切遲杜威 (CHD) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight third-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 forecast. These statements are subject to risk 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 and good morning to everyone. It's always a pleasure to talk to you, particularly when we have excellent results to report. I will start off this call by providing you with my perspective on our third-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 will then open the call to field questions from you.

Let me start out by saying that I am very pleased with our third-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 these significant headwinds, we delivered record quarterly net sales in both our domestic and international business units and for the total company. These record net sales results were driven by a 4.5% organic growth in the third quarter. This strong organic growth is largely volume driven and reflects positive momentum from the first- and second-quarter results of 1% and 3.3%, respectively. This organic revenue growth momentum has continued into the fourth quarter which is off to a strong start.

Our third-quarter gross margin was slightly above year ago, but below our expectations as the significant increases in commodity costs and product mix favoring our lower margin household business largely offset our hedging and cost-cutting programs. As promised, our marketing spending was up in absolute dollars versus year ago to support the launch of new products across almost every one of our power brands. However, our marketing spending as a percent of sales was down versus year ago due to the strong growth of our heavily trade-driven household brands.

Most importantly, we delivered a 12.5% earnings per share gain for the quarter, which was on top of an 11.6% earnings per share gain in the third quarter last year. Thus, we have been steadily building momentum over the course of 2011 despite an increasingly difficult business environment. All CPG companies are fighting those 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 third quarter. Go ahead, Matt.

Thanks, Jim. Good morning, everybody. I am going to start with EPS.

Third-quarter GAAP EPS was $0.54 per share, which compares to $0.48 in 2010, and this is a 13% increase from year ago. Reported revenues were up 6.7%, our organic growth was 4.5% for the quarter, and the strong organic growth has put us in an excellent position to once again deliver 3% to 4% organic growth for the full year. The 4.5% organic growth is comprised of 3.7% volume and an 80 basis points effective price in the quarter.

The positive price is largely driven by the specialty division, which is passing through raw material increases.

In the US consumer business we have yet to see a pullback in aggressive trade spending; however, we are seeing some positive price in our international business. The full-year organic revenue call is for 3% to 4% volume and flat price. By the way, the effect, if any, of our US SAP implementation is not in our 3% to 4% call and it's not in our EPS guidance. To the extent there is any incremental profit associated with that implementation, we will be reinvesting in marketing in the quarter.

Now I will briefly review the segments. The domestic business reported organic growth of 4.3% with 4.6% volume, partially offset by 30 basis points of negative price. The 30 basis points of negative price in Q3 is actually the same as we experienced in Q2, although we had some help in Q3 from price increases in powdered laundry and condoms. This was our highest volume growth quarter for the US business since Q3 of 2010.

In the international division we had 3.9% organic growth driven by growth in Canada, Mexico, Australia, and our export markets. This increase is driven by volume growth of 2.8% and positive price of 1.1%. We successfully implemented SAP in Canada, that was the first phase of our project. We did that in October.

We excluded 1.4% of sales in arriving at the international division organic sales, and the excluded sales were attributed to customer orders which shifted from Q4 to Q3 in anticipation of this implementation. 140 basis points may seem like a lot, but in fact it's only $1.5 million.

For our Specialty Products division organic sales were up 7.8% with volume down 1.8% and price up 9.6%. Remember I said before that price is primarily driven by price increases in the animal nutrition business where we are recovering increases in raw material costs. We had some volume softness in our international chemicals business which accounted for the division's volume decline.

Turning to gross margin now. Our reported third-quarter gross margin was 44.2%, a 20 basis point expansion from year ago. The increase in gross margin reflects cost reduction efforts somewhat offset by higher commodity costs and unfavorable product mix. Regarding mix, as you can see on the schedules attached to the release, household products were up 7% in the quarter and personal care was up around 1%.

The product mix created a lower gross margin in the third quarter. We now expect a similar mix effect in the fourth quarter. There will also be a drag of approximately 30 basis points on Q4 gross margin related to expenses in preparation for our new California facility, which will open in the March/April timeframe.

For full year, we expect commodities and cost reduction programs to largely offset each other. However, the impact of product mix is greater than our earlier expectations, primarily due to the success of our household products. As a result, we now expect our full-year 2010 gross margin to be in the range of down 25 to 50 basis points.

Now marketing. Marketing spend was $92 million or 13.1% of revenues. This is an increase of approximately 2% from the prior year. It is also a 10 basis point increase above the second-quarter rate, but down 60 basis points from the prior year's spending.

Remember, we grew dollar share on seven of our eight power brands thanks to the great execution of our sales and marketing teams.

I might also add that we had very strong organic growth in Q3, especially in the back half of the quarter, which somewhat outran our marketing spend. Value laundry detergent is clearly winning on shelf for Church & Dwight. If we back out our two value detergents from our calculation of marketing as a percentage of sales, marketing as a percentage of sales is actually equal to Q3 2010.

