切遲杜威 (CHD) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight first-quarter 2012 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.

Good morning to everyone. It's always a pleasure to talk to you, particularly when we have outstanding results to report. I'll start off this call by providing you with my perspective on our first-quarter business results, which you read about in our press release this morning. I'll then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with his perspective on the financial details for the quarter. When Matt is finished, I'll return to provide for more detailed information on the performance of our key brands and to discuss earnings guidance for the year. We'll then open the call to field questions from you.

Let me start off by saying I'm very happy with the first-quarter business results. We told you in February that we exited 2011 with strong momentum, as reflected in our 7% organic revenue growth in the fourth quarter. We continued that momentum in the first quarter 2012 by delivering 8% organic revenue growth, our highest quarter since the fourth quarter of 2008.

This outstanding organic revenue growth was driven by 10% growth in our domestic business and 7% growth in our international business. The 10% growth in our domestic business was driven largely by 14% growth in our household business, behind strong growth in our value-based fabric care business and innovative product news in our cat litter business.

Our sales results are down slightly for our premium-priced personal care brands, due largely to weak or declining category trends. However, we gained market share on key power brands such as Trojan, which achieved its second-highest quarterly share ever, and FIRST RESPONSE, which gained a full share point. These share gains should pay big dividends when the economy improves, because we expect these categories to return to historical growth rates.

We also told you in February that we expected a lower gross margin in the first quarter of last year due to the continuing year-over-year domestic mix. However, we're making progress on this front, as the gross margin for the first quarter of 2012 was 50 basis points above the fourth quarter of 2011. The first-quarter results also reflect that we've tightened our belts on overhead costs, as SG&A as a percent of sales improved by 40 basis points.

Don't be concerned about the lower marketing spending in Q1; it is simply a function of timing. It was only $1 million or roughly 2% below year-ago dollar spend. Also, our organic growth was so exceptional from the first quarter at these spending levels that we decided to delay some marketing spending until later quarters, where it could be used more effectively behind new products.

Most importantly, we delivered a 13.8% increase in earnings per share, which represents a strong start toward our annual EPS target of 9% to 10%. Now, please don't start foaming at the mouth and raising our annual EPS target, as Matt will surely explain what are our 9% to 10% annual EPS target is still appropriate.

Those of you who know me know that I have been a long-term pessimist about the business environment. I believe we will continue to face strong headwinds in 2012, including high commodity costs and weak consumer spending, which will perpetuate competitive price wars. All consumer packaging companies are fighting the same headwinds, but we 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 first quarter.

Thank you, Jim, and good morning, everybody. I'll start with EPS. First-quarter EPS was $0.66 per share compared with $0.58 in 2011. So EPS was up approximately 14% from a year ago.

Reported revenues were up 7.5% to $691 million. Organic sales were 8.4%, which excludes the impact of an acquisition and foreign exchange rate changes, which together had a negative impact of 50 basis points. Organic sales includes 2011 sales in December resulting from customer orders made in anticipation of our January 2012 US systems upgrade. That particular adjustment accounted for 1.4% of the 8.4% organic.

The Company believes such December sales would have occurred in the first quarter of 2012 were it not for the timing shift. Of the 8.4% organic growth, approximately 10.5% is due to volume, with 2.1% negative product mix and pricing -- and mostly product mix. Given our strong start, we now expect to deliver organic sales at the high end of our 3% to 4% annual target for the year.

Now, let's review the segments. The consumer domestic business's organic sales increased by 10.1%, primarily due to higher sales of ARM & HAMMER liquid laundry detergent. Other products that contributed to volume growth were XTRA liquid laundry detergent, ARM & HAMMER cat litter, and the introduction of ARM & HAMMER CRYSTAL BURST powerpack laundry detergent. These increases were partially offset by lower sales of ARM & HAMMER Spinbrush, Trojan condoms, and ORAJEL oral analgesic products.

Volume contributed approximately 3.4% to sales, partially offset by the 3.3% negative effect of product mix and price -- and again, mostly product mix. Organic sales includes an estimated 1.7% benefit from the timing shift that I discussed earlier, with respect to customer orders from December that were pulled forward into January in anticipation of the US systems upgrade.

Now, international. International had 7% organic growth in Q1 due to higher sales in Canada, France, Australia, and exports. This increase is driven by volume growth of 8.7%, partially offset by 1.5% of product mix and price.

For our specialty products division, organic sales were lower by 2.5%, with volume down 8.1% and price up 5.6%. The price is driven generally in the animal nutrition business, where we are recovering raw material costs. The organic decrease is primarily due to softness in the end markets, especially the dairy markets.

Looking ahead to the balance of the year, we now expect to be at the high end of our 3% to 4% organic growth rate. We expect organic sales to be higher in the first half of 2012 as compared to the second half of 2012 as a result of easier comparisons in the first half. We continue to expect our value products, particularly in the laundry category, to continue to benefit from the weak economy and deliver strong organic growth.

Now I'm going to cover gross margin. Our reported first-quarter gross margin was 43.8%, which is a 110 basis point contraction from a year ago. You may recall that in February we expected Q1 gross margin to be a replay of Q4 of 2011 gross margin, when gross margin was down year over year 120 basis points. The decrease in gross margin is primarily due to unfavorable product mix, as net sales of lower-margin Consumer Domestic Household Products rose 14.4% and net sales of higher-margin Consumer Domestic Personal Care Products were 2.6% lower.

The other contributor to the contraction is the start-up of the new California plant, which is on track to be fully operational in July. What is also noteworthy is that higher commodity costs in the quarter were offset by the effect of cost reduction programs. Gross margin improved by 50 basis points compared to the fourth quarter of 2011.

