切遲杜威 (CHD) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church and Dwight third 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 risk and uncertainties and other factors that are described in detail in the company's SEC filing. 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, Vanessa, and good morning everyone. It's always a pleasure to talk to you, particularly when we have excellent results to report. It's also a pleasure to be talking from our corporate headquarters in Princeton, New Jersey, which was shut down all of last week due to lack of power caused by Hurricane Sandy. That inconvenience was minor compared to the devastation occurred by many of our fellow residents in New Jersey. As a corporate citizen of this great state, we deeply feel for them and we will be donating $1 million to the New Jersey chapter of the American Red Cross to help provide food, clothing, and shelter to those in need.

I will start off this call by providing you with my overview of our latest quarterly 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 some more detailed information on the performance of our key brands and discuss our updated earnings guidance for the year. We'll then open the call to field questions from you.

Let me start off by saying I am very proud of my team for delivering the excellent third quarter business results in such a difficult economic environment. If you own the stock, then you will have a pick six winning ticket in your account since the company delivered very positive results on the six most important business measures. First, the organic revenue growth of 4.6% was very strong particularly on top of the 4.5% organic growth achieved in Q3 of 2011. This organic growth is driven by both our domestic and international business units which respectively delivered 4.8% and 6.7% organic growth. Second, we delivered on our promise of gross margin improvement with a 100 basis point gain in Q3 versus year ago. Third, despite lower marketing spending as a percent of net revenue, we grew share on our four biggest brands representing over two-thirds of our total revenues and profits. This includes all time high quarterly shares on ARM and HAMMER liquid laundry detergent, XTRA liquid laundry detergent, and Trojan condoms. Fourth, we continue to tighten our belts in view of the difficult economic environment and lowered our overhead costs by 70 basis points.

Fifth, this strong organic revenue growth, higher gross margin, and lower overhead costs drove an operating margin of 20% which was 200 basis points above year ago. Our ability to deliver an operating margin in the third quarter which is higher than the majority of our key competitors reflects the strength of our brands, the strong consumer demand for our innovative new products, and the lean cost structure of our company. Sixth, our Q3 EPS result of $0.66 was 22% above year ago, far better than any of our key competitors. The 22% EPS increase was ahead of our expectations for the quarter. So, at the end of this call I will discuss the implication for this year's earnings guidance.

I hope that this brief overview of my company's third quarter business results helps you understand my jubilation for referring to it as a pick six winning lottery ticket. Now, those of you who know me know I have been a long-term pessimist about the business environment. I believe we will continue to face strong headwinds for the rest of 2012, and the next few years, including ongoing insouciance surrounding commodity costs and weak consumer spending. All Consumer Packaged Goods companies are fighting the same headwinds. But, I believe that no other CPG company is as well suited as Church & Dwight to continue to deliver exceptional performance in a tough environment. I'll explain my rationale for that statement in a few minutes after Matt provides you with greater insights on the financial results for the third quarter.

Thank you, Jim, good morning everybody. I'll start with EPS. Third quarter EPS was $0.66 per share compared with $0.54 in 2011, which is a 22% increase from a year ago. Reported revenues were up 3.5% to $725 million. Organic sales was 4.6% which excludes the impact of a 2011 brand acquisition, foreign exchange rate changes, and the positive impact in 2011 of sales in anticipation of an information systems upgrade. And, those three items together had a negative impact of 1.1%. Of the 4.6% organic growth, approximately 5.5% is due to volume with a about 0.1% positive product mix and pricing. Given our strong year-to-date organic sales growth, we expect to deliver organic sales of approximately 4.5% for the year.

Let's now review the segments. The Consumer Domestic businesses organic sales increased by 4.8%, primarily due to higher sales of ARM & HAMMER liquid laundry detergent, ARM & HAMMER cat litter, OxiClean laundry additives, Trojan products, Nair depilatories, and the introduction of ARM & HAMMER Crystal Burst power pack laundry detergent. These increases were partially offset by lower sales of ARM & HAMMER powdered laundry detergent, ARM & HAMMER Spinbrush, ANSWER diagnostic kits, and ARRID deodorant. Volume contributed approximately 5.2% to sales partially offset by 0.4% negative impact of product mix and price for Domestic.