Looking ahead we expect to increase spending again in the fourth quarter to over 14% of sales. The total marketing spending will be up approximately 3% versus year ago in Q4. As a percentage of sales, we expect to be flat to down for the year. I might add that total trade in marketing, which is another measure that is worthy of investors, is expected to be up $[14] million in a fourth quarter and up $65 million for the full year.

SG&A year over year was up $6 million in the quarter. SG&A as a percentage of sales was 13.1% and flat with year ago. The higher SG&A costs in the quarter reflect higher year-over-year legal costs, information systems costs in support of our SAP implementation, as well as higher R&D spending. The reported operating margin for the quarter was 18% compared to 17.2% last year.

Now income from affiliates. Income from affiliates increase $2.1 million due to higher income from a joint venture. With respect to other expense, other expense was $4.7 million lower than year ago, reflecting lower interest expense as a result of our refinancing and debt repayment activities.

Now I come to income taxes. Our effective rate for the quarter is 36.8%, which is significantly higher than last year's 34.4%. The prior-year quarter included $3 million in benefits from tax settlements. We are forecasting an effective rate of approximately 35% for the full year 2011 and that compares to 35.2% for the full year 2010.

Now I am going to talk about cash. We generated $278 million of free cash flow so far this year. Netted in our free cash flow is $41 million of capital expenditures. Net cash from operations is above last year by $31 million.

Our operating working capital as a percentage of sales was 9.8% at quarter end, and by the way, operating working capital for us is defined as trade receivables, trade payables, and inventories. We have over $275 million of cash on hand right now and $250 million of outstanding debt.

For the first time in many years, Church & Dwight is now net cash positive and we have about [$650] million of available credit through our revolver and asset securitization facility. We expect to generate over $350 million of free cash flow in 2011, and remember that figure is after approximately $80 million of CapEx in 2011. The $80 million includes an $11 million investment for our West Coast facility out in California, which is on track, and $22 million for our SAP and data warehouse upgrades.

We did not repurchase any shares in Q3. We do plan on purchasing shares totaling approximately $80 million in the fourth quarter, and this is in the interest of covering share creep from options exercised in 2011. Now this will only have a very slight effect to EPS in the quarter due to the late timing of purchases in the year.

You may have seen that we announced an air pollution control joint venture with FMC and TATA Chemicals called Natronx Technologies. This JV will manufacture and market sodium-based dry sorbents for air pollution control in electric utility boiler operations. Natronx intends to invest approximately $60 million to construct the facility in Wyoming in 2012 to produce these sorbents. The investment will be shared equally by the three partners.

The joint venture will have no impact on EPS in 2011 but will be slightly dilutive to EPS in 2012.

In conclusion, the third quarter highlights include 4.5% organic sales growth driven primarily by volume. We delivered 20 basis points increase in gross margin, driven largely by our cost savings programs that more than offset higher commodity costs that the whole industry is experiencing, as well as product mix. And we increased our market share in seven of eight power brands, and EPS is up over 13% over a year ago.

We are maintaining our annual earnings per share goal of $2.17 to $2.20 for the year, which is an increase of 10% to 11% over last year. Back to you, Jim.

All right, thanks, Matt. I will finish off the call today by adding a little color to the solid third-quarter business results that Matt just took you through, and I will provide my outlook on the year.

Our solid third-quarter 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 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 the more value-oriented brands. The business results of our value-based laundry business, which is our biggest business, provide living proof of what is happening in the marketplace.

In the third quarter our Arm & Hammer Liquid Laundry Detergent achieved record share and net sales results, up over 10% versus year ago. The Arm & Hammer brand now accounts for one in eight liquid laundry detergent bottles sold in America.

On top of these great Arm & Hammer results our XTRA brand, which is our extreme value-based liquid laundry detergent brand, also achieved its highest ever quarterly sales, up about 10% versus year ago and is now the number two brand of liquid laundry detergent on a wash load basis, accounting for about one out of seven loads of laundry in America. As a result, our two value-based liquid laundry detergent brands, Arm & Hammer and XTRA, grew share in the first three quarters of 2011 totaling over 1 share point. Only one other competitor gained share in the first three quarters of 2011 and that was around 0.5 point in total.

Our Arm & Hammer Powder Laundry business is also on fire with 10 consecutive months of dollar share growth. Arm & Hammer Powder has gained more share growth in the third quarter, about 1 point and year-to-date a little over 1 point, than any other powder laundry detergent.

The second factor which is a key driver of Church & Dwight's success is that 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 on these eight power brands in over 80% of the quarters. In the third quarter this year, as Matt said to you, we grew share on seven of our eight power brands.

Two key factors drove these excellent share results. First, we have smartly reinvested some of our increased profits from the strong growth of our value brands to increase market share -- marketing support on our eight power brands by a total of 290 basis points or $140 million over the last three years.

While our marketing spending was relatively flat versus year ago and the first three quarters of this year, we have increased our trade spending to defend our brands against competitively driven price wars. Thus, our total advertising promotional spending against our brands is up 7% versus year ago in the first three quarters. We had planned and would have preferred to increase our advertising spending instead of our trade spending, but we had to deal with aggressive trade spending by one of our key competitors. The end result was the optimal mix of advertising and trade spending as proven by our strong organic revenue growth results.

