切遲杜威 (CHD) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight first quarter 2011 earnings conference call. Before we begin, I have been asked to remind on you this call the Company's management may make forward- looking statements regarding, among other things, the Company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the Company's SEC filings. I would now like to introduce your host for today's call, Mr. Jim Craigie, Chairman and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Good morning, everyone. It's always a pleasure to talk to you, particularly when we have good news to report. I will start off this call by providing with you my perspective on our first quarter business results which you read about in our press release this morning. I'll 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 more detailed information on the performance of our key brands and discuss our earnings guidance for the year. We'll then open the call to field questions from you.

Let me start off by saying that I'm very happy with the first quarter business results which were in line with our expectations despite some serious headwinds. We told you back in February that the first quarter earnings would be about equal to year ago because the first quarter last year reflected significant growth, including 8% revenue growth, 120 basis points improvement in gross margin, and a 21% increase in earnings per share.

Since January, we've seen greater than expected increases in commodity costs and weaker than expected consumer demand in most of the categories in which we compete. Despite those headwinds, we delivered 1% organic growth, held gross margins within 10 basis points of a significant gross margin gain achieved in the year ago quarter, and we kept our operating margin over 20%. And most importantly, we delivered a 4% earnings per share gain for the quarter which was on top of the 21% earnings per share gain in the first quarter of last year.

Thus, we had a good start to what has been a very difficult business environment so far this year. All consumer packages companies are fighting the same headwinds, but I continue to believe that no other consumer packages company is as well suited as Church & Dwight to deliver exceptional performance in a tough environment. I'll explain my rationale for that statement in a few minutes, after Matt provides you with his greater insights on the financial results for the first quarter.

Thank you, Jim. Good morning, everybody. I'm going to start with EPS. Our first quarter GAAP EPS was a record $1.15 per share, compared with $1.11 in 2010. EPS was up 4% from a year ago.

Our reported revenues were up 1.2%. The combination of foreign exchange, acquisition, divestitures, and a discontinued specialty product line had a favorable impact of 80 basis points in the quarter. That favorable benefit was offset by customer pickup program which resulted in delivery costs being reported as a reduction of sales rather than cost of goods sold, and that was also 80 basis points going the other way.

So, adjusting for those 2 items, organic growth was 1.2% for the quarter. The 1.2% was ahead of our February guidance of flat to 1% for Q1 and has put us in a good position to deliver 3% to 4% organic growth for the full year. Of the 1.2% organic growth, approximately 3.2% is due to volume with 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.

Now, remember last year we stayed on the sidelines of the price wars in the first quarter, so Q1 is our toughest comp from a pricing perspective. We're seeing the price mix trend improve each quarter, and we expect price mix to be flat to positive for the remainder of the year.

We expect to deliver approximately 3% to 4% organic growth for each of the remaining three quarters. The full year revenue call is for 3% to 4% volume and price mix of plus minus 50 basis points due to the pricing actions and optimization of trade spending.

So, let's briefly review Q1 for the segments. The Domestic business reported organic growth of 0.7% with 3.8% volume partially offset by 3.1% price mix. The Q1 organic sales included a couple of specific drags which I want to call everyone's attention to.

The first is the drag from lower AIM and CLOSE-UP value toothpaste sales as we deliberately eliminated unprofitable, buy-one-get-one-free on these brands. By the way, this is less of a hurt in future quarters. Now, we knew this when we called the Q1 organic sales in February. That's one of the reasons why we said it was flat to 1%. Anyway, this continuance of the BOGOs was a 60 basis points drag on Q1 total Company organic growth.

The second is the drag from lower OxiClean sales. This was a 70 basis points drag on Q1 total Company. The laundry additive category is down significantly versus year ago due to heavy loading by consumers during the launch of Tide Stain Release.

The good news is that OxiClean was up in market share in every class of trade in Q1. It had the strongest share gains in the category and shares are back to levels that we enjoyed prior to the launch of Tide Stain Release. As far as tailwinds go, litter and Trojan had terrific quarters in Q1, and XTRA which was a problem in 2010 has now stabilized.

Now looking ahead, we expect organic sales in the US to improve throughout the year as volume remains strong and price mix improves and becomes flat to positive. And remember, next quarter we'll be again lapping the peak of price mix year ago and we begin taking price increases. This gives us confidence that price mix will not be a drag for the balance of the year.

With respect to price increases, some specifics. We are taking a 5% increase on Trojan in May, and a 12% increase on powdered laundry detergent in July. In addition, we are shifting out liquid laundry promotional strategy by reducing our trade funds by 2% of net sales.

Now I'm going to turn to International. International had 3.1% organic growth in Q1 which was broadly based in a number of countries including France, Australia, and export markets. This increase is driven by volume growth of 4%, partially offset by about 1% price mix.

We are way lower price mix internationally than our domestic markets, and the reason for that is that international markets are heavily personal care, which are less promoted in household. With respect to the Specialty Products division, organic sales were up 2% with volume down approximately 4% and price mix up 6%.

Price mix is driven by price in the animal nutrition market where we are passing through cost increases. The specialty products division discontinued a product line. This was related to the cessation of operations at a chemical site in a foreign subsidiary as of the end of 2010. The sales related to that product line on a full year basis were $18 million in 2010.

