends are not looking good going forward.

But did they get worse this quarter than they were in the second quarter?

A little bit, yes.

Okay, all right. Thank you.

Marc Riddick, Riddick Consumer.

Good morning, folks. I wanted to touch on the increase in trade spending versus the lowering of marketing spending. It is understandable obviously, given what is taking place currently.

But I also wanted to touch on your thoughts on the current ad rates. I mean is it a situation where maybe not just this quarter but going forward increased advertising rates might change the future mix of trade versus marketing?

That would be nice. I mean again, our ad spending rate is one of the highest in the entire industry. It is still lower than it was a year ago, but that would be nice if people start spending money on advertising behind new product innovations and get the consumer to start maybe trading back up.

I would like that. I think that is what some competitors are talking about. But again the end judge is the consumer right now.

Also with respect to balancing out that message, is there an opportunity to work on perhaps maybe some of the higher end products and different channels? Or is that an opportunity to work with going forward? Or are we really looking at just increasing share on existing channels?

There is not that much of a channel game out there. Volume continues to shift into the mass and dollar channels from traditional channels; but that is nothing new.

I think the key is product innovation out there. And right, to your point -- yes, marketing spending behind it. So that would be a great position to head toward by all competitors.

We would certainly like that. Again we have one of the -- we have the highest marketing spending rate (inaudible) in the industry, and we have got a great new product pipeline. But it got cut at the knees on some price wars early this year.

So we would certainly like to go back to the game of innovation and higher marketing spending.

I appreciate it, gentlemen. Thank you very much.

There are no further questions at this time. I would like to turn the call back over to Mr. Jim Craigie.

All right. Hey, everybody, thank you very much for taking the time to day from your busy schedules. If you have any questions please follow up with me, Maureen Usifer, or Matt Farrell on your questions. Again, thank you. Bye-bye.

This concludes today's conference call. You may now disconnect.