Put another way, we don't sit on a pedestal at Church & Dwight and stick to our plans to increase advertising spending when faced with lower prices by our competitors. We responded quickly to the increased trade spending by one of our competitors, and as I said, executed the optimal mix of advertising promotions to drive strong organic revenue growth.

The other factor driving the growth of our power brands is our robust pipeline of new products. Over the past four years new products delivered about 50% of the Company's organic revenue growth. We have shipped innovative new products and almost every key category this year to support delivery of our organic growth target of 3% to 4%. We expect these new products to be as successful as our new products over the past four years.

A sample of these new products in our household business include XTRA with OxiClean laundry detergent. The combination of two of our power brands has driven distribution gains for the XTRA brand this year, which has helped to deliver a high single-digit jump in sales.

We launched the Arm & Hammer brand with OxiClean co-branded detergent two years ago, and that new product now represents over $100 million in annual sales and has a higher market share than the Era and Cheer brands. The XTRA with OxiClean new product will enhance the cleaning power appeal of our XTRA brand, which as I told you a few minutes ago is the number two brand in liquid laundry detergents on a wash load basis, accounting for one in seven loads of laundry in America.

We also launched a new sensitive skin product for our liquid laundry detergent business on the Arm & Hammer brand to enhance the brand's appeal to the 50% of consumer households who have sensitive skin issues. This helped to drive over 10% sales growth of the Arm & Hammer Liquid Laundry Detergent business in our third quarter and bolstered this brand's position as the number one value brand in liquid laundry detergents in America.

Another great new household product being launched in the fourth quarter this year is Arm & Hammer Ultra Last Cat Litter. Our new Ultra Last cat litter is the only cat litter where every granule is coated with baking soda to deliver all-day freshness, even if you forget to scoop out the soiled litter. We expect our new Ultra Last cat litter to build upon the huge success achieved by our Arm & Hammer Double-Duty cat litter line launched in 2010. That unique product eliminates both urine and feces odors.

This steady stream of great new cat litter products has resulted in 31 consecutive quarters of net sales growth, and Arm & Hammer cat litter is now the number one or number two clumping cat litter brand in most of the retailers in Americas. That is pretty impressive for a category which we entered only 13 years ago. It also shows the strong consumer appeal of the Arm & Hammer brand, which in total passed $1 billion in sales in 2010.

Now on the personal care side of the business we have several exciting new products in 2011. First, at our Arm & Hammer Spinbrush business we launched a new kids' Spinbrush for boys called My Way, which allows boys to personally decorate their toothbrush with popular peel-and-stick decals which come with the product. This new Spinbrush follows on the heels of the My Way Spinbrush for Girls, which was a huge success in 2010.

Our total My Way kids business is the number one kids' battery brand for the latest 52 weeks, more than doubling its share during that time. These successful new kids Spinbrushes have enabled our total Spinbrush brand to continue its dollar-share leadership on the battery-powered segment which it has held for the past 24 consecutive quarters.

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 unmistakable yes or no result. This new product and continued strong marketing support of our total pregnancy kit business resulted in our two brands, First Response and Answer, achieving a record quarterly share, and the only two brands to grow share in the third quarter in this high-margin category.

Finally, our Trojan brand achieved solid share gains in both the condom and vibrations categories. The share gain on Trojan condoms was driven by increased marketing support and the launch of our newest condoms called Bareskin. That is bare as in b-a-r-e, and you can figure out what that implies without my help.

On the vibrations side, our net sales were up over 60% in the third quarter behind the launch of a line of full-size vibrators under the Trojan brand name. This product line is now available in all classes of trade, as well as through our website and the 800-number on our commercials.

This category is new whitespace for the Trojan brand to enter. It represents a major long-term growth opportunity, because we estimate that the total vibrations category currently has up to $700 million in retail sales with no clear branded leader.

One side benefit of all these great new 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 the distribution gain will play a major role in continued sales growth in the fourth quarter of 2011 and into 2012.

Now there are many other new products that we have launched in 2011, but in the interest of time I will move on with my review of the other 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 factors.

Factor number three is that we have a proven history of ferociously defending our brands. We proved that in 2010 in our defense of the OxiClean franchise when it faced the entry of a mega-brand extending into this non-chlorine laundry additive category where OxiClean is the number one brand. The powerful new competitor gained some share behind significant marketing spending, but it came largely at the expense of other competitors.

OxiClean's all outlet share in the latest quarter was actually up over 0.5 share point versus year ago and the brand's share is also up over the first nine months of this year.

The fourth factor behind our continued success is the strong growth of international business. While our international business represents only 20% of our total revenues, it has delivered high single-digit sales growth and double-digit operating profit growth over the past five years. This strong growth continued in the third quarter, as Matt mentioned earlier, when our international sales delivered record quarterly sales and strong organic growth of about 4%.

Factor number five is our long history of success in expanding gross margin through cost optimization programs, supply chain restructuring, acquisition of synergies, and launching higher-margin new products. We expanded gross margin 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 basis point gain achieved in 2009 despite major headwinds from higher commodity costs.