Looking ahead first at second quarter, we expects second-quarter gross margin to be comparable for the first quarter due to a continuation of the product mix story. Because of the trend in product mix, we expect full-year gross margin expansion to be at the lower end of our 25 to 50 basis point range for 2012. Our anticipated gross margin improvement is primarily a result of our costs-savings programs outpacing commodity increases and product mix.

So despite gross margin contraction in the first half, we are confident in our ability to hit the lower end of the annual 25 to 50 basis point target as a result of the following reasons. One is the absence of first-half slotting. Slotting was very front-end loaded this year, and larger year over year in the first half versus the first half last year.

Second is higher mix of personal care in the second half, including some of our exciting new personal care products. And then finally, cost savings programs are outpacing cost increases.

And just some color on those cost savings programs -- first one, obviously, would be the Victorville startup, which, as I said, is going to be fully operational in July. The second is bringing unit dose laundry manufacturing in-house. You may recall that we said in the past that the first half of the year we'd be manufacturing the pods out-house versus in-house.

And the third is the benefits of our Simplicity Projects at two of our PC plants -- personal care plants, one in the UK and one in the US, that we are having lots of success with, and those savings will be coming on in the second half of this year.

Then, finally, approximately two-thirds of our most volatile cost inputs are hedged for the second half of 2012, which gives us greater confidence with respect to our input costs.

Now I'm going to cover marketing. Marketing spend for the first quarter was $68 million, or 9.8% of revenues, which is 100 basis points below the prior-year spend rate and slightly lower on the dollar spend. In spite of the slightly lower dollar spend, we grew dollar share in 5 of our 8 power brands. Now, this is due to the great execution by our sales and marketing teams. Looking ahead, we expect to increase spending for the balance of the year and now project full-year marketing spend to be approximately 13% of sales.

SG&A year over year was up $4 million in the quarter. SG&A as a percentage of sales was 13.3%, down 40 basis points from year ago. The higher SG&A costs in the quarter reflect higher legal costs and costs associated with our information systems upgrade.

For the full year, we expect a reduction of approximately 30 basis points to 13.1% of sales. This is a reflection of our continuous vigilance to control costs. With respect to operating profit, the reported operating margin for the quarter was 2.7%, and that margin was 30 basis points higher than the prior-year 20.4%.

Now equity and earnings from affiliates. Income from affiliates increased slightly due to the higher income from our joint ventures. On a full-year basis, we expect a decrease of about $3 million, in part due to the start-up of our NatronX joint venture.

Other income was virtually unchanged in the quarter. We do not anticipate any material changes for the full year as compared to 2011. And income taxes -- our effective rate for the quarter was 33.1% compared to last year's 36.5%. The tax rate includes a 220 basis point benefit due to the settlement of an IRS audit. This, of course, translates into $0.02 of EPS help, but it's purely timing. We anticipated this settlement to happen sometime in 2012, and we continue to expect the full-year effective tax rate to be approximately 35%. So no change since February.

Now, cash flow -- we generated $114 million of net cash from operations in the quarter, which was $34 million higher than last year. We also spent $15 million in CapEx, a large percentage of which was for our California manufacturing and distribution facility.

If we net those two numbers together, we come to approximately $99 million of free cash flow, so a very strong quarter. And during the first quarter, we purchased approximately 1.9 million shares at a total cost of $90 million. We continued to buy in April and purchased $110 million, or another 2.2 million shares, and at this point we do not anticipate any further purchases for the balance of the year.

At quarter end we had over $230 million of cash on hand, and approximately $500 million available in credit through our revolver, and a commitment to increase that features should we choose to for an additional $500 million. And our total debt to LTM adjusted EBITDA for our bank agreement was approximately 0.5 times, so clearly an unlevered company.

In conclusion, the first-quarter highlights include 8.4% organic sales growth, driven by a 10% net volume growth; an increase in share of 5 of our 8 power brands; and a healthy 20.7% operating margin. We expect second-quarter earnings per share of approximately $0.54 per share compared to $0.57 per share last year.

Remember, last year's second quarter included a $0.04 per share tax benefit as a result of New Jersey's corporate tax reform. If you look at the full year, we're expecting a balanced year for EPS when comparing the first-half EPS to second-half EPS. We're maintaining our annual earnings per share goal of $2.41 to $2.43 for the year, which is an increase of 14% to 15% over last year's reported $2.12, and 9% to 10% higher if we exclude the fourth-quarter 2011 deferred tax charge.

So back to you, Jim.

Thanks, Matt. I'll finish off our call today by adding a little color to the outstanding first-quarter business results that Matt just took you through and my outlook on the year.

Our great first-quarter business results are directly linked to 7 factors that support my earlier statement that we believe that no other consumer packages 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 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 switching to and staying with our high-quality but lower-priced brands.

A great example of this is the fact that our value-based ARM & HAMMER laundry detergent business was up double digits in sales growth in the first quarter and outpaced all other liquid and powder detergent brands. We expect the strong sales and share growth to continue in 2012 so that the ARM & HAMMER brand becomes the number two liquid laundry detergent brand in America.

The second factor which is a key driver of Church & Dwight's success is that we have a proven record of driving our power brands. We have over 80 brands, but 8 of these brands are our power brands, which generate 80% of our sales and profits. From 2008 to 2011 we grew market share on these eight power brands in almost 80% of the quarters. In the first quarter this year we grew market share on 5 of our 8 power brands.

Two key factors drove those excellent share results. First, we have effectively 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 130 basis points between 2007 and 2011.

While our marketing spending was slightly lower in dollars versus year ago in the first quarter of 2012, please keep in mind that we traditionally spend the bulk of our advertising dollars in 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 remaining three quarters of 2012 to support continued share growth in our power brands.

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

A sample of these new products include a new sensitive skin product on our ARM & HAMMER liquid laundry detergent line has significantly 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 12 consecutive quarters of growth and continues to grow faster than all other liquid laundry detergent brands.