International increased organic growth by 6.7% in Q3 due to higher sales in Europe and Australia. This increase was driven by higher volume of 6.6% and 0.1% negative from product mix and price. The International business had sequential improvement from Q2 to Q3. This was largely driven by the performance of Nair in Europe and Batiste in both the UK and Australia where we recently introduced Batiste. For our specialty products division, sales were lower by 0.9% with volume down by 4.7% and price up 3.8%. The price is driven by animal nutrition where we are recovering raw material cost. We expect our value products, particularly in the laundry category, to continue to benefit from the weak economy and deliver strong organic growth. As communicated throughout the year, we expect this quarter to post the smallest year-over-year increase in organic sales as we are comping 7.1% organic growth in the fourth quarter of 2011.

With respect to gross margin, our reported third quarter gross margin was 45.2% which is a 100 basis point expansion from a year ago. The increase in gross margin is consistent with our expectations and is primarily due to reasons we discussed during the second quarter conference call. Those were productivity improvements from our new plant in California and in house production of the unit dose laundry products, the launch of new products, third would be lower slotting. Fourth would be pricing such as on ARM & HAMMER cat litter. And, finally, the benefits of our commodity hedging program. We continue to be confident in our expectation of full year gross margin expansion, excluding Avid, because these initiatives have already been implemented. We expect gross margin to be above 45% in the fourth quarter. And, for full year, we expect gross margin expansion to be at the lower end of our 25 to 50 basis point range, excluding Avid.

Now marketing. Marketing spend for the third quarter was $92 million, or 12.7% of revenues, which is a 40 basis points decline from the prior year spend rate and slightly higher on a dollar spend. This reflects a shift in spending from the third quarter to the fourth quarter of 2012 as we support new product launches in Q4. We grew dollar share on five of our eight power brands and this is due to great execution of our sales and marketing teams.

SG&A. SG&A was lower year-over-year by $1.9 million. SG&A as a percentage of sales was 12.4%, down 70 basis points from year ago. The lower SG&A costs in the quarter primarily reflect lower legal costs and a timing shift from Q3 to Q4 related to R&D development expenses. For the full year, we expect SG&A to be approximately 13.2% of sales which is down 20 basis points from year ago. This is a reflection of our continuous vigilance to control SG&A.

Operating profit. Operating profit margin for the quarter was 20% and that margin is 200 basis points higher than last year's 18%. Income from affiliates decreased year-over-year primarily due to lower income from our Armand products joint venture as well as start up costs related to our Natronix joint venture. Other expense was favorable year-over-year due primarily to an FX loss in 2011 that did not repeat in 2012.

Now, income taxes. Our effective rate for the quarter was 35.7% compared to last year's 36.9%. The 35.7% for the quarter was expected. And, with respect to our full year, the full year effective tax rate should be approximately 35%.

Cash flow. We generated $315.9 million of net cash from operations for the first nine months of 2012 which is a $3.3 million decrease from the prior year. Remember, that's net of an $8.9 million increase in year-to-date CapEx. We spent approximately $50 million in year-to-date CapEx. And, a large percentage of that, approximately -- it's actually $24 million of that was for our new California manufacturing and distribution facility.

Next thing I'm going to discuss, the share buy back, which we announced in the release. We're pleased to announce the company's Board of Directors has authorized a new share repurchase program under which the company may purchase up to an additional $300 million of the company's common stock. Under the program, shares will be repurchased in the open market at times, at amounts considered appropriate by the company based on factors including price and market conditions. The company has approximately 140 million shares outstanding. We have an additional 20 million remaining on our existing repurchase program. The primary purpose of the program is to cover share creep. We expect to limit our purchases to approximately 100 million between now and the end of 2013. We may purchase some shares beginning in the fourth quarter. Now, I'm going to turn my remarks to Avid.

On October 1, the company closed on its acquisition of Avid. The purchase price was approximately $650 million financed primarily with $400 million of senior notes at a coupon rate of 2.875% due in 2022 and commercial paper. Jim will discuss Q4 and the 2013 outlook in a moment, but I want to take this opportunity to provide clarity on some of the one time charges in the fourth quarter that were taken into account within our guidance. So, we expect to have transaction costs of approximately $4.5 million. We expect inventory and fixed asset step up of approximately $7 million, all of which will be in 2012. And, we expect to have $2.5 million of incremental amortization in the fourth quarter. There will also be transition expenses of approximately $1 million in Q4 related to severance and information technology system design. With respect to 2013, we do not expect to have a material amount of transition costs next year. I would estimate it to be $0.01 or less and will not be calling them out separately.

