切遲杜威 (CHD) 2011 Q2 法說會逐字稿

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

Thank you. Good morning to everyone. It is always a pleasure to talk to you particularly when we have good results to report. I will start off this call by providing you with my perspective on our second quarter business results which you read about in our press release this morning. I will then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with his perspective on the financial details for the quarter.

When Matt is finished, I will 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 out by saying I am very pleased with the second quarter business results which were in line with our expectations despite some serious headwinds. Since January we have 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 about 3.3% organic growth in the second quarter up significantly from the 1% organic growth achieved in the first quarter.

This organic revenue growth has continued into the third quarter which is off to a very strong start. Like other consumer packaged goods companies our second quarter margin was a below year ago. However, through aggressive hedging and cost cutting we were able to keep the gross margin decline versus year ago to 90 basis points which was better than most of our competitors. As promised, our marketing spending was up 220 basis points versus Q1 to support the launch of new products across every one of our power brands.

Most importantly, we delivered a 12% earnings per share gain for the quarter on top of an 18% EPS gain in the second quarter last year. Thus we had a good start to what has been a very difficult business environment so far this year. All CPG companies are fighting the same headwinds. But I continue to believe that no other CPG company is as well suited as Church & Dwight to deliver exceptional performance in a tough environment. I will explain my rationale for that statement in a few minutes after Matt provides you with greater insights on the financial results for the second quarter.

Thank you, Jim. Good morning, everybody. I want to start with EPS. Second quarter GAAP EPS was $0.57 per share compared with $0.51 in 2010. EPS was up 12% from year ago. Reported revenues were up 5.3% and our organic growth was 3.3% for the quarter. The 3.3% was within our May guidance of 3% to 4% for Q2 and has put us in a position to deliver 3% to 4% organic growth for the full year. The 3.3% organic growth is driven by volume with neutral effect of price mix in the quarter.

The competitive environment is still aggressive in our categories but we are now lapping a year ago period with similar aggressive trade spending and competitive price wars. Price mix for the five quarters ended Q1 2011 averaged negative 2%, so the good news is that price mix for the total company was neutral in Q2 compared to negative 2% for the previous five quarters. We expect to be neutral in the second half as well. That's a little less positive than 90 days ago when we expected price mix to turn positive in the second half. We are seeing increased trade spend by competitors in several of our key categories and this has affected our view on second half organic growth as well as gross margins.

The full year organic revenue call of 3% to 4% is comprised of 3% to 4% volume and price mix of flattish to a minus 50 basis points due to the continued aggressive spending and product mix somewhat offset by our pricing actions in the marketplace which I will talk about in a minute or so. Now let's briefly review Q2 for the segments. The domestic business delivered organic growth of 2.1% with 2.4% volume partially offset by negative 0.3% price mix. This is a significant improvement from the previous five quarters which was over 3% negative price mix in each of those quarters. With respect to price increases, we took a 5% increase on Trojan in May and a 12% increase on powdered laundry detergent in July. Turning now to international, international at 3.1% organic growth in Q2 which was driven by growth in Australia and export markets. This increase is driven by volume growth of 6% partially offset by about negative 3% price mix.

This quarter we had higher price mix internationally than the domestic markets, primarily due to year-over-year promotional spending behind household products in Canada. For our specialty products division organic sales were up 13% with volume up approximately 6% and price mix up 7%. The price mix in this division is driven by price in the animal nutrition area where we are recovering raw material costs. The organic increase is primarily due to growth in the animal nutrition business where demand for our products has surged due to the hot weather in the US. The hot weather reduces the milk production by cows and our products do the opposite. They increase the milk production of the cows.

Ok, Gross margin now. Turning now to gross margin, our second quarter gross margin was 44.5% and 90 basis points contraction from a year ago. The decrease in gross margin reflects commodity costs on favorable product mix and higher trade spending. Price and product mix was a bit higher drag than expected but, for example, the dairy products that I just mentioned are a lower gross margin product. When we entered the year, we expected 200 basis points of cost savings and 100 basis points of commodity headwinds on a full year basis. The current thinking is as follows.

We still expect the 190 basis points of commodity headwinds which is a year-over-year increase of $20 million. On the plus side, we continue to expect 200 to 250 basis points of cost reductions. The effect of price and product mix is now expected to be flat to slightly negative for the full year and the help we are getting from the recent price increases is being offset by trade promotions and product mix. As a result, we now expect our full year 2011 gross margin to be in the range of 0 to 50 basis points improvement. Marketing spend was $88 million or 13% of revenues. This was 220 basis points above the first quarter and 10 basis points above the prior year. Q2 is up 6% over year ago in marketing spending.

We grew dollar share on five of our eight 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 compared to both the first half and the prior year and we project full year marketing spending to be 13% to 13.5% of sales. SG&A is next. SG&A year-over-year was up $6.6 million in the quarter. SG&A as a percentage of sales was 14%, up 20 basis points from year ago and the higher SG&A costs in the quarter reflect higher year-over-year legal costs as well as the effect of currency. Operating profit, reported operating margin, pardon me, for the quarter was 17.5% compared to 18.7% last year. Income from affiliates increased $1.6 million due to higher income from a joint venture.