As Matt told you earlier, our gross margin increased 20 basis points versus year ago in the third quarter of this year. While we had planned for a larger gain in our gross margin, we consider the results a major success because if you -- it has already occurred. Most of our CPG competitors incurred significant gross margin declines of several hundred basis points in the third quarter, which reveals how well we have aggressively attacked cost savings and hedged key commodities.

Nevertheless, in light of our Q3 and year-to-date gross margin results and continued retail price wars, we are lowering our previously stated 2011 goal of annual gross margin improvement from zero to 50 basis points to a decline of 25 to 50 basis points. We are not happy with that forecast and are in the process of taking aggressive actions to drive gross margin growth in future years.

This includes the early 2012 start-up of our new manufacturing distribution 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 and 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 our businesses to be among the industry leaders in low-cost production and distribution.

We are also working diligently on projects to reduce the manufacturing complexity of all of our product lines and lower the costs of purchased ingredients by combining our purchasing powers with other non-competitive CPG companies.

Factor number six 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 only equal to year ago in Q3, we are continuing to aggressively manage all overhead costs to stay best-in-class in our industry.

Finally, factor number seven is our strong record on free cash flow conversion. We have almost quadrupled our free cash flow over the past 10 years. Over the past five 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 continue to improve in this area as our free cash flow for the first three quarters of 2011 was $278 million or 11% 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 and faster growing leading brands.

All these factors give me great confidence of 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 can continue to deliver exceptional EPS growth going forward regardless of the future economic environment.

Let me switch gears now and simply talk about our outlook for the rest of 2011. As stated in the press release, as a result of the fact that our third-quarter results were principally in line with our expectations, we remain confident that we can deliver their 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.

We strongly believe that we can deliver this aggressive EPS target despite great-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 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 against the majority of power brands, and increased marketing support. All three of these factors should enable us to continue to deliver solid organic growth as reflected in our Q3 results, and we currently project even stronger organic growth in our current quarter, the fourth quarter this year.

Second, we believe we can still minimize our corporate gross margin decline to just 25 to 50 basis points despite significantly higher commodity costs and higher trade spending. While this is less than we previously projected, it is still a better outlook than most of our CPG competitors.

Three other points I would 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 actually have recently completed another small acquisition of the Batiste dry shampoo brand on June 28. This unique hair care brand meets all of our acquisition criteria. It's the number one brand in its category of dry shampoos. It is gross margin accretive to our company with a gross margin of over 50%.

It is growth accretive as demonstrated by its 90% compound average growth in net sales over the past four years. It is asset light as it is currently produced by [copackers]. Importantly, over 85% of Batiste's annual sales are in the UK which will increase our sales base in the UK by approximately 25%. Overall a terrific small acquisition which will deliver EPS accretions starting in 2012.

While we would love to make a larger acquisition, there are none available which meet our criteria and there were no acquisitions recently by one of our competitors which we regret not buying.

Second, I want to assure you that we are fully aware of the threat posed by new products being launched by our competitors. As I told you earlier, one of Church & Dwight's greatest strengths is its ability to ferociously defend our brands. We are prepared to do just that against the future competitive threats.

Third, given our strong balance sheet and high cash flow yield, we will continue to smartly manage our capital. This includes the doubling of our dividend that we announced in February 2011 and the share buyback program of up to $300 million of the Company's common stock that we announced in September 2011. I want to emphasize that this share repurchase program will not inhibit us in any way in our continued pursuit of major acquisitions and 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 prices, and continued price wars. But when things get ugly you should place your bet 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.

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

(Operator Instructions) Dara Mohsenian, Morgan Stanley.

Good morning. So appreciated your comments on ad spend versus promotion, but given you are going to end the year with marketing as a percent of sales nearly 100 basis points below the original level you expected, do you anticipate reboosting marketing spending next year as a percent of sales? Or are you comfortable with your share performance despite coming in with lower-than-expected advertising this year?

Well, Dara, we are not going to give an outlook on next year yet. It is always our goal to increase ad spending. We always told you, though, we would get up in the range of 13% to 14%. We are just about 13% right now, so we are getting to the point of where we think there is maximum results, but it's always a goal initially to be looking to get it up every year.

But, again, I am not going to give you any details about next year. We will reveal that to you in our February earnings call.

Okay. And you didn't repurchase any shares in Q3, but obviously plan to be more aggressive in Q4. Can you just explain the timing decision there and give us an update on how robust the acquisition pipeline looks at this point?

We did announce it in August, Dara, and October is when we essentially got it moving, so there is no story behind when we decided to do it. We just wanted to get it done before year-end. Through mid-year we had about a $2 million share run rate for option exercises. That has slowed down a bit but $80 million is going to be enough to cover the option exercise in 2011.

What was the second part of it?

That answers it. Thanks.

Bill Schmitz, Deutsche Bank.