In conclusion, the third quarter highlights include 4.6% organic sales growth driven by 4.5% volume growth and we had a 22% increase in EPS. We expect fourth quarter earnings per share of approximately $0.55 compared to $0.53 last year, excluding the deferred tax valuation allowance charge of $0.09 per share. The company reported $0.44 in the fourth quarter of 2011. So, we are expecting a good fourth quarter. We are raising our annual earnings per share goal to $2.43 for the year which is an increase of 15% over last year's reported $2.12, and 10% higher excluding the fourth quarter 2011 deferred tax charge of $0.09 per share. Back to you, Jim.

Thanks, Matt, I'll finish off our call today by providing a little color to the outstanding third quarter financial results that Matt just took you through, and my outlook for the rest of the year.

Our strong third quarter business results are directly linked to the seven factors that support my earlier statement that I believe 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 the position to thrive in any type of economy as exemplified by our consistently strong, double digit EPS growth over the past 11 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, which is our largest business, achieved almost 10% dollar sales growth in the third quarter and reached an all time high quarterly share. This record high quarterly share enabled ARM & HAMMER to pass the All brand to become number three brand in the liquid laundry detergent category. In addition, the strong share gains achieved by ARM & HAMMER liquid laundry detergent, ARM & HAMMER powder laundry detergent, and XTRA, our extreme value liquid laundry detergent, enabled Church & Dwight to pass the Sun Products company to become the number two laundry detergent company in America. This is a remarkable achievement for my company which has been driven by a combination of new products, increased distribution, higher marketing spending, and increased merchandising support behind our value oriented brands.

The second factor, which is a key driver of Church & Dwight's success, is we have a proven record of building our power brands. We have over 80 brands in total. But, eight of these brands are our power brands, which generate 80% of our sales and profits. In each of the first, second, and third quarters of this year we grew market share on five of our eight power brands. The key factor driving the growth of our power brands is our robust pipeline of new products. Over the past four years, new products delivered over 50% of the company's organic revenue growth. We have shipped innovative new products at every category this year to support delivery of our organic growth target of 3% to 4%. We expect the new products to be as successful as the new products we introduced over the past four years.

A sample of these new products include the new sensitive skin product for ARM & HAMMER liquid laundry detergent line that is designed to significantly enhance the brand's appeal to over 50% of consumer households who have sensitive skin issues. We believe this will help to drive continued growth of the ARM & HAMMER liquid laundry detergent business which has achieved 14 consecutive quarters of growth. Another great new product 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. These two new products now represent over 50% of the brand's total cat litter sales and helped drive over a 15% sales increase in dollar sales growth and a 2.4% share gain in the third quarter versus year ago. As a result, the ARM & HAMMER cat litter brands have now achieved 35 consecutive quarters of net sales growth, 10 consecutive quarters of share gains. It is now the clear number two brand in the clumping cat litter business. That's pretty impressive for a category which we entered only 14 years ago. It also shows a strong consumer appeal of the ARM & HAMMER brand which now accounts for over $1 billion in total annual sales.

On the personal care side of our business, we have several exciting new products in 2012. First, is our new Trojan condom, called Charged, which has deep ribs and special lubricants to provide intensified pleasure. This new product helped to drive an all-time record quarterly share of 76.6% for our Trojan condom brand, up a full point versus year ago. Another new personal care product is Tooth Tunes, which is a line of tooth brushes for young children that uses proprietary technology to play two minutes of music through your jaw bone to your ear from a broad range of artists such as Black Eyed Peas, Queen, and Selena Gomez. For those with young children, I guarantee you that if they use a Tooth Tunes toothbrush you will 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 and initial distribution, sales, and share results for this new product, which began shipping in July, are very strong.

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 $300 million in size with no major branded players. We first entered this category 2005 with our iconic Trojan brand and this year we are launching full-sized vibrators into new channels. We are very pleased with the consumption gains in our entire Vibrations line which were up 25% in the third quarter. We also recently initiated a free sample program in key urban markets across America in which we are giving away several thousand vibrators in each city to demonstrate the broad consumer appeal of this product. The first event was held in New York City in early August, and it created such a buzz that it was temporarily shut down by the Mayor's office due to the traffic jams it created.