Other expense was $3.2 million lower than year ago.This improvement is due to lower interest expense as a result of our refinancing and debt repayment activities. Next is income taxes. Our effective rate for the quarter is 30.6% compared to last year's 36.2%. The lower effective tax rate is in line with our previous guidance for this quarter and is due to the benefit of the recently enacted New Jersey corporate income tax reform. This benefited the quarter as well as the full year by $0.04 as we discussed last quarter. This benefit helps to offset the $0.02 charge in 2011 for costs related to our new site in Victorville, California, as well as commodity costs that are significantly higher than expected when we planned the year.

We are forecasting an effective rate of approximately 35% for the full year, and this compares to 35.2% for the full year 2010, so very comparable. Today we reported that our board has authorized the repurchase of up to 300 million of the company's common stock. I might add that the share repurchase plan will be funded out of available cash and will not affect our ability to fund acquisitions. Free cash flow, turning now to free cash flow, we generated $148 million of free cash flow so far this year. Netted in our free cash flow is $24 million of capital expenditures and net cash from operations increased by $48 million over year ago. The increase in net cash from operating activities is primarily related to favorable working capital changes, higher net income, and higher deferred tax liabilities.

Our operating working capital as a percentage of sales which we monitor very closely is 10.1% and that is consistent with our 2010 average of 10.3%, actually a little bit better. By the way, operating working capital is defined as receivables, trade payables, and inventory. We have over $163 million of cash on hand and approximately $615 million of available credit through our undrawn revolver in assets facility so plenty of dry powder. We expect to generate over $350 million of free cash flow in 2011 and remember that that figure is after approximately $80 million of CapEx. That $80 million includes an $11 million investment in our West Coast facility in Victorville, California, and $17 million this year for our SAP upgrade.

In conclusion, the second quarter highlights include a 3.3% organic sales growth driven by volume and an improvement in price mix trend. We increased our share in five of eight power brands and EPS is up over 12% from year ago. Back to you, Jim.

Thanks, Matt. I will finish off our call today by adding a little color to the solid second quarter business results Matt took you through and my outlook on the year. Our solid second quarter business results are directly linked to the seven factors that support my earlier statement that no other CPG company is as well suited as Church & Dwight to deliver exceptional performance in a tough business environment. First, we have the most unique product portfolio in the CPG industry. It consists of both premium and value brands which puts us in a position to thrive in any type of economy as exemplified by our consistently strong EPS growth over the past ten years.

In particular, our value brands representing about 40% of our revenue base have experienced strong growth in the 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 XTRA, our extreme value based liquid laundry detergent brand achieved its highest quarterly sales and is the number two brand accounting for about one out of seven loads of laundry in the United States. As a result, our two value based liquid laundry detergent brands, Arm & Hammer and XTRA grew by 1.5 share points.

Only one other competitor gained share and that was around a half percentage point in total. Also our Arm & Hammer powder laundry detergent business is on fire with seven consecutive months of dollar share growth, the highest monthly dollar share in six months in June and greater share growth than any other powdered laundry detergent brand. The second factor a key driver of Church & Dwight's success is we have a proven record of building our power brands. We have over 80 brands but eight of these brands are our power brands which generate 80% of our sales and profits. From 2007 to 2010 we grew share in these eight power brands in over 80% of the quarters. In the second quarter of this year we grew share on five of our eight power brands. Two key factors drove those excellent share results.

First, we have smartly reinvested some of the increased profits from the strong growth of our value brands to significantly increase marketing support on our eight power brands by a total of 290 basis points or $140 million over the past three years. While our marketing spending was relatively flat versus year ago in the first half of 2011, please keep in mind that we traditionally saved a bulk of our advertising dollars for the second through the fourth quarters to support the launch of our new products. And we do intend to spend more marketing dollars in the back half of 2011 to support continued share growth in our power brands.

The other factor driving the growth of our power brands is a robust pipeline of new products. Over the past four years new products delivered about 50% of the company's organic revenue growth. We are shipping 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 over the past four years. A sample of these new products includes the following. First, XTRA with OxiClean laundry detergent. This combination of two of our power brands helped to drive significant distribution gains to the XTRA brand this year which as I mentioned a minute ago delivered record sales in the second quarter and should continue to deliver strong sales growth for the rest of this year.

We launched the Arm & Hammer OxiClean co-branded detergent two years and that new product represents over $100 million in annual sales and higher market share than the Era and Cheer brands. We're also launching a new sensitive skin product for our liquid laundry detergent business on the Arm & Hammer brand to enhance the brand's appeal to the 52% of consumer households who have sensitive skin issues. This will help to drive continued growth of the Arm & Hammer liquid laundry detergent business which has achieved greater share growth in the past 52 weeks than any other major liquid laundry detergent brand and account for 1 in 10 liquid wash loads in the United States in the second quarter.

Another great new 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 has been a huge success. This product eliminates urine and feces oders. The Arm & Hammer cat litter brand consumption grew over 15% in the second quarter leading to the brand's 30th consecutive quarter of net sales growth, 10 consecutive quarters of share gains and now the number one and number two clumping cat litter brand in almost every major retailer in the United States. That's pretty impressive for a category which we entered only 13 years ago. It also shows the strong consumer appeal to the Arm & Hammer brand which in total passed $1 billion in sales.

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 three exciting new products. One is called the My Way Spinbrush for boys which allows boys to personally decorate their toothbrush with pocket and peel and stick decals which come with the product. We launched the My Way Spinbrush for girls in 2010 and had a huge success. Our total My Way kids business received a share of 51% in the second quarter which strengthens our position as the number one kids battery brand the latest 52 weeks. We're launching a new Spinbrush called Glow Brush which lights up tore two minutes to provide a could you how long they should brush.