Good morning. Is there any sign that this promotional activity in laundry is slowing at all? Because you look at some of the feedstocks and they are going the exact opposite way of the average price per unit in the category. Of course, I only have scanned data and I imagine it's probably even worse in the unscanned channels.

Yes, Bill, we are started to see it slow a little bit. Overall, pricing in liquid laundry in the third quarter, it was relatively flat versus the second quarter. There was a little bit more aggressive pricing in the value segment we compete in driven by one of our competitors, and we had to take some actions to maintain our price gaps in that segment. But we are optimistic that pricing will begin to improve going forward.

But, again, we don't control the world there. If our competition doesn't want to do that then we have to maintain our price gaps and stay competitive.

What are the retailers saying about that, because it seems like the category profit pool is shrinking because they are eating some of it too?

I can't speak for the retailers. I can just speak for me and we are doing fine.

Okay. All right, thanks very much.

Per Ostlund, Jefferies & Co.

Thanks, good morning, guys. Maybe just following on to Bill's question quickly, your pricing actions were a little bit, I would say, more targeted and maybe more modest than some of the competitors. But did the third-quarter volumes benefit at all from any pre-buying ahead of the actions in powder detergent or condoms at all?

Oh, no.

No, not at all.

Okay, okay. I wouldn't have thought so.

Are you satisfied with your pricing now, or do you see the need for additional pricing given maybe a little bit of the shift in the commodity picture? Or maybe even a different way, do you see potentially an opportunity to take more pricing if price gaps have opened up a bit here?

Well, two points. First of all, we don't lead pricing in the laundry detergent category. We are about a 10, 11 share; the big dog in the category is about a 60 share.

Secondly, on the powder side, we did take a double-digit price increases in the powdered laundry business and that is making its way into the marketplace as we speak. So I think that you will see some higher pricing on powder going forward as that price increase gets fully reflected by the retailers.

Okay, good. Thank you.

Alice Longley, Buckingham Research.

Detergents again. Did you say Arm & Hammer was up 10% year over year and XTRA up 10% year over year?

Yes, at least that.

Okay, was that value or volume terms?

Dollars.

Dollars? How much was each one up in volume terms?

Alice, don't play this game with us. We are not going to get into volume and dollars. It's dollars; dollars are what we get paid on, dollars is what you get paid on.

Well, what I am trying to figure out is how much the pricing was negative year over year.

Oh, little. Very little was pricing.

Very little?

Yes. Consumers are voting with their feet; they want value laundry detergents.

But I thought you just said that -- where was your negative pricing for the US in the quarter? I thought it was heavily weighted to detergents?

Let me help you with that, Alice. If you think about 2010, we weren't as heavily discounting in 2010 as we are in 2011. So year over year, if that is what you are trying to get at Q3, so it is true that year over year we would have had more trade spending in Q3 2011 versus 2010 for laundry.

So, again, what was the negative pricing for those two detergents year over a year?

I couldn't give you the specific brand pricing.

Why don't you call Maureen afterwards? She will get the details for you.

I mean like 2% to 3% or something like that?

Alice move on; call Maureen.

All right. And then the big question, well, another one, is your operating margins have been going up for a number of years. I know you are not giving us guidance today for 2012, but what would -- where can we get operating margin expansion going ahead? It seems like you have kind of reached the end of the line for operating margin expansion.

Well, there are a lot of things that drive gross margin expansion, Alice. One of them obviously is our plant footprint, so as you know, the York plant helped us overcome all the commodity price increases that the whole industry is struggling with for the last two years. That was a big factor for us.

And as you know, we have the California plant that is going to be opening next year. So that is going to pay dividends for us for years to come because it's going to remove millions of miles of diesel fuel costs from our system.

We also get gross margin expansion from our new product offerings. As you know, our policy is to only introduce new products that have margins that are accretive to the brand.

And acquisitions have also been an element, historically, of our gross margin expansion. Because typically when we buy something we are so good at it there is a tremendous amount of cost synergies, so we can actually expand the gross margins for the acquired business over a period of years. We haven't bought something big since 2008, which is when we bought Orajel, yet we have been hitting our numbers in 2009, 2010, and 2011 for EPS, so I think that should be very encouraging to investors.

Okay. My last one is with your balance sheet and all that cash flow when do you get to the point where you are not being responsible to shareholders and not doing anything with all that cash flow?

Excuse me, our shareholders are up to over 30% this year. I think we are being very responsible to our shareholders.

Let me take a swing at that, Alice. So if you think about the cash, you go back sequentially, so in February this year we doubled our dividend and we were trying to target a 2% yield. The stock has moved pretty well since then and now our yield is 1.6%, so we are going to revisit that again in February when we give guidance. So that will be the right timing to think about the dividend again.

You are correct, we generate more and more free cash flow every year and so obviously we have to be good stewards of the cash. As far as the buyback, we announced a very modest buyback, the $300 million, just to cover share creep. Obviously that could be expanded, but that is the only decision we would make with the Board. And we look at that probably at the same time that we did make the decision on the dividend.

Thank you.

Jason Gere, RBC Capital Markets.