Now gross margin. Our reported first quarter gross margin was 44.9% which is a 10 basis points contraction from year ago. The decrease in gross margin reflects higher commodity costs and trade spending, somewhat offset by the benefits of our cost reduction programs. Just to provide everybody a bridge, commodity increases were a drag of approximately 220 basis points, while price mix was a drag of about 30 basis points in the quarter.

On the plus side, our cost improvement programs contributed 240 basis points of help. Now, if you recall in February when we entered the year we expected 200 basis points of cost savings year over year and 100 basis points of commodity headwinds. The current thinking is this. We now expect 190 basis points of commodity headwinds which is an increase of about $20 million incrementally.

On the plus side, we have 200 to 250 basis points of cost reductions and 40 basis points of help from price increases, and this includes pass-throughs on the Specialty Products business. As a result, we continue to expect to hit our full year gross margin expansion target of 50 to 100 basis points.

For the second quarter, the gross margin is expected to be approximately the same as the first quarter of this year, but lower than last year's record 45.4% gross margin which reflects higher year over year couponing and slotting in Q2 2011. The back half of the year of gross margins will expand due to mid-year price increases and accelerated cost savings programs.

With respect to long-term gross margins, today we also announced our plans to relocate a portion of our Green River, Wyoming operations to Victorville, California in the first half of 2012. This is pending local approvals. Specifically, we will be moving the cat litter manufacturing operations and our distribution center.

The site will also include a liquid laundry production line, and the new leased site will have the ability to expand for future needs. This move is part of our long-term commitment to expand gross margins by reducing the complexity in our supply chain network and improving manufacturing and distribution costs. We will incur approximately $0.04 this year for charges related to accelerated depreciation and severance, and this is baked into today's full year earnings call.

Next topic is marketing. Marketing spend was $69 million or 10.8% of revenues which is a 10 basis points decline versus the prior year spend rate and flat on a dollar spend. In spite of a flat spend rate, we grew dollar share on 5 of our 8 power brands, and this is due to great execution by our sales and marketing teams.

Looking ahead, we expect to increase spending for the balance of the year and project full year marketing spending to be 13% to 13.5% of sales. Finally on a full year basis, our combined marketing and trade spending will exceed 2010 levels by approximately $50 million. As you can see, we are continuing to support the business with higher marketing and trade spending in 2011.

SG&A year over year was up $2 million in the quarter. SG&A as a percentage of sales was 13.7% which is up 40 basis points from a year ago, and the higher SG&A cost in the quarter reflect higher legal costs.

SG&A of percentage of sales is expected to continue to be slightly unfavorable next quarter due to higher legal, research and development, and costs for SAP implementation. But for the full year, should be a reduction of approximately 10 to 20 basis points down to 13.4% of sales. And this is a reflection of our continuous vigilance to control SG&A.

As far as operating profit goes, our reported operating margin was a healthy 20.4% and operating margin was 40 basis points below last year's 20. 8%. Income from affiliates increased $1 million due to higher income from a joint venture. On a full year basis, we expect a $3 million increase in JV income.

Other expense was $6.2 million lower than year ago. This improvement is due to lower interest expense as a result of our refinancing and debt repayment activities.

Income taxes is next. Our effective rate for the quarter is 36.5% compared to last year's 36.2%. The higher effective tax rate is primarily due to lower manufacturing deductions. We are forecasting an effective rate right now for the full year of 35% compared to 35.2% last year.

This is a reduction from our original forecast of 36.5% for the year due to the benefit of a recently improved New Jersey corporate income tax reform. We're going to have an $0.08 1- time tax benefit in the second quarter. This is going to be partially offset by $0.04 of charges from the West Coast plant on a full year basis, and the net of those 2, $0.08 minus the $0.04 provides us with additional insurance to handle commodity price increase that may come later in the year.

Now I'm going to talk about a split quickly. Yesterday we announced a 2-for-1 stock split of our common stock in the form of a soft dividend payable on June 1, 2001 to shareholders of record as of May 16, 2011 and the split will increase our total shares outstanding from approximately 71.5 million to 143 million shares.

Free cash flow, we generated $73 million of free cash flow in the first quarter of the year. Netted in our free cash flow is $7 million of capital expenditures. Net cash from operations is above last year by $7 million and our operating working capital as a percentage of sales stands at 10%, which is consistent with the beginning of the year.

And by the way, operating working capital is receivables minus trade payables plus inventories. We have over $159 million of cash on hand and approximately $615 million of available credit through our revolver and asset securitization facility. The Company paid down the balance of its AR Securitization, or $90 million in the first quarter.

Our total debt to LTM adjusted EBITDA for our bank agreement is approximately 0.5 times at quarter end. We expect to generate over $350 million of free cash flow in 2011, and that is after approximately $80 million in CapEx. The $80million includes $11 million investment for our West Coast facility this year and $12 million for our SAP upgrade.

In conclusion first quarter highlights include 1.2% organic sales growth driven by 3% volume growth, increased market shares in 5 of 8 power brands, and a healthy 20.4% operating margin record EPS. We are maintaining our annual earnings per share goal of $4.35 to $4.40 for the year which is an increase of 10% to 11% over last year.