Finally I am proud to announce an exciting new toothbrush called Tooth Tunes. Tooth Tunes is a manual toothbrush that plays popular commercial music for two minutes to encourage proper brushing. This brush will be available in three SKUs, top 40, pop, and legends with three different songs in each SKU featuring famous singers or bands such as Justin Bieber, Black Eyed Peas and the Rolling Stones. Initial retail response to the Tooth Tunes products has been outstanding with strong support expected during the upcoming holiday season. These three great new products should enable our Spinbrush brand to continue its dollar share leadership in the battery-powered segment which it held for the past 23 consecutive quarters including an almost 300 basis points share gain in the second quarter of this year.

Another new personal care product is our new First Response digital ovulation test which enables a woman to better determine her optimal time to conceive and provides an unmistakeable yes or no result. This new product and continued strong marketing supports of our total pregnancy kit bris resulted in our two brands, First Response and Answer being the only two pregnancy kit brands to grow share in the second quarter which increased our overall share leadership in this high margin category by 240 basis points.

Finally, we have launched a line of full-sized vibrators under the Trojan brand. This product line is available in all classes of trade in 2011 as well as to our website and the 800 number in our commercials. This category is new white space for our Trojan brand to enter. It represents a major launch in growth opportunity because we estimate that the total vibrations category currently has up to $1 billion in retail sales with no clear branded leader. Our total Trojan vibrations business had a 35% increase in gross sales in the second quarter versus year ago and achieved a record quarterly share of over 61%, up 6 points versus year ago. One side benefit of all of these great products and the recent strong growth of our brands is that we have achieved significant distribution gains on almost every one of our power brands in 2011.

The share and sales impact of these distribution gains will play a major role in continued sales growth in the back half of 2011. There are many new products we're launching in 2011 but in the interest of time I will 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 five other key drivers. Number three is that we have a proven history of ferociously defending our brands. We proved that in 2010 in defense of our OxiClean franchise with the safety entry of a mega brand extending you into non-chlorine additive laundry category which OxiClean is the number one brand.

The powerful new competitor gained share behind significant marketing spending but disproportionately came at the expense of other competitors. If any competitors picks a fight with us, they better be ready by a never ending death match adds as exemplified by the fact that OxiClean's market share 2011 was 20 basis points below year ago and over 600 basis points greater than it stood and we bought the brand in 2006. The fourth factor behind our continued success is the strong growth of our international business. While 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 five years. This strong growth continues in the second quarter as Matt mentioned earlier. Factor five is our long history of success and expanding gross margins through cost optimization programs, supply chain restructuring, acquisition synergies, and launching higher margin new products.

We expanded gross margins by 1,563 basis points in the past ten years. While we did not improve our gross margin in 2010, we were successful in holding the 430 basis points gain achieved in 2009 despite major headwinds from our commodity costs. As Matt told you earlier, our gross margin decline 90 basis points in the second quarter, but we consider that a success because if you already heard most of our CPG competitors incurred much bigger gross margin declines in the second quarter which reveals how well we aggressively attack cost savings and hedge (inaudible) commodities.

In light of our Q2 gross margin result and continued retail price wars we are lowering our previously stated 2011 goal of annual gross margin improvement from 50 to 100 basis points to 0 to 50 basis points. While I never like to lower an annual goal we still expect positive gross margin improvement in 2011 which is better than most of our competitors and we are in the progress of taking actions to drive gross margin growth in future years. This concludes the recently announced addition of a manufacturing and distribution facility in Southern California. This move is part of our long-term commitment to expand gross margin by reducing flexing 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 our liquid laundry and cat litter businesses and position our business to be among the industry leaders in low cost production and distribution. This plant is expected to be ready for production in 2012. Like our recently completed plant in York, Pennsylvania, it is expected to play a key role in driving future gross margin improvement. We are also working diligently on projects to reduce the manufacturing complexity of all of our product lines and lowering the costs of purchased ingredients by combining our purchasing power with another noncompetitive CPG companies.

Factor number six is our ability to tightly manage our over head costs. Church & Dwight currently has the highest revenue per employee of any major CPG company. While over head costs were up slightly in Q2, largely due to higher than planned legal costs, we are aggressively managing all over head costs to stay best in class in our industry. Finally, factor 7 is our strong record in our free cash flow conversion. We have almost quadrupled our free cash flow over the past ten years. Over the past five years our conversion as percent of income was 128% best in class in the CPG industry. As Matt told you a few minutes ago we continue to improve in this area as our free cash flow from the first half of 2011 was $148 million, up $45 million or 43% above year ago.

This cash flow in our strong balance sheet has 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 and faster growing 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 biased opinion no other CPG company is as well suited as Church & Dwight to thrive in any type of business environment. We were delivering exceptional EPS growth before the recession. We are delivering exceptional EPS growth during the recession, and we are 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 second quarter results were principally in line with our expectations, we remain confident that we can deliver our previously announced earnings per share estimate of $2.17 to $2.20 which is an increase of 10% to 11% over 2010 excluding a pension charge of $0.10 per share in 2010. This annual forecast reflects evenly balanced EPS for the remaining two quarters of 2011. We strongly believe that we can deliver this aggressive EPS target despite greater than expected headwinds from higher commodity costs and weaker consumer demand. Our confidence in delivering this aggressive EPS target is based on two key factors.