So I guess I will kind of go on Alice's question, but a little bit differently though. As we think about the evergreen targets it feels like next year the 3% to 4% organic should be fine. So, yes, I guess we are expecting a bit more on the margin side.

Can you talk maybe about the opportunities still on the SG&A side versus maybe on the gross margin? Because I guess to kind of get back to that 10% EPS growth that you guys have consistently delivered over the last decade, it does imply that there is more margin coming through and your marketing spending is kind of at the low end of your 13%, 14% range. So I was just kind of wondering if you can parcel that out a little bit, and then I have a follow up.

What I was saying, on the SG&A side we already have best-in-class performance there, but we are looking to do things. We are implementing a new company-wide healthcare program next year which we think will help to keep healthcare costs in check, and beyond that we have other programs too to keep it very tight. We have a very tight overhead and we are going to keep it that way and even look for ways to improve upon it.

Yes, would add to that, Jason, that our SG&A as a percentage of sales in 2010 was 13.5% and we are tracking to be around that number -- 13.5%, 13.6% -- for full-year 2011. As you know, we have had flat headcount at Church & Dwight for many years now. In order for us to continue to do that for another five years that is one of the reasons why we have put in this SAP system, so we can make our folks even more productive going forward.

So we do expect to get some leverage out of SG&A going forward as a result.

Okay. So should we be anticipating -- I guess, I know you guys haven't really talked too much about the plant and maybe relative to the York, Pennsylvania, can you kind of benchmark what type of cost savings you think could be there? It could be half the magnitude?

I guess I am just trying to get a framework of it seems like gross margin would have -- after two years of not seeing gross margins go up because of the macro environment should we be anticipating that with pricing, with cost savings, the mix, that this will be the driver? Are you endorsing the kind of 10% earnings growth for next year?

Jason, it's only November. You know our policy is we are not going to talk about next year until February. We are always pretty consistent with that.

But do you feel -- I mean do you feel pretty good going into it? I guess that is just kind of -- just conceptually?

Jason, we have delivered 10 straight years of 10% EPS growth so that speaks for itself.

Okay. I will drop off and just get back in the queue if questions aren't answered. Thanks.

[Joe Lackey], Wells Fargo.

Can you give us the degree of expected sales from the pull-forward in Q4?

Actually we can't. We really don't know how that is going to go in Q4. Like I said, it was small dollars in Canada. I think the fact that there was no disruption to our customers in Canada went very smooth and that is a tribute to the folks that worked on that and the Company's ability to execute. I think we, and our customers, will be pretty calm about the January 1 implementation as well.

And like I said before, to the extent it gets pulled forward we will try to quantify it and call it out. And to the extent it generates any incremental profit we have an opportunity to invest it in marketing.

Yes, that is appropriate. Matt, I know you guys were at least looking at laying out some new hedges in October. Can you elaborate on that at all?

Yes, that is true. We typically do start making hedging decisions this time of year and we have made some consistent with the past. But what I normally do is I wait till February and kind of tell everybody how much of 2012 we have hedged and in what areas, but that is our policy.

And I know again waiting until February on a lot of this stuff, but if you can maybe kind of give us a general idea of what you are planning as far as CapEx. I know you have got the $20 million JV investment there, but any sort of parameters we should think about?

Well, remember the JV investment that would be outside of -- if you think about your statement of cash flows that would be investment in JV.

As far as CapEx goes, we probably would be around $70 million next year if you asked me today, simply because the investment in the California plant is going to be about $20 million. As you probably know, we average, absent these big things that we have done the last few years -- the York plant, the SAP implementation, the California plant -- absent those we run about $50 million to $55 million of CapEx. So $70 million to $75 million next year is a safe bet.

Great, thanks.

Joe Altobello, Oppenheimer.

Good morning. Just a couple quick questions here. First, in terms of the question Jason asked regarding the efficiencies from Victorville, I am not sure he got an answer. But how should we think about the savings there vis-a-vis York? Is it half the size of York in terms of cost savings or is it about equal to what you got from Pennsylvania?

Yes, but, Joe, just to be fair we never quantified what the impact of York was. What I can tell you is that the plant in York is 1.1 million square feet and the one out in California is 450,000 square feet. So it's not as big, but the element is the fact that we are going to benefit from lower distribution costs, which we didn't get from the York plant.

Remember York is only 150 miles away from Princeton, so they are still on the East Coast in other words. Whereas now we are actually moving the manufacturing out West, so the composition of the save is going to be a little bit different. But we haven't quantified that stuff in the past; we just build it into our gross margin call for the future.

I was just curious how it compared to York, but it sounds like you kind of gave us some pieces there so that is helpful.

In terms of gross margin, it looks like fourth quarter you are looking for gross margin to be down year over year. You had a modest increase in 3Q and obviously part of that is the California plant, but could you quantify for us what the input cost impact was on gross margin this quarter? I would imagine that gets better, rather than worse, going forward.

Why are you thinking that?

It seems to be the refrain we have heard throughout this earnings season from other staples names.

Yes, they are full of optimistic bullshit.

Could you tell us how you really feel?