Another great new product being launched in 2012 is ARM & HAMMER Ultra Last cat litter. Every granule of this new cat litter is coated with baking soda to deliver long-lasting odor control. Ultra Last is off to a great start and follows the hugely successful launch of ARM & HAMMER Double Duty cat litter line in 2010. As a result of this steady stream of great new product introductions, the ARM & HAMMER cat litter brand achieved its all-time high quarterly share in the first quarter and has now achieved 33 consecutive quarters of net sales growth, 12 consecutive quarters of share gains. It is now the clear number two brand in the clumping cat litter business and is closing in on number one.

That's pretty impressive for a category which we entered only 14 years ago. It also shows the strong consumer appeal of the ARM & HAMMER brand, which now accounts for over $1 billion in total sales.

On the personal care side of our business, we have several exciting new products in 2012. First is our new toothpaste for sensitive teeth, which combines 2 of our power brands, ARM & HAMMER and ORAJEL, to provide maximum pain relief in a low-abrasion formula that is gentle on enamel.

Another new product in the oral care category is TOOTH TUNES, which is a line of manual toothbrushes for young children that uses proprietary technology to play two minutes of music from a broad range of artists. This product will begin shipping in the second half of 2012. For those of you with young children, I guarantee that if they use a TOOTH TUNES toothbrush, you'll have to yell at your kids to stop brushing instead of yelling at them to brush. TOOTH TUNES represents our first entry in the $800 million manual toothbrush category.

We are also pursuing two other high-margin white space categories to help drive the Company's future growth. First is the vibrator category, which is over $500 million in size, with no major branded players. We first entered this category in 2005 with our iconic TROJAN brand, and this year we are launching full-sized vibrators in the new channels.

Second, we have entered the dishwashing additives category, which is over $100 million in size, via the OxiClean brand. The government-mandated removal of phosphates from dishwashing detergents has created a need for a booster product to deal with the noticeable increase in cloudy film on glasses and dishes. Our new OxiClean dishwashing booster product boosts the cleaning power of dishwashing detergents to once again deliver crystal-clear dishware.

There are many other new products that we are launching in 2012, but in the interest of time, I'll move on with my review of the factors driving Church & Dwight's continued success and discuss our updated earnings guidance on the year. Let me quickly run through the 5 other key factors of our success.

Number three is that we have a proven history of ferociously defending our brands, as evidenced by our successful defense of the OxiClean brand when a large competitor entered the category two years ago.

The fourth factor behind our continued success is the strong growth of our 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 5 years. This strong growth continued in the first quarter, as Matt mentioned earlier.

Factor number five is our long history of success in expanding gross margins through cost optimization programs, supply chain restructuring, acquisition synergies, and launching higher-margin new products. We expanded gross margins by 1550 basis points in the past 10 years. While we did not improve our gross margins in 2010 and 2011, we were successful in holding on to 380 of the 430 basis point gain we achieved in 2009 despite major headwinds from commodity costs.

As Matt told you earlier, our gross margin declined 110 basis points in the first quarter, but that was in line with our expectations and 50 basis points above the prior quarter. We have initiatives in place to achieve our gross margin target of 25 to 50 basis point improvement in 2012, although the strong household mix may drive it to the lower end of that range.

We are taking longer-term actions if to drive continued gross margin growth in future years. For example, as Matt told you, in late May we begin production at our new manufacturing facility in Southern California. This plant will enable us to support the continuing strong volume growth in both our liquid laundry and cat litter businesses and position these businesses to be among the industry leaders and low-cost production and distribution.

Factor number six is our ability to tightly manage our overhead costs. Church & Dwight currently has the highest revenue per employee of any major consumer packaged goods company. As mentioned earlier, our overhead costs were down 40 basis points from the first quarter versus year ago, which reflects how aggressively we manage 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 our industry.

As Matt told you a few minutes ago, we continued to improve in the first quarter, as our free cash flow was 36% 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, including the construction of more efficient new plants, and acquisition of higher-margin and faster-growing leading brands.

All of these factors give me great confidence about our ability to deliver our aggressive 2012 business targets despite the very tough business environment facing all companies these days. In my biased opinion, no other consumer packaging company is as well-suited as Church & Dwight to thrive in any type of business environment.

We were delivering exceptional earnings per share growth before the recession; we are delivering exceptional earnings-per-share growth during the recession; and we are taking actions to ensure that we continue to deliver exceptional earnings-per-share growth going forward, regardless of the future economic environment.

Let me switch gears now to simply talk about our outlook for the rest of 2012. As stated in the press release, as a result of the fact that our first-quarter results were very strong, we remain confident that we can deliver our previously-announced earnings-per-share estimate of $2.41 to $2.43, which is an increase of 9% to 10% over 2011 adjusted earnings per share. We strongly believe that we can deliver this aggressive EPS target despite continued expected headwinds from higher commodity costs and weaker consumer demand.

Our confidence to deliver these aggressive targets is based on two key factors. First, we strongly believe that we can deliver the market share gains on our power brands required to deliver our target of 3% to 4% organic growth. These share gains are expected to result from our innovative new products, significant distribution gains across the majority of our power brands, and consistent marketing support.

All three of these factors should contribute to continued organic growth, but the growth will not be as strong in the second half of 2012, because we will be up against strong organic sales in the second half of 2011.

Second, we strongly believe we can deliver gross margin expansion of 25 to 50 basis points despite being down 110 basis points in Q1, although that mix may drive us to the lower end of the range. Our gross margin expansion is expected to result from the factors that Matt mentioned earlier. And keep in mind that we will be comping over gross margins in the back half of 2011 that were lower than the front half.

Three other points that I'd like to make before I turn the call over to questions. First, achieving our 2012 EPS target is not dependent upon making an acquisition. We have aggressively pursued a lot of acquisition opportunities over the past year, but we have not been able to find a major acquisition at the right price that meets our acquisition criteria.