First, we strongly believe we can deliver the share gains in our power brands 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 spending. All three of these factors enable us to continue to deliver solid organic growth as reflected in our Q2 results. Second, we strongly believe that we can still deliver gross margin expansion of 0 to 50 basis points despite higher commodity costs and higher trade spending. While this is less than previously projected, it is still a better outlook than most of our CPG competitors. Three other points I would like to mention before I turn the call over to questions.

First, achieving our 2011 EPS target is not dependent on making an acquisition. We continue to be very aggressively pursuing acquisitions. We actually made a recent small acquisition of a boutique dry shampoo brand on June 28th of this year. This unique hair care brand meets all of our acquisition criteria it is the number one brand in its category of dry shampoos. It is gross margin a accretive to our company with a gross margin of over 50%. It has high growth potential as demonstrated by the 90% net sales growth over the past four years. It is asset light as it is currently co-packed. Importantly, over 85% of the annual sales of $20 million are in the UK which will increase our economies of scale in this country by approximately 25%. Overall, a terrific small acquisition will deliver EPS accretion starting in 2012.

Second, I want to ensure you that we are fully aware of the threat posed by new products being launched by our competitors in the second half of 2011. As I told you earlier, one of Church & Dwight's great strengths is the ability to ferociously defend our brands. We're prepared to do just that against future competitive threats. Third, as Matt mentioned a few minutes ago, given our strong balance sheet and high cash flow yield we're a announcing a share buyback program of up to $300 million of the company's common stock. I want to emphasize and listen to me clearly, this share repurchase program will not inhibit us in any way in our continued pursuit of major acquisitions. It is a reflection of our confidence in future free cash flow performance.

In conclusion, 2011 is shaping up to be a very challenging year due to the weaker than expected consumer demand, higher than expected commodity price and rice wars but when things get ugly place your bets on the company that has the product portfolio that thrives in such an environment and the management team that has a track record of knowing how to successfully leverage that portfolio to deliver strong EPS growth.

That ends our presentation. I 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). Your first question comes from the line of Per Ostlund Jefferies & Company.

Thanks and good morning everybody. I know you touched on this a couple of times in the prepared remarks, but on the repurchase authorization is there any timeline to it and by that I mean is there any -- is there a mandate in the authorization that expires on X date and then or alternately do you have any sort of sense how it is going to be paced?

The answer to that, Per, is no, there isn't an end date, so it is open ended so the way it is worded essentially is we can purchase from time to time in the open market. That does not preclude us from doing a 10-B filing so we can actually buy through blackout periods and in that case you actually would specify the amount you would be buying. Is that enough for you?

Yeah, that works. I guess maybe you also touched on that it won't preclude any sizable acquisitions. Does it signal anything in terms of just the availability of anything that's that attractive of size?

One thing to think about Per is our year-to-date share creep has a run rate of about 2 million shares. We have talked from time to time in the past with investors about the significant free cash flow that the Company generates even after paying dividends, so to the extent that we would take share creep off the table, a run rate of 2 million shares at a price of $40 to $50 would be $80 million to $100 million annually which we would pay out of available cash and remember we have $650 million of undrawn lines between our revolver and our asset securitization facility, so in no way would this affect our ability to fund acquisitions.

Excellent. Maybe just one quick one on the organic sales forecast, so you kept that the same here at 3% to 4%. Looking sort of to the back half, do you see the trend kind of continue where that specialty behind the animal nutrition really kind of continues to be the above trend or do you see maybe the three reporting segments sort of normalizing all around that same level as the consumer side picks up behind some of the innovation?

I think fall and winter will eventually come, so the temperatures will come down and unlike what we're seeing in the dairy products it is going to fade. We expect stronger growth of the consumer domestic and continued strong growth international in the second half.

And FPD will fade back to normal growth levels.

And the first quarter the consumer business in the US had 1% organic growth, so over 2% now, so the domestic business is accelerating Q1 to Q2.

Great. Thanks, guys.

Your next question comes from the line of Caroline Levy of CLSA.

Thank you very much. A couple of things. Have you commented or could you comment at all on the outlook for 2012 commodity costs?

No.

Not at this time.

And not even on the percentage that is hedged, perhaps?

We could do that. We're about 10% to 15% hedged for next year and a lot of our decisions with respect to hedging and our long-term contracts will be made between now and when we get to the end of the third quarter.

Okay. And then could you tell us how the Trojan condom business did and if you're losing share to Durex and if there is any change in behavior by the Durex leadership.

The condom brand is doing very well. We lost a couple tenth of share points so far this year and that's not a problem. We took a price increase in effect in Q2 and competition has followed, and we're also launching higher margin new products which is helping the profitability of category, and quite honestly the competition is coming from the Ansell company. They had gains in distribution in that have caused a couple of tenths off us. There has been no sign of any increased activity out of Durex which is part of SSL now part of Reckitt.

There is timing also going on in condoms. We had some account resets that happened in Q1 this year that would normally happen in Q2, so it is a little bit lumpy, but all in all the business is healthy.

Okay. And the higher legal costs in the second quarter, is that going to continue through the rest of the year, do you expect?

Yeah, I do. It is expected to also be a factor in the third quarter.

Do you know, could you quantify it?

No.

Okay. You talked about international having strong growth. We estimate about 9% was currency, so the base business may be up 3% or so, 3% to 4$?

The organic business was up 3%.

Right. So is that what you expect or do you expect to be able to grow faster than that over time.

Your FX calculation is correct for Q2. I want to make sure we're on the same page which you had 9%.

Yep.