So in other words, your view is that the world is getting a lot better for commodities?

No, it just seems like the year-over-year impact should be getting better.

Well, I think you are right from a year over year standpoint, just because if comparisons get a little bit easier I think that is fair. But full year it's a large drag year over year. That is just math that they get a little bit more favorable, because they started to ramp up in second half of 2010.

Okay. Just one last one if I could. The Natronx JV, what is the strategic benefit for you guys, particularly given that it's going to be dilutive to next year?

In other words, why get involved?

Yes, if you are going to lose money on it.

Joe, it's a great new platform from our Specialty Products division. Air pollution is going to be a majorly growing business in this country going forward with the new EPA regulations. This joint venture will deal with old coal-fired plants which need a fairly efficient way to beat the new air pollution requirements, and so it's a great opportunity for us to drive some good organic growth in our Specialty Products division. It's worth the investment.

Okay, perfect. Thank you.

Connie Maneaty, BMO Capital Markets.

I also have a follow-up on the joint venture. How are the sales and profits going to be split and where will it be recorded in your P&L? And then long term, what do you think the potential of the joint venture really is?

Connie, this is Matt. So the JV -- it's a three-way JV, so a third, a third, a third. The results of operations will be split in that fashion; they will report on the other income and expense line, which is where we report JV income.

The market is expected to be about $200 million to $400 million in sales, and this is in, I think it's -- 2015 is the projection. So as Jim said, that is going to build over time and that is about as far as we will go right now. You know, we haven't even built the plant.

Okay. Then also, I was intrigued by a comment you made about combining purchasing power with other non-competitive CPG companies. What do you mean by that?

Yes, we have actually made some progress on that but I am not going to name any names. What we mean by that, Connie, is that -- let's say for example, we buy cartons. Lots of people buy cartons. So you might go to a company who is a non-CPG company who buys the same size cartons as you, combine your volume, and then get a joint bid. You get more leverage that way.

So it must have some real efficiency implications, because given everything you buy to look for non-competitive partners might offset the efficiencies. So how does the math work on that?

No, it doesn't offset --

No, Connie --

This is purely purchase price.

This is purchasing power, purchasing power. This is taking our purchasing size, as Matt said, somebody else's purchasing size, putting that together and getting a better price out of supplier. And the supplier will benefit now from a steadier, long-term contract from both companies; the larger sizes keep their plants humming.

So the bottom line is savings on our purchase price which helps us drive the gross margin improvement.

Yes, that is interesting, thanks. Then what is the outlook for pension expense and contribution, either at the end of this year or next year?

I think you got me stumped there, Connie. As far as defined benefit plan, you know we put that one to sleep a year ago in the fourth quarter. You may remember we had a big charge associated with that, so the DB plans you are talking about now are just simply the international ones.

So I know in the Q we disclose what the contributions are year-to-date, so we will be filing that probably today.

Okay, thanks. That is it for me.

Marc Riddick, Williams Capital.

Good morning, folks. Church & Dwight was sort of in the middle of a tug-of-war, if you will, between the states of New Jersey and Pennsylvania, and with the new headquarters being announced last month I was wondering if you could spend a couple of moments sort of taking us through that process and some of the benefits that you may be able to see going forward from that announcement. Thanks.

Thanks, the answer is no. We made a lot of judgments. We decided to build our new headquarters about 10 miles south of our current headquarters here.

The building, the key building we are in here in Princeton, which we own -- we own four buildings. There is four buildings in Princeton; we own one. We are turning that into our world headquarters for R&D and our SPD divisions, and the rest of the Company is moving 10 miles south of here to Ewing into an industrial park.

And I will just say that the state of New Jersey came forward with incentives to make that a good deal for us, but I am not going to go into any details as far as what Pennsylvania offered or New Jersey offered. Let's just say we are very happy to keep our headquarters in New Jersey.

Okay, good. Is there a time frame as to when that transfer may take place? Are we looking at next year?

Yes, we are thinking fourth quarter 2012 is what we are targeting right now.

Okay, thanks a lot.

Lauren Lieberman, Barclays Capital. Lauren has disconnected.

Chris Ferrara, Bank of America.

Hey, guys. I wanted to ask about maybe some of the differences in laundry between the tracked and non-tracked channels you are seeing. Because if you just look at the scanner data -- and given obviously this is not perfect data. But it looks like in liquid laundry you guys have actually been the most aggressive on negative pricing, and it has been going on for quite a while given Henkel's doing something similar. But it looks like the lower end of the category is pricing pretty aggressively and you are the most aggressive.

So I guess what is different outside of the tracked channel that we might not be seeing?

No, what you are seeing is somewhat true. Our friends at Henkel got very aggressive on pricing in the first part of this year and opened up their price gaps for us. They are our key competitor in the value segment and we had to respond to protect our business, so that is exactly what is going on.

Again, I always told you one of our greatest strengths of this company is defending our businesses and we had to step in and defend our businesses.