Second, I want to assure you that we are fully aware of the threat posed by competitive marketing initiatives and new products being launched by our competitors in the second half of 2012. 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 this against any future competitive threat.

Third, although we had a great first quarter with 13.8% EPS growth, please do not expect or forecast higher earnings for the year than our forecast of 9% to 10% growth. Our 9% to 10% EPS growth target is already higher than almost all of our CPG competitors. If things go better than we expect in the rest of 2012, we will reinvest back into higher marketing spending in the second half to ensure that we exit 2012 with strong momentum, just like we exited 2011.

In conclusion, 2012 is shaping up to be another very challenging year due to the weak consumer demand and high commodity prices. But when things get ugly or stay ugly, you should place your bets on the Company with the product portfolio that can thrive in any such environment and the management team that has the track record of knowing how to successfully leverage that portfolio to deliver strong earnings-per-share growth.

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

Operator, please go ahead.

(Operator Instructions). Bill Chappell.

This is Sarah on for Bill. We just have a couple of questions about the laundry pods. I'm wondering if you could give us some color on the pods business, and how you saw initial sell-through, how the growth progressed through the quarter, and what you see growth trajectory looking like in the next couple of quarters?

And then what is your -- were you able to gain incremental shelf space at your key retailers, or was that more replacement shelf space? Just give us some color around that.

It's really too early to give a good forecast on the pods. We were out early. Our distribution was almost entirely incremental. It's off to an okay start -- a good start, a very good start, but it's really too early. It's just -- the latest four-week shares is coming in; it's really early for everybody. Marketing support is just -- in a big way, it's just beginning to start, and the same is true for our competitors.

So it's really too early to say how big the pods category will be and how everybody is doing. We're very happy with our start. Again, the distribution was terrific. It was incremental. And initial takeaway by consumers is looking good, but again, it's just too early to use that as projection vehicle.

Okay. And then, if I could, just one follow-up to that question. Given how early it is in the market, can you talk about your confidence level with the capacity that you have in being able to support the business coming in-house?

Yes, we feel very confident. Like I said, the product is coming in-house by the end of Q2, and we will have plenty of capacity to meet demand for that product.

Okay, thanks so much.

Bill Schmitz.

It is Nick Cavallo on for Bill. Another laundry question. Can you guys just tell us how much total US laundry volume was up in the quarter? Because if I look at the scanner data, it looks like it probably came in a whole lot better than the data would suggest, even considering the pre-buy, so any help there would be appreciated. Thanks.

Yes, Nick, the laundry category exhibited a little bit more growth in the first quarter than some of the past, but -- so that's good. But nothing to shock folks with.

We were more impressed by the fact that we had very strong share gains as continued -- we have had for the last couple of years. We continue to outpace the category as consumers trade down to our great value brands. It was a good quarter, but I wouldn't say it is a trend so far. So let's see what happens over the rest of 2012.

Great, thanks. And then if you wouldn't mind, can you just comment a little further on the acquisition environment, and if there's been any meaningful changes since we last spoke? Thanks.

Yes. I would just tell you that we don't discuss any specific details on M&A. I would tell you the environment is very active, and we're very involved. But we have very, very specific acquisition criteria of looking only for leading brands, and margin-accretive brands, and asset-light brands. And so far there's been nothing that was acquired by somebody that we regret. We're actively looking for acquisitions that fit that bill, but that's about as far as I can go.

Great, thanks, Jim.

Tim Conder.

Thank you. Just a couple here. I guess to add onto that acquisition question, Jim, if you can just -- do you think the environment will accelerate as we push towards year-end? Again, we've seen this movie before, and it didn't quite -- the rules changed right near the end. But with the tax situation as it sits now, and if they're for private companies, do you think there's a motivation there to get things done, number one?

And then, you touched on it, but if you can give a little bit more color about a large competitor's commentary to roll back prices in certain categories, and how that may impact you?

I've been wrong before about the acquisition environment. I think, like you are insinuating, that a lot of factors going on with organic growth being tough for a lot of companies, tax law changes out in the future potentially, that it would accelerate it.

I would tell you is more activity out there as far as opportunities for deals, but it hasn't materialized in deals, quite honestly. So I don't know; I would tell you I think sellers still are a little bit lofty on what they think they can get for their businesses. So it's -- you would think -- I think you're right; I thought I was right in the past saying I thought activity would pick up, and it hasn't happened. But you never know. Stay tuned.

On a competitor rolling back prices, I would say that only affects us in one category, being powdered laundry detergents. We did take pricing in that category, and we intend to maintain that price increase.

Okay, and then one other -- maybe a little off-to-the-side question here. Again, your power brands are doing well. You guys continue a great track record of execution. Any thoughts at this point about further SKU rationalization in those -- the pieces that generate only the 20% of sales that may be a lesser piece of margin?

Yes, absolutely, Tim. It's an understatement to say you have no idea of the pressure inside this Company to deliver our gross margin targets. And that is leading to intense detail on every business, SKUs, small brands you have no idea we even own out there that are small. We are looking under every rock in this Company to find anything that delivers a low-margin and either we can discontinue the SKU or even discontinue some tiny brands out of our 80 brands -- again, you don't know some of them. Most people don't know some of them.

So we're doing everything possible to drive our gross margin targets this year and in the future, and that is resulting in intense scrutiny on every SKU in our portfolio.

Okay, great. Thank you, gentlemen.

Thank you.

Jason Gere.

So the first question I want to talk about is the personal care side. And I know you have confidence in the second half, but obviously, the business has been a little bit softer. So when we think about the guidance that you're providing, the gross margin obviously needs to see the negative mix turn a little bit more neutral with Personal Care coming back, but at the same point I'm just trying to see what type of contingency plan and do you have if Personal Care doesn't get better and household still continues to deliver?