The organic was 3% for the second quarter.

We expect continued organic growth in that area of 3% to 4%, 3% to 5%.

Okay. And then you talked about OxiClean lost a bit of share. You're going to be sure to defend. Can you just give us a little more color on what's going on in the marketplace, who is taking share and why and why you think that -- what do you think it takes to reverse that?

OxiClean is the one business which kind of surprised us this year in the sense that the category was very weak in the first quarter, almost down double-digits. That followed 2010 in which there was a major competitive war as a large competitor entered the category. A lot of spending was put behind that. A lot of spending was done to defend against that. We defended very well and held our share and other competitors took the lumps as this new entry gained share and surprisingly in the category pretty strong last year and surprisingly this year the category started very weak. We're still trying to figure out why quite honestly. We're not sure if there was a lot of pantry loading last year with all the trial incentives and the defensive spending or whether possibly the category is a premium category and is sort of a luxury category that people could back off on. The good news is the category came back a little positive in the second quarter so but it did surprise us. Our share basically is flat in the first half of the year which is okay, up strong in the first quarter, down a bit in the second quarter, but overall flat on the year, but the good news there is it looks like the signs of the category growth is coming back which is important to us and we have good initiatives planned in the second half of the year to continue to maintain our hopefully drive share growth there. It was the one surprise of the category that surprisingly went very weak in the first quarter of the year on us.

Okay. Thank you. And then just on --

Carol?

Yes.

We have a long queue here.

Go ahead. That's fine. Thank you.

Thanks.

Your next question comes from Bill Chapell of SunTrust.

Good morning.

Hey, Bill.

Just can you give us a little more color on the stepped up trade promotion? I mean, is it across the board or is it -- are you seeing it more just in the detergent category? Are you seeing pressure from a specific player that is making you step this up or are you doing this pro actively to kind of build your market share?

Yeah. No, Bill, it is largely the household side of the business, a little bit in oral care. It is competitively driven and as I said a year ago and certain big competitor started price wars, price wars are not good for everybody. Those who start it usually win some share at first and then they upset the guys who lose it. We also won last year in fighting back but some other competitors lost and guess what the competitors that lost last year are being aggressive this year with spending and forcing the rest of us to continue aggressive spending. That's where it is. Overall again liquid laundry is always one of the biggest categories there. We've done well in the category. We're very good fighters in that category and our value position puts us in good position but there has been an unexpected high level of trade spending continuing in that category, a little bit in litter I would tell and you oral care also has been very competitive.

And just to kind of dig into that, my understanding was part of at least P&G's price increase taken in June was a rollback on trade promotion on the liquid side. Does this imply that that's not happening or are you just seeing trade promotion from the other players more in kind of the mid-and lower tier side of the market?

All the trade spin back talked about in the second half of this year, so we still don't have a clear picture whether that's going to happen, and the real driver of spending is Hanckel will out there right now which again the one lost share last year and trying to get did back this year. The issue of hopefully lower trade spending, jury is still out on that one. I would say it doesn't look hopeful, but the jury is still out.

Last one, did you say you wouldn't say what the legal expenses were for or you wouldn't quantify the costs?

Yeah, we weren't going to forecast the costs for the second half for legal.

Can you tell us why, what the issue is that's stepping it up?

It is just related to the legal --

A variety of cases.

The litigation we have described in our 10-Qs, no new ones there, the same ones we have had for a while.

Great. Thanks.

Your next question comes from Wendy Nicholson of Citi Investment.

I just wanted to clarify and follow-up on Bill as last question on the promotional spending because if I look at the last couple of Nielson reports, particularly the last one, it looked like your promotional spending was up dramatically and Procter's down. I just want to clarify, and I know it is only Nielsen and only one month or whatever, but just to be clear, you want to maintain the same price gap that you have had historically in most of our categories or in laundry and specifically, is that correct, so if they take more pricing or back off promotional spending you will follow in kind, is that right?

In general that's right, we will, but they're not the only competitor in the category, and we also had to be competitive versus our value players in the category. Again, Again, I said that's where the problem is right now that Hankle lost last year and being aggressive this year which will affect everybody in the category and we have defended very well and grown our share despite that, but it has caused us to spend more trade spending than we would like.

The announcement by Hankle with respect to pulling back on trade promotional spending is not obvious to us at this point in the first week of August.

That's all I need. Thank you so much.

Your next question comes from Joe Altobello of Oppenheimer.

Thanks. Good morning guys, just a couple quick he ones. First in terms of pricing you obviously mentioned this morning you've taken a couple of pricing actions. You led in condoms and I think you followed in detergents. What the chances we see additional pricing in the back half of this year in other categories.

Slim to none.

Okay. That's helpful. Secondly, on the gross margin side, the change in gross margin guidance this morning, you also mentioned three factors there, the commodity pricing, promotion activity, and product mix. Is there one that stands out that's really driving that or are they all contributing to roughly equally?

I mean, it is a range, Joe, so I am just to repeat what I said in product mix is certainly affecting gross margins and we got the price increases but because of how aggressive some of our competitors have been in some categories, it is not flowing through and getting the help that we thought we were going to get from it.

Okay. One last one. Any thoughts on a detergent using pod technology similar to what Procter & Gamble is working on or about to launch?

We have lots of thoughts, thank you.

Anything in the pipeline?

We have lots of things in the pipeline.

Okay. Thanks a lot, guys.

Your next question comes from Tim Conder of Wells Fargo Securities.