This guidance now assumes the benefits of a lower tax rate, mid-year price increases, charges related to our new California facility, and over $20 million in incremental commodity costs versus our original guidance.

Remember, 2010 was a front end-loaded year with 54% of pre-tax earnings in the first half. That makes comparisons more difficult year over year, but as expected our pre-tax 2011 earnings, evenly balanced between first half and second half. Finally, with respect to the second quarter, we expect second quarter organic sales growth of 3% to 4% and earnings per share of $1.11 to $1.13, up 8% to 10%. In the second quarter, we'll have an effective tax rate of approximately 31% which relates to the New Jersey tax reform. Back to you, Jim.

Thanks, Matt. I'll finish off our call today by adding a little color to the solid first quarter business results that Matt just took you through and my outlook on the year. Our solid first quarter business results are directly linked to the [sentence] factors that support my earlier statement, that no other consumer packages company is as well suited as Church & Dwight to deliver exceptional performance in a soft business environment.

First, we have the most unique product portfolio in the CPG industry. It consists of 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 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 that our value based liquid laundry detergent business was the only competitor to achieve increased consumption in the first quarter, and our sales gain was over 10% in a category that fell almost 5%. As a result, our 2 value based liquid laundry detergent brands, ARM & HAMMER and XTRA each grew share in the first quarter, totaling over 2 percentage points. Only one other competitor gained share, and that was around a half a percentage point in total.

The second factor which is a key driver of Church & Dwight's success is that we have a proven record of building share in our power brands. We have over 80 brands, but 8 of those brands are our power brands which generate 80% of our sales and profits.

From 2007 to 2010, we grew share on these 8 power brands in over 80% of the quarters. In the first quarter of this year, as Matt told you, we grew share on 5 of our 8 power brands. Two key factors drove the excellent share results. First, we smartly reinvested some of the increased profits from the strong growth of our value brands to significantly increase marketing support on our 8 power brands by a total of 290 basis points or $140 million over the past 3 years.

While our marketing spending was relatively flat versus year ago in the first quarter, please keep in mind that we traditionally spend the bulk of our advertising dollars in the second through fourth quarters to support the launch of our new products. And we do intend to spend more marketing dollars in 2011 to support continued strong share growth in our power brands. In particular, we expect our marketing spending in Q2 to be at least 200 basis points higher than Q1.

The other factor driving the growth of our power brands is our robust pipeline of new products. Over the past 4 years new products delivered about 50% of the Company's organic revenue growth. We plan to ship innovative new products in every key category this year to support delivery of our organic growth target of 3% to 4%.

We expect these new products to be a successful as our new products we've launched over the past 4 years. A sample of these new products includes the following, XTRA with OxiClean laundry detergent. This combination of 2 of our power brands has helped to drive significant distribution gains in the XTRA brand this year, which is expected to deliver a strong jump in sales.

We launched ARM & HAMMER with OxiClean detergent 2 years ago, and that product now represents over $100 million in annual sales and has as high a market share as the Era brand and a higher market share than the Cheer brand. The XTRA with OxiClean new product will enhance the cleaning power appeal of our XTRA brand which you may be surprised to learn is the number 2 brand in liquid laundry detergents on a wash load basis, accounting for one in 8 loads of laundry in the United States.

We are also launching a new sensitive skin product for our ARM & HAMMER Liquid Laundry Detergent brand to enhance the brand's appeal to the 52% of consumer households who have sensitive skin issues. This will help drive continued growth of the ARM & HAMMER Liquid Laundry Detergent business which has achieved 11 consecutive quarters of growth, and passed the All brand in the month of March to become the number 3 liquid laundry detergent brand in America.

Another new great product being launched in 2011 is a 40-pound large size of our ARM & HAMMER Double Duty Cat Litter. We first launched the ARM & HAMMER Double Duty Cat Litter line in 2010 and it's been a huge success. This product eliminates both urine and feces odors.

The ARM & HAMMER Cat Litter brand which has achieved 29 consecutive quarter of net sales growth, 9 consecutive quarters of share gains, and is now the clear number 2 brand in the clumping cat litter business and closing in on number 1. That's pretty impressive for a category which we entered only 13 years ago. It also shows a strong consumer appeal to the ARM & HAMMER brand which in total passed $1 billion in sales in 2010.

On the Personal Care side of our business, we have several exciting new products in 2011. First, on our ARM & HAMMER SPINBRUSH business, we are launching 2 great new products. One is called the My Way SPINBRUSH for Boys which allows boys to personally decorate their toothbrush with popular peel and stick decals which come with the product. We launched the my way My Way SPINBRUSH for Girls in 2010 with huge success. It was the number one kids battery SKU for the past 10 months, and it also propelled our SPINBRUSH Kids business to be the number 1 kids battery brand for the latest 52 weeks.

We are also launching a new SPINBRUSH called Globrush which lights up for 2 minutes to provide an appealing queue to kids for how long they should brush. The great new products should enable our SPINBRUSH brand to continue its dollar share leadership in the battery powered segment which it's held for the past 22 consecutive quarters. Another new Personal Care product is our ORAJEL Naturals Teething Gel which extends our market leading ORAJEL brand into the fast growing natural segment.