I don't have any doubt about the EPS, but I'm wondering about the composition of your earnings growth next year -- for this year if the gross margin comes in lower because the Personal Care. So maybe lead off with that as a first question.

Yes, Jason. We're feeling pretty good about Personal Care in the back half of the year. First of all, but we're lapping some pretty weak category trends from the back half of last year. And secondly, we have a whole slew of new products launching in the back half of the year. So as I mentioned, things like that TOOTH TUNES and that. So we're feeling pretty confident.

And you know us. We always have contingency plans to make our numbers. And it wouldn't be the worst thing in the world if our household business continued with raging growth, and maybe the mix for gross margin a little bit, that we make our EPS. But that's what we get paid to do, is to watch all the levers, and we will deliver that EPS. Things change out there, and we'll adjust to it. But back to your first point is -- we feel pretty damn good about the Personal Care business in the back half for the reasons I told you.

Okay. And just housekeeping-related, what is the expectation for the specialty business? Because organic sales were, I think -- it was a little bit weaker this quarter than we saw last year. So are you expecting negative organic sales, so hence the high end of the 3% to 4% is really going to be consumer -- more consumer then maybe specialty helped out last year?

Yes, that's fair, Jason. We got off to a very soft January and February. March and April picked up, but it's a bit of a hole for us to fill that on a full-year basis for the specialty business. So yes, as far as -- on a full-year basis, the driver is going to be the consumer business, almost entirely.

And don't forget, too, that specialty business has a lower gross margin, so to the extent that it's a little weak, that actually, again, helps us make our corporate gross margin targets.

Okay. And then just the last question, thinking about some of your brands that -- obviously they have a strong following in the US, like at TROJAN or FIRST RESPONSE, but not really getting that global expansion. So I know -- I'm just wondering, how do you guys talk internally or with the Board just about how to get the real growth opportunities that are out there, outside of really North America, whether it's Canada, Mexico, the US? But certainly, there still seems to be a huge opportunity for many of your categories and your brands. So I was just wondering how you guys think about that over the next few years.

Well, Jason, we do think about it a lot. We don't really talk to you guys a lot, but I can tell you, FIRST RESPONSE hit record sales shares in Canada and Australia this latest quarter. TROJAN hit a record share up in Canada and had a very strong quarter down in Mexico, so we are looking as best as possible to take our US brands outside of the US and grow them. But we use good reasons. In some cases, they have legs; in some cases, they don't.

We're driving share growth in ARM & HAMMER toothpaste over in the UK. So we're slowly doing that again. Maybe our fault we don't talk about it enough, but we're looking to, as much as possible, globalize some of our key brands. But we do it smartly. We've got to look at the market overseas, who the competitors are, and what kind of equity we believe we can have. And where we've done it -- we've taken FIRST RESPONSE to Australia, and it's a leading-share brand. And we've driven it up in Canada and other countries. So maybe our fault; we should talk about it more in the future, but we're looking for that.

And then we look for strong brands in oversee markets. You don't know the fact we have 2 or 3 local brands up in Canada that are market leaders like GRAVOL and that, that's up there, I think, for upset stomachs and that. So maybe in fairness, we should talk about more of that in the future so you understand what we're doing better.

Okay. And actually, I'm going to throw out one last one. You talked about some new channels with the vibration category, you piqued my interest, so I was wondering if you could talk a little bit more about that.

Well, those are channels that you largely visit, to the adult store channels out there. And that is actually the largest seller of adult products right now, so we have gotten in that channel. It's a little more difficult than other channels, because there's a few chains, and then there's a lot of mom-and-pops. So it's a little bit slower distribution build. But right now, it's the largest seller of vibration-type products, and we are making a full-force effort through our distributors and that to get into that channel with that product.

Okay. With that, I'll end on that high note. Thanks, guys. (Laughter)

Alice Longley.

I hope I didn't miss this. I think you said second-quarter sales would be strong -- did you specify what organic sales growth should be, then?

And then could you say something about this recall of Spinbrush and how much that might affect sales?

Alice, this is Matt. No, we did not call second quarter top line. We just said we expected another strong quarter.

What does that mean? Stronger than 3% to 4%?

We said on the year, we think will now finish at the high end of our 3% to 4% range.

And you are going to beat that in that second quarter and then be below that in the second half? That's my question.

No, Alice, don't forget the pacing of our last year. Organic growth last year from Q1 to Q4 went 1%, 3%, 5%, 7%. So this year, we're starting up against weaker comps last year, but we end up against stronger comps in the back half. So we've kind of guided everybody to think the opposite way this year -- organic growth will start very strong, and then as we lap big numbers in the back half, it will get lower.

The opposite is true for gross margin. We had very strong -- our stronger gross margins occurred in the front half of last year, and the ones in the back half were weaker. So that's why we're telling you we think we'll have gross margin upside in the back half of the year to get to our target of 25 to 50 basis points, although now we're -- because of product mix, we're saying more toward the lower end of that target. So that's about as clear as we been on those two factors.

Alice, we didn't -- the only line-item call on the second quarter was we said that the gross margin for the second quarter would be comparable to the first quarter, and we think that we have strong sales. But we're not calling the individual items on the P&L, just the EPS, we said, was around $0.54.

Okay. No, the last -- the comps last year -- it sounds really tough in the second half, because it had 7% in the fourth quarter, but that was partly a calendar issue. And your calendar is pretty similar this year, right?

No, there's no calendar issue.

So I guess my question -- will your sales be up in the second half? Will your organic sales be up in the second half?

Sure.

Yes.

And then, what about that recall?