Thank you. Just a couple here related to the pricing and especially in the value category, gentlemen. Is your sense that it is just Hankle being extremely aggressive to try to regain that share or something else afoot in the category linked to the consumer?

No, it is primarily just an aggressive competitor out there. I mean, I should mention good news is the liquid laundry category which was down about mid-single digits in the first quarter was down only about 1% in the second quarter, so the category looks like it is coming back which is good news, and it is just that competitor who lost badly on share a year ago who is trying to regain the share this year. Again, as I told you in my call, our share growth is the best of anybody in the category and we'll defend ourselves aggressively and that meant we had to spend trade spending to neutralize the actions of this competitor.

Okay. And then, Jim, on the acquisition, you outlined again it is going to give you more scale in your UK operations. Is what you're acquiring here, it is transferable to other markets? What other things does that acquisition give you and how do you see the opportunity I guess to ramp the sales base here fairly quickly?

Again, 80% of the sales are in the UK but 20% are in other countries including other parts of western Europe and the United States. We do see opportunity to grow it in all of those markets. It is a very unique product. Dry shampoo is one of the ways in an old product but a very hot product recently. A lot of hair care companies are telling women not to shampoo their hair every day because it will strip the hair of oils and as a result this business has had quite a little pop out there again, the compounded average growth rate of almost 90% over the past four years in the UK was quite impressive to us. The margins were impressive. It was kind of a unique product that we got at a fair price and that we think it has good growth potential going forward.

And are there immediate plans, Jim, meaning immediate over the next two years or so to expand that very quickly in other markets outside the UK?

We're still in the process of making those kind of decisions.

Okay. Final question is related to the share repo. Generally historically you haven't really had any. I guess following on alluding to an earlier question, should we view this anything more than to offset the share creep? I mean, as far as your opportunities with the available excess cash?

You're right. We haven't bought back shares since the year 2000, and we have been generating an increasing amount of free cash flow over the last couple of years, and earlier in the year we doubled our dividend because we had such significant cash flow that we were generating. As I said before, $350 million annually after CapEx, the dividend is about $100 million requirement on a full year basis so leaves us $250 million and as I said before, we have tremendous amount of available lines, existing lines of $615 million, and we can actually expand our revolver in addition to that if we want to do something larger. There is no message with respect to the announcement other than we have the ability now to take share creep off the table.

I was just add to that we have the great cash machine. Matt and his crew have generated the greatest percentage of free cash flow of any competitor out there and it is just at a point now where we practically have no debt. We are working hot and heavy on acquisitions, and this in no way will inhibit that given the amount of cash we have, the borrowing capacity we have, so please don't read into this any change in our desire to continue to be a great acquirer in this category and that's it, just this was just an opportunity to buy back some shares and because we have so much damn cash.

Good problem to have. Thank you, gentlemen.

Your next question comes from Alice Longley of Buckingham Research.

Alice. Hi. Your guidance assumes gross margins are up in the second half. Can you mainly tell us why you think they will be up, some of the companies are guiding to even worse gross margin declines in the September quarter than the June quarter, and could you tell us, you know, what we're going to see in terms of gross margin comps in the third quarter versus the fourth quarter as well?

Alice, we would never forecast the gross margin by quarter year-over-year. As we said before, we have lots -- the things that influence year-over-year gross margin is the timing of our cost savings programs, and you probably remember that we accelerated some of the -- pulled those some into the year. We started expecting 200 basis points of cost savings, and we now are 200 to 250, so across savings programs we pulled into this going to influence the second half gross margin. The other thing, too, is we have the launch of some of these new products that Jim made reference to, the Tooth Tunes and Neti-Pot which are also high margin products.

So if that's the case, will mix be better in the second half than it was you called it out as a negative this quarter?

We expect price mix in the second half to be neutral, neutral to up a bit, but we actually thought we were 90 days ago we were pretty convinced it was going to be a positive trend in the second half, and now we think it is going to -- it won't be, and that's the reason why we went from 50 to 100 to 0 to 50.

And the way to think of price mix is that maybe price and mix together are plus 2 and dealing is negative 2?

On a full year basis?

Well, for the second half.

Hey, one thing that is probably worth pointing out is if you look at our gross margins last year, our lowest margin quarter was the third quarter where we were at 44%, and if you look at our trends so far this year first quarter was 44.9, and second quarter was 44.5, so you can kind of do the math on what you think the range will be in the second half, but that -- the comp actually hasn't influenced it as well year-over-year.

It is reasonable to think that gross margin is going to be up in the third quarter, right?

Year-over-year, yeah.

Yes.

Okay. And then my other question is on a dividend which you doubled last February I guess. Can you sort of comment on your leanings for increasing that another 50% plus?

Well --

When we come to February, whatever.

Well, we doubled it as you said earlier in the year, and we do evaluate our uses of cash flow all the time, and the number one destination for us is M&A, and as far as return on cash to shareholders, you know, we made one move with respect to doubling the dividend, and now we have decided we're going to address share creep and but it is something that the management and the board does crease regularly, and I think at this point we wouldn't comment any further on our intentions.

Okay. On detergents, I guess XTRA was up more than Arm & Hammer this quarter. Should we expect that to continue through the rest of the year?

That's probably a pretty good assumption. Again, that's the good news/bad news story. There is tremendous consumer appeal for our value brands, and so the good news is XTRA has had tremendous growth, a record sales quarter in Q2. We expect that to continue to be strong. The bad news it is obvious will a lower margin product so that affects some of the mix. We think our value detergent business will continue to be very strong overall in the second half of the year.