Finally, we have launched a line of full-sized vibrators under the TROJAN brand. This product line will be available in all classes of trade in 2011, as well as through our website and the 800 number on our commercials. This category is new white space for our TROJAN brand to enter, and represents a major launcher in growth opportunity because we estimate that a Total Vibrations category currently has up to $1 billion in sales with no clear branded leader.

One side benefit of all of these great new products and the recent strong growth of our brands is that we have achieved significant distribution gains on almost every 1 of our power brands in 2011. This share in sales impact of these distribution gains will kick in starting in our current second quarter. There are many other new products we're launching in 2011, but in the interest of time, I'll move on with my review of the factors driving Church & Dwight's continued success and discuss our updated earnings guidance on the year.

Let me quickly run through the 5 other key drivers of our success. Factor number 3 is that we have a proven history of ferociously defending our brands. We proved that in 2010 in our defense of our OxiClean franchise, when it faced the entry of Omega brand extending into the non-chlorine laundry additives category where OxiClean is the number 1 brand. The powerful new competitor gained share behind significant market spending, but it disproportionately came at the expense of our competitors.

And if any competitor picks a fight with us, they better be ready for a never ending death match as exemplified by the fact that OxiClean share was up 3 full points in the first quarter this year, while the new competitor lost almost 5 share points.

Factor number 4 behind our continued success is the strong growth of International business. While our International business represents only 20% of our total revenues, it is delivered high single- digit sales growth and double-digit operating profit growth over the past 5 years. This strong growth continued in the first quarter, as Matt mentioned earlier.

Factor number 5 is our long history of success in expanding gross margins through cost optimization programs, supply chain restructuring, acquisition synergies, and launching higher margin new products. We've expanded gross margins by 1,560 basis points in the past 10 years. While we did not improve our gross margin in 2010, we were successful in holding the 430 point basis gain achieved in 2009, despite major headwinds from higher commodity costs.

As Matt told you earlier, our gross margin declined 10 basis points in the first quarter of 2011, but we consider that a success because we held all but 10 basis points of the 120 basis points gain achieved in the first quarter of last year. And as you've already heard, most of our CPG competitors incurred much bigger gross margin declines in the first quarter which revealed how well we have aggressively attacked cost savings and hedged key commodities.

In spite of our Q1 gross margin result, we still feel confident that we can deliver our previously stated 2011 goal of increasing our annual gross margin by 50 to 100 basis points, and we are taking longer-term action to drive continued gross margin growth in the future.

As Matt mentioned, we announced today that we are in the process of taking over a manufacturing facility in Southern California. This move is part of our long-term commitment to expand gross margin by reducing complexity in our supply chain and reducing manufacturing distribution costs. This plant will provide us with easier access to major populations in the West.

The plant will also allow us to continue to grow both our liquid laundry and cat litter businesses and position those businesses to be among the industry leaders in low cost production and distribution. This plant is expected to be ready for production in 2012, and like our recently completed plant in York, Pennsylvania, is expected to play a key role in driving future gross margin improvement.

Factor number 6 is our ability to tightly manage our overhead costs. Church & Dwight currently has the highest revenue per employee of any major CPG company. While overhead costs were up slightly in Q1, we are aggressively managing all overhead costs to stay best in class in our industry. Finally, factor number 7 is our strong record of free cash flow conversion. We have almost quadrupled our free cash flow over the past 10 years.

Over the past 5 years, our free cash flow conversion as a percent of net income was 128% which was best in class in the CPG industry. As Matt told you a few minutes ago, we continued to improve in the first quarter, as our free cash flow was 15% or $10 million above year ago. This cash flow and our strong balance sheet have enabled us to smartly invest in our future through both investments in our supply chain, such as building more efficient new plants, and the acquisition of higher margin faster growing leading brands.

All of these factors give me great confidence about our ability to deliver our aggressive 2011 business targets despite the very tough business environment facing all companies these days. In my 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 and we're taking actions to ensure that we continue to deliver exceptional EPS growth going forward regardless of the future economic environment.

Let me switch gears now and specifically talk about our outlook for the rest of 2011. As stated in the press release, as a result of the fact that our first quarter results were principally in line with our expectations, we remain confident that we can deliver our previously announced earnings per share estimate of $4.35 to $4.40 which is an increase of 10% to 11% over 2010 excluding a pension charge of $0.21 per share in 2010.

We strongly believe we can deliver exceptional EPS growth despite greater than expected headwinds from higher commodity costs and weaker consumer demand. Our confidence in delivering this aggressive EPS target is based on 2 key factors. First, we strongly believe that we can deliver the share gains in our power brands required to deliver our target of 3% to 4% organic growth.

These share gains are expected to result from our innovative new products, significant distribution gains across the majority of our power brands, and increased marketing support. All 3 of these factors should have a significant impact on our organic growth starting in Q2, as reflected in our Q2 target of 3% to 4% organic growth.

Second, we strongly believe that we can still deliver gross margin expansion of 50 to 100 basis points despite higher than expected commodity costs. Our gross margin expansion is expected to result from our aggressive cost saving programs, launching margin accretive new products, lower trade spending, pricing on a few key brands and the benefits of our aggressive hedging program.