The second white space category that we recently entered via the OxiClean brand was the dish washing additives category, which is over $100 million in size. The government mandated removal of phosphates from dishwashing detergents in 2010, creating the need for a booster product to deal with the noticeable increase in cloudy film on glasses and dishes. Our new OxiClean dishwashing booster product enhances the cleaning power of dishwashing detergents to once again deliver crystal clear dishware. This new product has already achieved a 10% share of the dishwashing additives category after only seven months in distribution. There are many other new products that we have launched in 2012, but in the interest of time, I will move on with my review of the factors driving Church & Dwight's continued success and discuss our updated earnings guidance for the year.

Let me quickly run through the five other key factors of our continued success. Number three is that we have a proven history of ferociously defending our brands as evidenced by our defense of OxiClean when a large competitor entered the laundry additives category. In fact, OxiClean's third quarter share of 41.1% is 200 basis points above year ago, twice the size of the nearest competitor, and a higher share than when the major competitor first entered the category. We have not only successfully defended our position against this multi-billion dollar competitor, but now we are attacking back and growing our share position.

The number four factor behind our continued success is the strong growth of our International business. While 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 first quarter of 2012 but did not continue in the second quarter due to some competitive issues. We promised you in our last earnings call in August that programs have been put in place to reinvigorate organic growth in our International business. We delivered on that promise. As stated earlier, our International business achieved organic growth of 6.7% in the third quarter. This was driven by strong sales gains across a wide range of markets and countries, including western Europe, Australia, Mexico, and Brazil.

Factor number five behind Church & Dwight's success is our long history of expanding gross margins through cost optimization programs, supply chain restructuring, acquisitions synergies, and launching higher margin new products. We expanded gross margin by 1,560 basis points in the past ten years. While we did not improve our gross margin in 2010 and 2011 we were successful in holding 380 of the whopping 430 basis point gross margin gain achieved in 2009 despite major headwinds from higher commodity costs. And, despite a 100 basis point decline in gross margin in the first and second quarters of 2012, Matt and I promised you back in August that a broad range of initiatives were being implemented that would enable us to achieve our gross margin improvement in the back half of 2012. And, once again, we delivered on that promise with a 100 basis point improvement in gross margin in the third quarter versus year ago. We expect even a stronger improvement in gross margin versus year ago in the current fourth quarter.

Factor number six behind Church & Dwight's long term success is our ability to tightly manage our overhead costs. Church & Dwight currently has the highest revenue per employee of any major Consumer Packages company. As mentioned earlier, our SG&A overhead costs were down 70 basis points in Q3 versus year ago and a full 60 basis points below year ago for the first three quarters of 2012. This significant reduction reflects how aggressively we manage our overhead costs to stay Best in Class in our industry.

Finally, factor number seven is the strong record on free cash flow conversion. We have almost quadrupled our free cash flow over the past ten years. Over the past five years our free cash flow conversion as a percentage of income, was 128% which was Best in Class in the CPG industry. On a full year basis we will again exceed 100% free cash flow conversion in 2012. Our cash flow and strong balance sheet have enabled us to smartly invest in our future through investments in our supply chain, including construction of more efficient new plants, and the acquisition of faster growing leading brands.

All 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 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. We are taking actions to ensure that we can continue to deliver exceptional EPS growth going forward regardless of the future economic environment.

Before I switch gears and talk about the outlook for the rest of 2012, I would like to make a few comments about our recent acquisition of the Avid Health company. For those of you who are not familiar with Avid, it is one of the fastest growing companies in the vitamin, mineral, and supplement category. This category is over $5 billion in size and is one of the fastest growing categories in Consumer Packaged Goods with a 5% to 6% historical steady growth rate. Avid's L'il Critters brand is the number one brand of children's gummy vitamins. Avid's Vitafusion brand is the fastest growing brand in the adult gummy vitamins. Overall, Avid holds a 2 to 1 share advantage relative to the number two gummy vitamin competitor.

There is a great deal of future growth opportunities in this business. We believe the upside is two-fold. First, gummy vitamins represent about 58% of all children vitamin sales today but only about 3% of the adult vitamin category. However, the total adult vitamin category is about 19 times the size of the kid's vitamins, or about $5 billion. So, we are confident there is a huge opportunity to grow the gummy form in adult vitamins, which Avid first entered in 2008. That growth is already happening as we speak, as the gummy form is the fastest growing segment of both kids' and adult vitamins.