You're expecting Arm & Hammer loan as a franchise to also gain share or not?

Yes.

Okay. Thank you.

Your next question comes from Jason Gere of RBC Capital Markets.

Good morning, guys.

Hey, Jason.

I was wondering if you could just talk maybe about the delta between the track and the untracked channels, what you're seeing out there in terms of -- I know consumer demand is pretty bad out there, but can you talk a little bit about the difference between the two channels right now?

First of all the untracked channel is going to change a lot because Wal-Mart is going to be part of Nielsen shortly, so that was a wonderful move to put a major competitor in there. The untracked channels have generally done very well. That's what the flow is toward the mass merchants and toward the dollar channels and somewhat the club, but I wouldn't say major change in that over time, it is just there has been for a long time a flow that way.

Okay. And then I guess I was just trying to think about the organic sales and I appreciate the color that the consumer domestic should see acceleration into the back half of the year with the spending. Can you just talk maybe about the eight power brands versus the tail brands and then kind of how you're managing those tail brands right now? Like in the quarter that 2%, how does that split between the eight power brands and the tail brands? Do you see the tail brands starting to stabilize? How are you managing those businesses?

The bottom line on that, Jason, is we always put our focus more on more on the eight power brands. They're all doing like I said we grew share on five out of the eight. We generally grow share on that five or six or eight out of the eight we put the focus there. The tail brands have been doing pretty well. Matt mentioned earlier we intentionally in the first half of the year discontinued some bonus packs on our value tooth paste which, honestly, were unprofitable and we took them out so that was part of the reason our organic growth went down a little bit and those brands lost some share but it was a wise move for us in terms of gross margin by getting rid of business that made no sense. Otherwise our other tail brands are some are actually growing and doing well because their value based and we managed those quite well, and the decline on those is very minor.

Jason, this is Matt. Just to give you a number, the value tooth paste that Jim made reference to, Aim and Close-up where we ended unprofitable Bogo's from a top line that was a 30 basis points drag on organic growth in the second quarter but it was a conscious decision on our part.

And that drag should continue? I mean, just trying to get a little perspective there.

Actually it is bigger in the first quarter, actually tailing off, so it will be less of a factor in the second half but certainly affected the second quarter.

Okay. And just the last question, I think back at your meeting back in February for the year end. We were talking about SG&A and that this year you were expecting to see some good SG&A leverage coming through and I know there has been some legal costs and I am sure there is probably some FX, too, but when you look to the back half of the year, do you expect SG&A to get some leverage, especially as the top line accelerates, you have easier comps, and it sounds like the sales are a little bit second half weighted, so how should we be thinking about that?

You're right about the legal costs, and those are things that are hard to predict and hard to forecast, so that is as you would characterize a head wind, but we still think we have opportunities to get leverage on SG&A year-over-year, but I wouldn't call a basis point number right now.

Okay. So that implies a second half should built into your guidance is that there is some improvement as a percentage of sales in SG&A?

Yep.

Okay. Good. Thanks.

Your next question comes from Chris Ferrara of Bank of America Merrill Lynch.

Thanks, guys. Wanted to go back to the shelf space gains you said in the power brands you have been gaining space, and I know that has been ongoing, but can you just talk more recently about the trends, how much visibility do you have? Have shelf space gains accelerated or distribution gains accelerated and how far of that is coming from innovation versus what you think is just retailers emphasizing value product?

I don't quite know how to answer your question about acceleration. We actually put a chart out in a presentation recently on Wall Street which indexed our distribution gains over the last several years, and I would be glad to give you that afterwards. Those are pretty much over for the most part this year as far as they usually happen on the second quarter, so we again had very good distribution gains across our eight brands. To your point, it is partly innovation, and it is partly value. Our value brands have done very well and retailers are making smart moves to get more emphasis on the shelf to the value brands, so value brands like XTRA and to some degree Arm & Hammer laundry detergent achieved some of their share gains on the value proposition, but they have also had great new products. The XTRA with OxiClean has done well. The Arm & Hammer for the Sensitive Skin has done well, so it is kind of a combination of both, Chris, puts the bottom line which is very good is our product innovation and value oriented portfolio have helped us to gain share across the board in all of our power brands.

Got it. Thanks, guys.

Thanks.

Your next question comes from Bill Schmidt of Deutsche Bank.

Hey, Bill.

Matt, can you help me with the earnings other than because sales were held the same, gross margin was brought down, you are going to keep the advertising level still in the same range, so how do you hold the guidance? I know you said there is not a material change in the SG&A ratios, so is it lower interest and lower share count? Is that the way to think about it?

Well, I mean, primary levers when it comes to EPS are revenue, gross margin, and SG&A. We would say marketing would be secondary because that's important to how we draft the business and revenue gross margin are certainly we have ranges in there, and SG&A as I said to Jason before, we do see an opportunity to get some more leverage year-over-year on SG&A. In the second half of course we have these new product launches that are also influencing factors so we have that built in as well and the success of Tooth Tunes in particular and net Neti-Pot, so there are pieces but we definitely see a way home for 10% to 11% EPS growth.

Is it more share repurchase driven the point. I get all of those things. Is If you look at guidance 3% to 4% and the only change is gross margin is worse than before.

We have a $0.03 range for the year, and the share repurchase at best would be a penny.

Okay.