There are 3 other points, I'd like to make before I open the call to questions. First, achieving our 2011 EPS target is not dependent upon making an acquisition. We continue to very aggressively pursue good acquisitions. We have actually made 2 small acquisitions in past year of the number one nasal hygiene brand and the number one natural cat litter brand.

However, we have not been able to find a major acquisition at the right price that meets our acquisition criteria. Second, I want to assure you that we are fully aware of the threat posed by new products being launched by our competitors in the second half of this year.

As I told you earlier, one of Church & Dwight's greatest strengths is its ability to ferociously defend our brands. We'll be fully prepared to do this against future competitive threats.

And third, we announced yesterday, as Matt stated, a 2-for-1 stock split of the Company's common stock payable on June 6 to shareholders of record as of May 16. While we recognize that stock splits are not common these days, few companies have achieved a stock price appreciation that Church & Dwight has since our last stock split in 2004.

Our stock price is now in the top quintile of stock prices in the S&P 500. So, we felt it would be better to have a stock price that is more in line with the average stock price in the S&P 500. And we would not have taken this action if we were not extremely confident about our future performance.

In conclusion, 2011 is shaping up to be a very challenging year due to the weaker than expected consumer demand and the higher than expected commodity prices. But when things get ugly, you should place your bets in the Company that has the product portfolio that thrives in such an environment and the management team that has the track record of knowing how to successfully leverage that portfolio and its aggressive cost management skills to deliver consistent strong EPS growth.

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

Bill Chappell, SunTrust.

Good morning.

Good morning, Bill.

I guess first just digging into the top line guidance of maintaining that 3% to 4%. I think prior you had said that was all volume, no price, and obviously you're announcing some pricing on both Trojan and the detergent side. Should we look at that as - -?

Bill, we lost you. Operator, are you there?

His line is open.

Okay. Operator, maybe we can get Bill back in a minute. Go onto the next question, please.

Alice Longley, Buckingham Research.

Hi, I'll just finish that question. I think it was a good question. So now for the year and for the second quarter, how do you expect the organic sales growth to be broken out volume versus price?

On a full year, Alice, we spoke on 3% to 4%, but the price mix is going to be zero to plus 50.

For the year?

For the year, right. And for the second quarter, it's going to look very similar. We're going to - - it's going to be a volume driven quarter, and if anything, price will be zero to positive.

And then when we get into the second half of the year, what do you think your average pricing is going to be in the second half, price mix?

It'd be positive.

Like one?

You mean year over year?

Yes.

No, we're saying 3% to 4% in the second half. You could have 3.5% volume by quarter and you could 50 basis points of price by the end of the year. You could possibly have on the high end of the range as the year goes on, a combination of volume and price.

Okay. And this leads to another question that confused me a little bit. I think you said that marketing and trade spending would be up $50 million for the year. Is that correct?

Yes.

Now does that -- that includes advertising plus spending that comes off sales?

Yes.

Okay. And so I'm a little confused because we've -- trade spending is still going to be a greater drag than -- it's going to be a drag for the year?

Remember - -

Off sales, but maybe more than offset with pricing?

Remember in the first quarter we were last year, we were on the sidelines, right. So we have -- year over year we have a tough comparison with respect to trade. So there's more trade in the first quarter of 2011 versus the first quarter of 2010 by a long shot. So that's a chunk of that $50 million.

And then I think you saw, Alice, or you might have heard, we're actually going to be reducing our trade spending in our liquid laundry detergent business by roughly about 2% in the back half of the year. So that should offset a lot of the trade spending increase in the first quarter of the year.

Okay, and the second quarter is also going to have higher - - you mentioned higher couponing and slotting fees, and those come off of sales too?

Yes, they do.

So what will price mix be in the second quarter? Is it going to still be negative?

No, I think it's more likely that it'll be flat.

Okay. Company wide?

Yes, company wide.

And then I have some questions about detergents. How much was the category - - what was the category like in the second quarter? I guess maybe down in value or what was it in value at volume terms?

You mean the first quarter?

In the first quarter, excuse me. All retailers included.

The total category liquid laundry detergent in the first quarter was down about 5%. We were up about 10% in that environment. That's why we gained about two share points in the quarter.

And you're talking value now?

No, I'm talking the total category.

In volume terms? In volume terms or value terms?

Dollar.

Dollar terms. So the category was down 5% and you were up 10% at retail?

Yes.

And that includes XTRA and ARM & HAMMER?

Yes.

Okay. And what was the category in volume terms? Was it just over flat?

I'd have to grab that. I don't have it at my fingertips.

You might have reached your quota, Alice.

Okay. I'll go on -- I'll stop. Thank you.

Okay.

Joe Altobello, Oppenheimer.

Hi, guys, good morning.

How you doing?

Hi, just a few quick ones. First, in terms of consumption, you mentioned consumption was soft across most of your categories. Over the last three, four, five months, have you seen consumption start to level out or get better, or is it actually getting worse as we head into the June quarter?

It's generally either been flat to getting worse, Joe. Now keep in mind, though, pricing going forward should be a positive of that, but I would say this economy is showing more signs of weakness than strength.

Okay. And in that vein, are you seeing consumers who may be pinched by gas prices or what have you starting to trade down to some of the more value oriented products or has that not started yet?