Yes, the recall -- as we said in the release, that we've recalled selected lots of Spinbrush rechargeable sonic toothbrushes distributed between the dates that were in the release. And we said that there are also -- it was an immaterial item, both for the second quarter and for the full year. And the only other context I can give you is that the annual sales of this particular rechargeable sonic toothbrush is less than $2 million.

Okay. And then on the Personal Care categories, you highlighted that the decline was the category's. And you gained share with TROJAN and FIRST RESPONSE. How much are your categories declining in Personal Care?

They are weak. We've had some categories -- like battery toothbrushes, down about 3%. Toothache was down about 2%. And then the condoms and diagnostics categories were up less than 1%, which we consider to be weak.

So overall weakness; that's pretty common in a lot of the industry, as they are higher-margin and more discretionary categories. So those categories traditionally grow in the 3% to 5% range. So we think that growth will come back when the economy comes back. In the meantime, like I said, we're very happy just pounding away at growing our shares in those categories.

Well, it sounds from the numbers you just gave us as though your categories were flat to down 1 or something, and you were down more than that, so it sounds as if you actually lost share.

That's not what I said. I told you TROJAN gained a half a share point; FIRST RESPONSE gained a full share point in those categories, so we're gaining share in some key categories that are just relatively weak or slightly down.

All right. I'll talk more about this later. Thank you.

Joe Altobello.

Just a couple of quick ones. First in terms of the overall market growth, Jim, you've been pretty downbeat for a while and, obviously, been correct here. Have things gotten worse incrementally thus far in 2012? And secondly, on that point, have you seen any impact on your categories, either good or bad for you, in terms of higher gas prices?

No, Joe, it has kind of plateaued. It's kind of in a stall right now out there in the categories, which I honestly think will continue for a little while ahead. Again, who knows what the election will do with the economy and that, or what will happen around the world, but I'd call it a plateau.

We really haven't seen the gas thing -- it's hard to translate through. I would say consumer packaged goods is a little more insulated from that than other more discretionary things, like going out to restaurants, or buying items that you don't really need. You have to eat. You have to brush your teeth. You have to wash your clothes, and things like that. So I would think -- I don't think it's been as much of an impact as it has been going out to restaurants, and things like that.

Okay, so to make the link between the growth in household and higher gas prices, that's not a driver?

No; I wouldn't -- I don't think it's as much. There's a lot of things going on out there. I don't think it's as big a driver as in other businesses.

Okay, great. And then secondly, in terms of the marketing spend, is there a mixed impact on marketing given the fact that your household businesses are growing so much faster?

No, not really, Joe. We pretty much planned flat dollar spending in the first quarter, and then our volumes exploded on us, more on the household side. So again, on a basis points or a percent of net revenue, it doesn't look pretty, but it was pretty much in line with what we expected to spend.

I told you, we've always planned to spend more money in the second through the fourth quarters, because that's when our new products launch, and is always more effective to launch -- spend money against new product news than against the old product line. So that was just a numbers games going on with marketing spending more than anything else, and we're very happy that we have lots of dry powder left in the back three quarters.

Okay, great. Thank you.

Connie Maneaty.

First of all, I can't believe you think we foam at the mouth. But beyond that, --

Not you, Connie.

I have a question -- earlier in the year, you had some caution about the liquid laundry detergent category as unit dosing started to become part of it. So I was wondering if you could describe what dynamics you think would be healthy for the category if unit dosing is successful?

It's a good -- great question, Connie. In the first quarter, that category in the food, drug, and mass channels is only up a little less than 2%. We're kind of looking back at what happened in laundry additives a couple of years ago when a major competitor entered the category. And when that happens, some big product news, a lot of spending went on, and the category had very strong growth rates for the first four quarters. And that it fell back and went negative for the last 4 or 5 quarters.

Again, you never know. This is a huge category, it's like a $6 billion category versus that $1 billion category for laundry additives. So I would think in this case, with every competitor out there launching the pods, every competitor spending some kind of decent money to support those pods, I would expect to see some pretty strong category numbers, maybe up in the mid-to high single digits on liquid laundry detergent for maybe 3 or 4 quarters.

And then they key thing will be repeat -- how do consumers react to it? It is going to be the highest priced per wash load laundry detergent out there, which is pretty tough and a recessionary-type economy, but consumers will try it. There will be a lot of incentives to try it. And they key thing will be when it goes back to its normal high prices, and there's less incentives, what the repeat purchases will be. And again, that will happen about a year after the products are launched.

So are the pods considered part of liquid laundry? Because they are different forms. Some of them have powder and some are part liquid, part powder. How are they categorized? And once the investment spending is over, is it profit accretive in the category?

We are honestly attracting it as a separate category, but we look at it in combination with the liquid laundry detergent category. And the accretion -- every company has got their own numbers as far as this product, which is pretty expensive to make versus other stuff, but is going to be sold at a higher price per wash load. So I can only speak for ourselves that long-term this will be accretive, and we'll just have to see how much we sell and how well it does.

Great. Very helpful, thanks.

Caroline Levy.

A couple of questions. I don't know if you addressed this, but I understand Maureen has left. Who should we be calling with questions?

I am the lucky one. This is Matt Farrell.

Okay, Matt, good. So I'm assuming it will take a while for you to replace her? You have no plans at this point?

Yes, big shoes to fill.

Yes, okay. Secondly, my question is around how much of the demand growth you've seen in laundry is coming from consumers being stretched, so that geographically, do you see a difference where your market shares are significantly higher, and you're growing faster in the toughest economies in the US?

Caroline, that's a very good question. Quite honestly, we haven't seen anything like that. I think you would see the economic pain is pretty spread across this country, but it would be interesting -- we really haven't looked into that kind of intense detail as to whether some higher markets, maybe like a New York City, compares to a very rural market.

But good question. I'll ask my troops to take a look at it, but I don't think it's anything that different, quite honestly, across the markets right now.