You're limiting to what you can buy and as I said the run rate is 2 million shares a year, so even if we're to take all of that off the table at best we get you around a penny. That's not a big swinger.

Okay. The delta I guess is just better SG&A leverage but I thought you said that's not going to be hugely -- you know what I mean? There is a 50 basis points gap on the margin side, isn't there, with the sales the same?

Depends on where you come out with your top line, right?

That didn't change, you know what I mean?That's fair. Gross margin side, would you be wanting to quantify how much of a drag the big specialty growth was in the quarter because I know mix was called out pretty aggressively. Was that primarily because the specialty business grew so much faster and maybe in the back half I think you said you assumed to slow a little bit and the consumer business accelerate, is that a big driver?

It is a factor in the second quarter, but I wouldn't say it would be a big swinger for the full year just because I said it will tail off the whole dairy product spike in the second quarter. A little bit more in the third quarter, but, yes, especially with influence this quarter and it would be muted by the fact that you get three other quarters in the year.

Okay. That's great. One quick last one for Jim maybe. This dry shampoo acquisition, does this signal like a bigger push into sort of traditional personal care categories? I know like historically you haven't been big in skin and obviously deodorant business has been a little tough recently. Does that change at all?

No, Bill, not honestly. It is just we're agnostic as to which way we go in household, personal care and that and this was a great opportunity in the personal care category, so we took it. No, it doesn't indicate any swing one way or the other.

Great. Thanks very much, guys.

Thanks.

Your next question comes from Lauren Lieberman of Barclays Capital.

I just wanted to first follow up on personal care sales. Just a little bit confused because sales were flat in the quarter. You talked -- I thought in the press release it says that condoms were down but earlier in an answer to a question you said condoms were up. We know value tooth paste and Nair was good. Where was softness in personal care this quarter?

First of all I want to congratulate you. I understand you were just married and came back from your honeymoon, so we haven't built that into the category projections personal care for us, but we'll think about that.

Thanks, Jim. Appreciate it.

As far as the different businesses within the personal care side, you mentioned, right, we did lose business and Matt quantified on the tooth paste.

Nair had a very good quarter. Good quarter, so somewhat offset the weakness in Trojan. With respect to Trojan, we said Trojan was lumpy, so up Q1, down Q2, but on the half up and also saying our prospects are good for the second half as well in the Trojan category.

Trojan plus tooth paste simply what it is in terms of personal care in the quarter.

Trojan was a quarterly shift and the tooth paste was an intentional getting rid of unprofitable Bogo's.

Can you explain the shift in Trojan for me, what was it that pulled sales into Q1?

We had some accounts that reset in Q1 that normally would reset in Q2, and the other thing is we had a May price increase as a lesser factor but you had a little bit that swung into Q1 as early buy.

Okay. Cool. And then for new product launch activity, I might be misunderstanding, but you highlighted two new products in the press release, but it sounds like some of the other things like the Sensitive Laundry, the XTRA plus OxiClean, have these launched yet or still coming? I had maybe my misunderstanding but I thought they were more of a 2Q launch was the plan.

Everything else is launched. The ones we mentioned were back half new news launches on the Simply Saline Neti-Pot items and the Tooth Tunes and everything else launched in Q2 and that's why we started to ramp up our marketing spending by over 200 basis points versus Q1 and we'll keep up and spend more dollars in the back half of the year and we're really excited about the Tooth Tunes item. It is obviously an item that we bought from Hasbro company who launched it several years ago and delivered in the neighborhood of $40 million to $50 million in gross retail sales out there. They couldn't handle the product, the SKU complexity, the product, they couldn't handle the retailers. It wasn't their normal retailers, and they discontinued the product. But it was a terrific product and we bought the rights to it and we're relaunching it in a smarter way in terms of fewer SKUs. We got some of the hottest artists out there, and the retailer reaction so far has been phenomenal.

Okay. Great. And then my final thing is I thought, Jim, when you mentioned working with noncompetitive CPG companies to maybe consolidate purchasing, that really interesting, so anything you can share on that, how new is this? Is this something you're starting now and hope to get benefits in 2012 and just how broad is the work that you're doing?

It is new. I can't share with you who it is, but it is -- you can think we often talk to you about what our largest ingredients are from core goods and surfactants on that and we're finding companies out there we don't compete with that buy those materials from some of the same suppliers, and we're talking to them and it will have begin to have some impact in 2012 but probably more after 2012. It is a move to create greater purchasing leverage that will help us in the future on the gross margin.

Okay. Great. Thanks so much.

Thank you.

Your last and final question comes from Leigh Ferst of Lincoln Shields..

I have a question about the Simply Saline Neti-Pot. Can you talk about the distribution for that? Would you be using -- would it be similar or different from where you are already?

It is very similar. It will be out there in drug stores, mass merchants, and very similar to every place we have Simply Saline today which is in all type of accounts.

Okay. What about the natural foods or natural products channel? Are you in there at all?

We do have a few products in there. That is an interesting opportunity for that channel. Thank you. We'll take a look at that. But mostly right now we're going into our traditional channels which are 98% of the volume in this country.

Thank you.

Thanks.

There are no further questions. Are there any closing remarks?

I want to thank everybody for taking the time today to hear our call. Again, we're very happy with the first half, especially in this very, very tough business environment, and we feel very encouraged about the second half. Again, I told you month of July was an exceptional month for us. We're off to a strong start, and we certainly hope it continues and we'll deliver the numbers we promised to you. Thank you very much and have a great day.

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