Until the proofs in the pudding, like I said, our liquid laundry detergent business was up 10% in sales in the first quarter when the category was down 5%. So I think you're seeing the consumer being pinched, and again, as I mentioned in my part of the talk, that's one of the great strengths of Church & Dwight with 40% of our business in the value side. In fact, as Matt mentioned, we actually rolled off some volume in the first quarter on our value toothpaste business as by just, Jim, by doing some unprofitable [bogos], but that'll be behind us in the back part of the year. So again, it's one of our strengths that we don't mind what the economy is like out there. If it's bad we win, and if it's good we win.

Got it, okay. And in terms of promotion spending, you mentioned obviously the comparisons get much easier year over year in Q2. Are you seeing your competitors in key categories actively pulling back on promotion spending rather than just leveling off over last year?

I'll refer again to liquid laundry detergent because that's the most competitive category. We saw volumes in on deal in the first quarter was about equal to a year ago. The good news is future prices were up from the fourth quarter of last year, but they were still well below year ago. But we see that trend improving as future prices continue to rise up in the category which again, will help category growth, and I guess you could take that as a lessening of the price war that took place in that category in 2010.

Okay, excellent. Just one last one if I could. What's your reaction to P&G's new Tide Pods product, and are you planning something similar to that?

No reaction. I told you in my earlier speech, we ferociously defend our brands and we'll continue to do that in the future.

Okay, super. Thank you.

Bill Chappell, SunTrust.

Can you hear me now?

Can you hear me now?

Can you hear me now? Can you hear me now?

Is this a telephone commercial?

I was insulted that Jim had me cut off the first time.

Yes, this is the Verizon earnings call.

Go ahead and watch what I do this time to finish answering your question.

Back to - - Alice asked it well, but just trying to understand or clarify, so you're basically saying in the new guidance that price mix is only adding kind of 0% to 0.5% versus your prior guidance of 0%.

The prior guidance, we entered the year we thought price could be plus or minus 50 basis points. And now we're seeing a combination, as Jim was pointing out, what we're seeing with respect to what's been done on deal and future prices and on price increases. It seems to us on a full year basis it's going to be flat to plus 50 basis points.

And you're not expecting volume to decelerate further with the pricing? You don't expect that to change a whole lot?

That will be a big question, Bill, to be answered out there, but again, we -- if that happens, the consumer gets into a pinch in their pocket books, that's usually a plus for Church & Dwight with 40% of our business in the value side of the business as shown by what happened to our liquid laundry detergent business in the first quarter. But I do think that's something which all companies are concerned about right now.

And then just looking on the detergent side, when exactly do we comp versus the Wal-Mart promotions last year and then the elimination of XTRA out of one retailer last year? Is that second quarter or is that more third quarter and maybe you can quantify how big each of those were?

The distribution gains are -- the advantage of those comes on starting in Q2. The retailer action you mentioned was a Q2 action year ago, so the reverse benefit of that again will start in Q2 of this year.

So basically it'll be two pluses for us.

Okay. And then just finally, just as you look to this new plant, is there any way to quantify what type of savings compared to the York plant? Is it smaller, a third smaller, half smaller? And then also on the tax rate, is there any reason why the tax rate should bounce back up in 2012, Matt, and I know it is early, or should this be pretty permanent?

Let me do the plant first. The plant is not the size of York, Pennsylvania. It's a smaller plant, and we won't quantify the impact of that until next year. On the tax point, you're right, it is early, Bill, but if I had to peg 2012 tax rate today, it probably around 35.5%. So it's going to be a benefit going forward.

Great. Thank you.

Jason Gere, RBC Capital Markets.

Good morning, guys.

Hello, Jason.

So I guess just going back to the marketing, and I know when we go back to CAGNY or even your fourth quarter presentation, talking about the marketing spending and trying to get it consistent with the gross margin, and I understand the first half is going to be lower from a percentage of sales and even from a -- I guess it would be flattish from a dollar standpoint. But just the confidence that 13% to 13.5% is the right number, especially when you're seeing some of your competition out there in the back half. And I was just wondering if you could just maybe put a little color around that? And also in that context, mention which of the three categories of the eight where you didn't gain share, and I'm just wondering if those are areas where you will be spending a little bit more money?

Jason, I have pretty good confidence on the marketing spending. I think first of all, all the pricing actions you're seeing from our competitors and us are showing a direction out there that will enable the spending. I would tell you, if anything, we're in a better position than not to protect that spending because we've done a better job than most other guys in taking care of the cost side. I think some of my competitors still may have to tighten the notches on their marketing spending in the back half in order to handle the cost increase where we've done a better job of that. So, I feel very confident we'll be able to do it, and as I said in my part of the talk, we start pouring the gas on in marketing in the second quarter of the year.

To your second part of your question, the three categories where we lost some share, one was TROJAN. It was one of those good cases. Our consumption was up in Q1. It just wasn't up as high as the category, so we lost a little share, but it was a positive consumption, very positive sales quarter for us. SPINBRUSH was another case. We had a very good quarter on sales, but the category was a little different than us, so we didn't make as -- the share was down a little bit. ORAJEL was one where it was some private labels hurting us there, and we're taking actions to deal with that. But otherwise, we had a great quarter on ARM & HAMMER Liquid Laundry Detergent and XTRA. We had a great, great quarter on cat litter, that's on fire. Our FIRST RESPONSE, our pregnancy kit business, did extremely well, and our depilatory business did extremely well.