I'm just trying to understand, if the economy ever improves, whether you can hold onto your share or not?

Oh, we will. We have lots of research data that shows that consumers who have traded down and now have repeatedly tried our products over the last several years, since this recession kicked in in 2008, are sticking with the brand even whether or not they get their jobs back or make more money and that. They have found out that we truly produce a great laundry detergent, and they can save a lot of money by buying us versus the higher-priced brands.

Right. And then if you were to suddenly see your volumes drop off a lot as a result of Procter discounting, would you take action? Are there certain levels you will defend?

We always maintain careful price gaps versus all our competitors and do take action when things like that happen. So we do -- we have a lot of scientific studies that tell us what price gaps we have to maintain -- and again, cross every brand, against every competitor. And we do -- I think we have a quite a good reputation for knowing that we take action very quickly when we see things that either close those gaps, and we have to respond by lowering prices, or sometimes, increase the gaps, so we take advantage of it by raising our prices.

Right. I noticed -- I think you said you're not going to buy any more shares back this year, is that right?

Not after April. We bought back in -- in the month.

Don't you have ample cash flow? Because I think -- is this typical that you just do your certain amount? Or do you need a further authorization?

Yes, we actually haven't bought back shares for over 10 years, until late in 2011. And this is a Company that generates a significant amount of free cash flow. We were building a lot of access to cash, so obviously, two of the outlets are dividend and buyback. And in February, we raised our dividend again. In 2011, we had doubled it.

In 2012, February, we took it up again. So now we're at a 40% payout. And then the buyback of shares that we started in late 2011, we continued in March. So we said in February we could buy at least as much as we bought last year, at a minimum, and likely increase it.

And you are correct in that we generate a lot of cash. And in the first quarter we generated almost $100 million of free cash flow, and ended the quarter with $230 million of cash.

We have an authorization of about $300 million, so we're going to start bumping up against that. So we would need another authorization of a similar size to continue what we've been doing for the last few months.

It was just the way you said -- it sounded pretty categoric, that you're not going to do more. Is that open for discussion?

Not for this year.

This year.

That's correct.

Okay. And then do you think marketing expense in the second quarter will be up a little bit, actual dollars?

Yes. We expect marketing to increase in the second quarter from -- are you talking about from the first quarter or year over year?

No, year over year.

Yes, year over year it will be up.

Okay. But the real increase, the more dramatic increase will be in the back half. Is that what you're expecting?

Well, we're expecting it to increase the rest of the way, actually, because on a full-year basis, we're expecting 13%. We're starting at that 10.8%. And the reason why first quarter is typically low is because we don't have full distribution on our new products. So it is common for us to have higher marketing spend in Q2, 3, and 4 than Q1.

And if gross margin doesn't do everything you hope it will, would you adapt your marketing expense so you make your targeted EPS growth?

Marketing isn't the only area we look at stuff. We look across the board and make the levers, so -- we're not going to -- our goal, really, in the year is to increase -- get that up 13%. And if there's upside, which I think there's more chance of now than downside, we would spend back more on marketing to exit the year, like we did last year, with great momentum.

Okay, thank you so much. Very helpful.

Erin Lash.

Thank you for taking my question. I wanted to follow up on the acquisition environment and, specifically, what areas you would be looking at to either build out your portfolio or build out your geographic reach with an acquisition.

Erin, we're pretty agnostic on that. We've consistently said over time that we look for our criteria -- again, number one or number two share brands, margin-accretive brands, growth-accretive brands that we think we can grow steadily, and asset-like brands. And I think our history has shown that we'll look at almost any category in any geography doing that.

Keep in mind, today we make products in almost every type of product -- liquids, powders, roll-on, sticks, rubbers, sprays and everything. So that opens a door to us to look at a lot of other categories, because we can bring those products into our plants and save a lot of money from the current owners.

So we are pretty, again, agnostic. And we just -- our most recent acquisition was the Batiste hairspray brand over in the UK. We've never been in hairspray. It's the UK, which is one of our smaller markets, but we got into that business. We happened to make aerosols in our UK plant, so we are bringing that product in-house. It will help us save money, drive our gross margins north. And it was one of the fastest-growing hairspray brands in the UK market, and it's off to a fantastic start.

So that just shows you, nobody would have ever thought we would have gone into the hairspray business, but we found a great opportunity, higher-margin, high-growth, asset-like, great gross margins, and we bought that business.

Thank you, that's helpful.

And then if I could just follow up, and I apologize if I missed this, but what is your expectation or have you provided an expectation for commodity costs for the year?

Well, we haven't other than to say that we don't expect them to be down year over year. Commodity costs are higher for us year over year. What we did say is that we are hedged, so we're not as concerned about movements in the second half for the remainder of the year, actually.

All right. Thank you, that's helpful.

Thomas Wilkins.

Thank you. Going back to the 40% payout ratio for dividends, that's the highest payout ratio in the last 11 years, and percentage-wise, is a big increase in the dividends. Does this reflect a change in philosophy at the Board level? We're seeing this at other companies. Wondered whether you would comment whether there's more emphasis now on dividends versus buybacks.

Historically the Company for many years had a payout ratio of somewhere between 10% and 15%. And as the Company has become a lot, lot bigger over time, with more and more power brands, and generating significantly more free cash flow on annual basis, the Company has realized that we generate a lot of excess cash. So we've slowly been bringing it up. So we went from 15% to a 30% payout a year ago, and that we took it up to a 40% payout this past February.

The philosophy, frankly, is that the Company's strategy -- we are an acquisitive Company, so we'll does want to have plenty of capacity to acquire and add to our power brands. And over the period of time, we have now -- we're BBB rated. It was a far different story several years ago.

The Company's access to the capital markets is significantly greater than it was historically. So therefore, we have the excess cash; the access to the capital markets convinces us that we don't need to hang onto that cash, and that we can take the dividend up and pay money back to our shareholders, and then take some shares out and at least cover share creep on an annual basis -- and then some, if we have additional cash.