I would also keep you in mind that Henkel's actions were an outcome of last year where another competitor started a price war in the whole category and Henkel got hurt pretty badly. So Henkel's reaction this year were somewhat understandably, but unfortunately they responded and got very aggressive on price and we had to respond to them.

I have always said to everybody it's very easy to start a price war, and one of our competitors started that last year, and it's very hard to end a price war because those who get hurt and lose in the past tend to keep aggressive in the future. We would love to see the price war end, but we didn't start it and we can't end it unless everybody else stops it. So that is what is going on.

Thanks. I guess one last one. You guys said that Q4 is going to be the strongest organic sales growth quarter of the year and that is great and it makes sense. But unless you blow through the full year plus 3% to 4% rate Q4 is actually going to be the weakest quarter of the year on a two-year stack basis, right? Just trying to think about underlying momentum and eliminate just the one year ago comp.

So are you actually seeing incrementally a worsening environment in a lot of your categories? Because even on a three-year basis it's the slowest quarter of the year; you are seeing kind of a steady deceleration through the year.

You better talk to Maureen, that math doesn't jive with our math.

Why don't you say it a different way, Chris? So if we have 4.5% organic growth in Q3 and we are expecting something similar or better in Q4, tell me how you are getting to your weak numbers.

So just simplistically, the comp in a year ago was 2.8% in Q3, minus 1.4% in Q4, so the comp is essentially getting 4-and-change points easier.

You know what you are forgetting; remember we had that whole crazy day thing last year? We had fewer days in the fourth quarter and we had more days in the first quarter, remember that?

I do and I get that is why the comp is much easier in the fourth quarter, but it doesn't change the fact that your growth doesn't accelerate very much despite the comp getting much easier. That is what I am -- I guess it's also another way of understanding what the Q4 growth rate is going to look like too, because that comp gets much easier because of that change in days dynamic?

Yes, see last year year-over-year in Q4 2010 versus Q4 2009 we had fewer days year-over-year. In 2010 and 2011 Q4 we had the same number of days, so we don't have a day issue year-over-year. It is apples-to-apples. Last year looks like a low growth quarter on a reported basis because of the days.

Got it, thanks.

Bill Chappell, SunTrust.

Good morning and thanks for taking the call. Just wanted to dig a little bit into the Tide Pods that are expected to come out in February. P&G has kind of talked about it being -- pods being as much as 30% of the category. I guess in some extent this is a way of compaction or our next round of compaction.

I think you have said you have something similar out there or planned. Can you talk about how much of a driver it could be for your margins going into next year and how you see that market?

It's a hard one to call, Bill. I first applaud Proctor for driving the category through innovation. This is an innovation and as far as what percent of the category it will take that is to be seen. Consumers haven't voted at all yet, but I do applaud the push in innovation.

We will have our version of pods out there. It will be out there in the first quarter next year. It will be margin accretive. I won't -- we don't get into margins by product and things like that. But it is definitely a move in the right direction to drive gross margin improvement in the laundry category and we fully applaud it.

But can it have -- looking at the past benefits from compaction, can it have a similar type benefit on freight and logistics if it plays out?

It could. I will tell you, Bill, there is one concern we have. There has been a long-term trend of people overdosing on liquid and this product you cannot overdose with. So while there is a gross margin improvement on a wash load basis, if you did exactly one wash load quantity per liquid to pod it could be a little dilutive as it cannibalizes liquid, as far as taking away from the overdosing effect on liquid. So that is why we are a little hedging our bets.

Apples-to-apples pod versus liquid, when liquid is properly used, is gross margin accretive, but liquid is not properly used in many cases so that could dilute some of the gross margin improvement. And that is just something we got to see what plays out in the marketplace as the pods go out there, how many people buy, what effect that has on the liquid side of the business.

So there is a little bit of give and take and that is why it's -- until the consumer starts voting we won't know the final answer.

Okay. And then just one quick one. I think for the first half of the year six out of eight power brands had been growing share. Now it's seven. Did you tell me what the new winner is?

The one that didn't grow in the third quarter?

Or the one that is now growing that wasn't growing in the first half or it seems like you --?

I think it was Trojan. Trojan, I said earlier might be -- we increased marketing spending and our new Bareskin product is doing exceptionally well. So Trojan has reignited share growth starting in the third quarter.

And it's still Orajel that is the one that is not?

That is correct and that is just -- there is a little bit of private-label activity in that category and we are dealing with that.

Great. Thanks so much.

All right. Let me wrap up this call today.

Let me just say I think some of you are looking for some very pretty results in a very ugly business environment. We are delivering outstanding results versus competition. We have strong organic growth, we have positive gross margin improvement where almost every competitor has negative, and quite negative results, and we are delivering double-digit EPS growth.

As I said in my call, we have momentum on organic growth. We expect that fourth quarter to be our strongest organic growth quarter of the year on a percentage basis. Our Q4 EPS will be the highest EPS gain on the year, and we have some competitors in this current quarter actually calling negative EPS growth versus year ago.

So if you want something pretty I would tell you to go buy a dog. If you want to buy the best performing stock in the CPG industry, buy Church & Dwight. Thank you.

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