Okay. And then the second question, just looking at the channel trends, we've been hearing different things from your competition, track versus the untracked channel. And I would guess that the untracked is more favorable for you, but it sounds like in some cases we've seen track growing faster than untracked. So just wondering if you can talk to that a little bit and what you've been seeing and how you think that's going to play out, especially with some of the pricing going forward? Everyone's taking pricing, but just in terms of the consumer, your value consumer, and should you see that resurgence back with some of those untracked channel retailers?

It's a great question, Jason. I think there's a lot of flux going on right now between the channels, and I think you're seeing Wal-Mart getting more aggressive out there in strategies, but also all the channels are trying to figure stuff out. I think the great clue for the future will be how the channels handle the price increases coming forth from all the manufacturers and what happens then. But we've got great positions with all of our retailers in all the channels, and I don't think you'll see that much difference in them this year, but I think that the answer to your question is to be played out by the retailers as to how they act going forward.

Okay. And then just the last question is on SG&A leverage. I think back before we were looking at maybe something in that 40 basis point temporary reduction and I guess you're saying 10 to 20 now. How much of these legal costs, can you talk a little bit about that? And then just the accelerated D&A from the plant, is that built into that 10 to 20? Thanks.

We can't talk about what the litigation, but it's largely driven by litigation costs year over year. And with respect to the West Coast plant, that's in COGS. That's another bit of a drag on cost of goods sold. It's not an SG&A hurt. Okay, Jason?

All set.

Lauren Lieberman, Barclays Capital.

Thanks, good morning.

Morning, Lauren.

Just had a question on pricing, I thought it was interesting that in the release you talked about taking pricing in about 10% of the portfolio. But between laundry, condoms, and then cat litter where I think distribution costs are really high right now, that would be a far greater percentage of the portfolio. So could you talk about that and how cautious you're being, if there is room or need or potential to take more pricing? Thanks.

Thanks, Lauren. Keep in mind we're only the category leader in a couple of categories like condoms, and then we took action and we increased them based on the massive increase in latex prices. On the laundry side of the world, pricing is only happening in powder which is the smaller part of the segment. There is some trade reduction spending in the liquids side, but the leader only took pricing action on powder. And the other categories we're in, the leaders in those categories have not taken action for the most part. So we're being aggressive in the one sense and following what happens, and we're being conservative in the other sense of waiting for the leaders in those categories, if and when they make a move, we'll certainly look at and decide what to do. But, we have not passed up any opportunities to take pricing when the leaders take pricing, and I don't think you should - - at this point I would doubt to expect more unless there's a significant change in commodity prices in the marketplace from this point forward.

Okay. And then just a -- sorry, a little housekeeping thing. What was the divestiture flowing through Consumer Domestic this quarter?

Consumer Domestic would have been -- (Inaudible)

I thought they would be done by now. So is this a last quarter -- sorry, then it's my mistake. I thought they would have been -- we would have been through it. So is this the last quarter?

Yes.

Okay, great. Thanks so much.

Thank you.

Connie Maneaty, BMO capital.

Good morning. Could you just describe a little bit what's going on in the condom category and how much share you lost? And is it due to a lot of promotion or what's going on?

No, Connie, the category is actually fairly solid. The category has been growing low single digits which is good for that category. We've been doing a lot of innovations there, and one of our two other major competitors has been doing stuff. So it's again, it's a -- I wish I was growing share, but I'm growing consumption, I'm growing sales, growing profits. So it's a good situation and nothing I'm worried about at all. We've got a lot of great new innovations coming, and as you know, we branched out now more into side categories like the vibration side which are starting to take out as we start to expand distribution into all channels out there. So I'm very happy with the TROJAN business, both the condom side is going nicely and the new white space on the vibration side is starting to take off.

Does that mean Wal-Mart is going to be taking the Vibrations products?

I don't want to go into what any retailer is doing out there.

Okay, thanks.

Thanks.

Olivia Tong, Bank of America.

Thanks, good morning. Wanted to follow up a little bit on marketing. With the new outlook, it looks like it could be flat year over year for the rest of the year. I'm just wondering, you've obviously got a lot new products that are coming in the second half, so where could spending plans have be tweaked down versus your going into the year expectations?

Just wanted to make sure everybody understands that what we're expecting is for gross margin to expand 50 to 100 basis points, and as you know as gross margin goes, so goes marketing. So we are expecting marketing to be flat to up 50 basis points. So our expectation is that, that will be up year over year. Spend rate.

On a year over year basis, if you're saying 13% to 13.5%, it's obviously potential for it to be flattish for the year. So where have your spending plans changed relative to where it was, say, going into the year three months ago?