But do you think the Board has a preference now for dividends versus buybacks?

No, no. Once you declare a dividend, it's a marriage, right? So we're going to be -- we've been paying dividends for, I don't know, how many -- 100 years or so. We continue -- we're going to continue to pay dividends.

No, let me word my question another way. Percentage-wise, using your free cash flow for dividends or buybacks -- the allocation for dividends is increasing now, right?

Now, it's -- as far as the dividends go, we can only comment on what we have declared as dividends today. We cannot project in the future what -- if there are going to be future increases. That's something that the Board and management evaluates on annual basis. That's as far as we can go on that topic.

Okay, thank you.

Marc Riddick.

I was wondering about the comment that you mentioned on the trade-down process for your brands. Consistent with that, it seems that retailers are not pulled back from embracing or at least aggressively pursuing private label and store brand, compared to maybe where they were a couple of years ago.

And if that is the case -- and you can consider that my view; it doesn't have to be yours. But if that's the case, I was wondering if that then provides you a different view or impacts how you're looking at marketing for the remainder of the year, or maybe addresses target areas that you might look at?

It's a good insight. In our 13 categories, private-label only has a meaningful presence -- and what I mean by that, more than say, 10 share points -- in about three of those categories. And the history of private label has been that only in categories where it has a meaningful presence does it really cause some harm during economic tough times. So first of all, as I said, we face private label only in a very few of our categories.

And retailers have a tough time on growing it. You would see, overall, private label has been creeping up due to the economy, but again, it's a very small piece in the majority of our categories.

Now, most of the people buying our products have just seen the fact that they have tried them -- you know, they were facing some tighter pocketbooks. They've always heard about our great brands, and they tried them, and they found out how terrific they are.

The growth rates we're seeing on things like ARM & HAMMER liquid laundry detergent are just fantastic and is proving that people didn't just try it once and run back to their brand. They tried it, realized how good it was. They repeated it and repeated it. They call share requirements -- how many of your annual purchases you make from a particular brand. We are seeing our share requirements grow steadily on brands like ARM & HAMMER laundry detergent as people find out how great they are.

People forget, too, we have several different forms of that brand. We have ARM & HAMMER with OxiClean. We have ARM & HAMMER laundry detergents for sensitive skin. So we have all the varieties that the premium brands have, but we offer them at more of a value price. So people who need them for whatever purpose -- again, some more powerful cleaners with, like, OxiClean in them, or sensitive skin, we have those varieties, and the people can save quite a bit of money. On a 150-ounce jug of laundry detergent, you'll save $9 by buying ARM & HAMMER versus the premium brand. And that is quite a bit of money in today's pocketbook.

I agree with those sentiments. But from the standpoint of -- would you say that -- do you still think you have to communicate that to the retailers? Because from the standpoint of understanding the consumer behavior, I get that, there's the trade-down, or trade-across, or whatever it may be. The consumers get it; they're happy with it; and their behavior becomes sticky.

Do you find yourselves continuing to have to educate the retailers that this is the case, and then from that standpoint, future shelf space gains may be possible?

That's a tough question. Retailers all vary on their support for private label. Some are very focused on growing their private label; some have very minimal private label. For those who have minimal private label, they're all about big brands. They love our brands and push them.

For those that have private label businesses, we constantly do try to educate them about the power of having our brands as part of their portfolio. And again, the growth rate, they just can't deny how fast our brands are growing. If they aren't behind our brands, like ARM & HAMMER liquid laundry detergent, they're losing out on the marketplace right now. That has led to a lot of distribution gains for us, and a lot of share growth over the past several years.

Exactly, exactly. Thank you very much.

Leigh Ferst.

I have a question about how you were discussing your gross margin progression, and I realize you probably analyze this from a lot of different points of view, but you are talking about it on a sequential quarterly basis more than you were on a year-over-year. And I was wondering if you could tell us the reasons why? Does that have to do with the commodity environment, or something else?

No. The way to think about is this. In the first half of the year, we have the mix issue obviously hurting us. And we're saying that that's going to get a little bit better in the second half. And one of the reasons for that -- what I said was that we have a little more balance in personal care in the second half, compared to household, versus the first half. And remember, we have things -- some new products coming, like TOOTH TUNES, in the second half that are going to help us.

We also have slotting that's very front-end loaded this year, so slotting is another drag on gross margin, and there's an absence of that in the second half. The third thing would be price. So we have taken price selectively on some brands in the first quarter. Those would be, for example, Nair and natural -- just the natural litter and also baking soda.

But that's really being offset by the slotting. So as you move through the year and we get through the second half, we get the benefit of that. So that's a plus in the second half.

The other thing is Victorville, our plant -- we have startup costs in the first half. We don't have those start-up costs in the second half. We're manufacturing the unit dose pods outside -- a third-party -- in the first half. We're not making it out-house in the second half.

And then we have a number of programs in two of our personal care plants, one in Folkestone, UK, and then in Lakewood, New Jersey, where we expect the benefits of the completion of certain products starting in the third quarter.

So there are a number of things that benefit the second half that are not in the first half. So that's the way to think about why, on a year-over-year basis, we think we're going to be showing positive gains in the second half versus the first half.

Thank you.

Thank you. There are no further questions, thank you. Please go ahead with your closing remarks.

Okay, everybody. Again, this is Jim Craigie. I want to thank you all for taking the time to listen to our first-quarter results. Again, we're very thrilled with those results, and we've given you our outlook on the year, which I think is consistent with what you'd expect from us over time.

So with that, if you have any questions, follow up by calling Matt. And I wish you all a great day. Thank you.

Thank you. This concludes today's Q1 2012 earnings call. You may now disconnect.