Let me clarify, our spending plans haven't changed at all. We are holding to all of the targets we set out to be in the year -- the gross margin growth, the improvement in marketing, holding to the EPS. So nothing's changed at all. Quarter by quarter we'll make adjustments to things as the things -- to our spending in that as things happen in the marketplace. But as I said in my part of the speech, we always turn the gas on in marketing in the second quarter of the year is when our new products hit the marketplace and our new distribution hits the marketplace. And I think I said earlier that our marketing spending in Q2 is expected to be about 200 basis points over Q2 year ago as you start to turn the gas on. But in the year, that will net out to 0 to 50 basis points of marketing growth. And again, we get that range because you never know what's going to happen competitively, commodities, everything going on in the market, but we generally look for a positive year. And we've had a long history of growing the marketing spending because we're able to grow the gross margin. So no, we're holding right to our exact call we made earlier in the year.

Okay, thanks. That's helpful. And then just secondly, can you update us on where you stand on your hedging levels on the key commodities? You said probably about half three months ago. Just wondering where you are now? Thank you.

I think a lot of people are interested in where are we with respect to 2012 since that's going to be upon us before you know it. And what we typically do is we start locking in 2012 in the second half of this year, so like the October -- September, October timeframe. So right now, we're probably about 15% hedged in 2012 which is not unusual for us at this time. And the news the last couple days where just about every commodity has started to trend down the last few weeks, so that may result in the worry about commodities in the second half being tempered right now.

Bill Schmitz, Deutsche Bank.

On this call, I will limit myself to nine questions.

Okay.

All right. Can you just talk about the diesel hedging, because I think -- how much of that productivity in the quarter, the I think you said 240 basis points. Can you just say like where you are hedged out on diesel? I think you said you were 50% for the year, but how long does that hedge in place? And looking at the gross margin guidance does it make sense that the pricing starts to come through when the diesel hedge starts to roll off? And then if you do have the hedge in place, does that mean that you might have commodity inflation next year if diesel prices don't go down? Or are these like Evergreen diesel hedges?

No, they're not Evergreen. They typically they are diesel hedges run for twelve month periods. We had the good fortune of when that 15% that I talked about in 2012, a good chunk of that is diesel fortunately, which of course is one of the most volatile swingers for us. But just to give you context, remember when we said we expected headwinds of 100 basis points to gross margin of commodity inputs and now it's 190?

Yes.

So now, the 190 basis points on a company this size, it's close to $50 million. The biggest on year over year is actually surfactants which goes into detergents, and that's a petroleum based input. And the second one would palm fatty acid distillate, that's the one that we pass-through for the specialty products business. So diesel is up, but it's not the biggest mover right now.

Because the data I have from the Department of Energy says that diesel is up 40% in the quarter, and if spot prices hold about 51% for the year. So surfactants are up more than them?

Actually just to clarify, when I say that 190 basis points, that's net of our hedging activity.

Okay.

It is higher than that if I did absolute value.

Got you. And then could you just say what your diesel is hedged at, or is that too much information?

Yes, it's probably too much information.

Okay, all right. I gave you an out there. And then this Tide Pod tablet, how hard is it for you guys if it's successful? Because you know in the UK it's like 30% of the laundry market tablets. How hard is it for you guys to introduce a product there?

Bill, I can't answer that question. It was supplied to me by Procter & Gamble. So what's question number three?

Okay, I'll keep going. So then, just like the Wal- Mart assortment change, it's become like a flea market at that place, Dynamo and Fab are back in. Is it harder to differentiate now? And do you think those products are going to withstand the next SKU curtailment?

I wouldn't call them a flea market. They're the world's greatest retailer.

Would you say that last year?

They're doing what they need to do to drive their business and we're a big partner. They've done -- this year is going to be a really great year for us with them based on programs we worked together. And what's question number four?

Okay, and then I promise this is my last one. But I did think you said at the Analyst Day, and I'm not like - - I don't mean to be pejorative here, but didn't you say 50 to 100 basis points of marketing spend increase for the year at the analyst meeting?

Yes. You're right, Bill, I need to clarify this. So going to get back on with this, I think BofA had the question earlier. So you're right, we did say 50 to 100 for each gross margin and for marketing and marketing is 0 to 50 right now. That is correct.

Okay. All right, thanks, guys.

Thank you.

Joe Altobello, Oppenheimer.

Sorry, just two quick follow- ups. First on the gross margin, want to make sure I heard this right, so if Q2 gross margin is going to be flat with Q1, to even get to the low end of your guidance you're looking at about 150 basis points in the back half of the year. Is that more pricing or savings, and is that more weighted toward Q3 or more Q4?

It's both Q3 and Q4, and it's cost savings. And obviously you're right, that the price on a full year basis is about -- I think I said earlier, it's 40 basis points help year over year.

Okay. Got it. And just one last one, Jim, earlier you mentioned that marketing spend would be up 200 basis points year over year, and I thought Matt said earlier it's going to be 200 basis points versus Q1, so which is the answer?

Say that again, Joe.

You said marketing -- earlier Jim said that marketing would be up at least 200 basis points year over year, and then, Matt, you earlier said it would be up 200 basis points versus Q1.

Yes, I think I misstated. First, it's Q1.

Okay. Perfect, thank you.

All right, if there is no further questions, I want to thank you all for tuning in today. I'd just like to say again, we, despite increased headwinds out there in the marketplace, we feel very confident we can still deliver our targets this year which are very aggressive out there. And I ask you to stay tuned and watch what happens in the marketplace and Church & Dwight will deliver. Thank you very much.

This concludes Church & Dwight's first quarter 2011 earnings conference call. You may now disconnect.