Second, Avid's gummy vitamins have won awards for the best taste profile of any gummy vitamin. Unlike other vitamin companies that sell all forms of vitamins, including pills and capsules, Avid sells only the gummy form. It's excellent R&D capabilities are 100% focused on making great tasting gummies. And, it's self manufacturing this product whereas its competitors are largely produced by co-packers. As a result of having the best tasting gummy vitamin in the fastest growing segment of the gummy business, Avid has tripled its sales over the last three years, and is one of the fastest growing vitamin, mineral, and supplement businesses. It represents a significant new growth platform for our company that should enable Church & Dwight to continue to deliver superior EPS and TSR results to our shareholders. As Matt told you, the Avid acquisition closed on October 1, and a multi-functional team from Church & Dwight is now in full control of the business and integration is underway.

Now, let me switch gears and simply talk about our outlook for the rest of 2012 and our initial forecast of 2013. As stated in the press release, as a result of our outstanding Q3 results we now expect diluted earnings per share for 2012 to be $2.43. This is an increase of 15% on a reported basis, and 10% over 2011 when you exclude a deferred tax valuation allowance of $0.09 per share that we incurred in the fourth quarter of 2011. Please also note that the new EPS forecast for 2012 does not include any potential EPS impact as a result of Hurricane Sandy.

We also previously announced that the recent acquisition of the Avid Health company was expected to be approximately $0.02 dilutive to 2012 earnings per share. We have now improved visibility into one time charges, as Matt spoke to you about, and as a result, we believe the acquisition will be earnings neutral to 2012. So, in total, we improved our 2012 EPS outlook by $0.04, $0.02 for now forecasting the high end of the EPS range for our core business and $0.02 for the elimination of the dilutive effect of the acquisition. In addition to the higher EPS forecast for 2012, we plan to redeploy some of the higher than expected earnings in Q3 to increase marketing spending in Q4. That will drive strong consumption and enable us to exit the year with strong momentum, just as we did last year. We strongly believe that we can deliver these aggressive EPS targets despite continued weak consumer demand.

Our confidence in delivering this aggressive EPS target is based on two key factors. First we strongly believe that we can continue to deliver the market share gains in our power brands to deliver organic growth of 4.5% for the full year of 2012 which is above our annual target of 3% to 4%. These share gains are expected to result from our innovative new products, significant distribution gains across majority of our power brands, and strong marketing support. All three of these factors helped to drive 5.5% organic growth in the first three quarters of this year and to continue to -- contribute to continued organic growth in the fourth quarter of 2012. However, the organic growth in the fourth quarter will not be as strong as the first three quarters because we will be up against 7% organic sales growth in the fourth quarter of 2011.

Second, as stated earlier, we strongly believe that we can still deliver strong gross margin expansion in the fourth quarter to achieve our annual target of 25 to 50 basis points despite being down about 100 basis points in the first half of 2012. Our gross margin expansion is expected to result from a wide of initiatives that have already been implemented, as Matt highlighted earlier. As a result of these factors, I feel confident that we can deliver diluted earnings per share growth of 10% for total 2012 on an adjusted EPS basis. 10% EPS improvement for total 2012 is terrific in this tough business environment and better than all of our key competitors. However, we are going do even better in 2013 when we expect earnings per share growth of approximately 13% to 15% driven by 9% to 10% earnings growth from our strong core business and accretion from the recent acquisition of the Avid Health business. And, we expect to deliver the 13% to 15% EPS growth while also increasing the marketing investment behind the newly acquired gummy vitamin business and our eight power brands. If this outlook for the Church & Dwight business doesn't excite you as much as it excites us then call me for some gummy vitamins and a free vibrator to wake you up.

In conclusion, 2012 is shaping up to be another very challenging year due to the weak consumer demand. But, when things get tough, you should place your bets on the company with a product portfolio that can thrive in such an environment and the management team that has a track record of knowing how to successfully leverage that portfolio and new acquisitions to deliver strong EPS growth. That ends our presentation. I will now open the call to questions that you may have which Matt and I will do our best to answer, operator, please go ahead.

(Operator Instructions)

Jason Gere, RBC Capital Markets.

Hey, Jason.

I have two housekeeping things and then just a more strategic question, guys. Matt, you were mentioning about the fourth quarter, those one time items, is that included or excluded in the $0.55? I just wanted to be clear on that.

It's all in.

So, it's all in. What's the total EPS impact? What would you calculate that to be when you look at the $0.55? Is that a couple of pennies?

If I rack those numbers up.

Yes.

We said the transaction costs were $4.5 million, got $1 million for transition, the incremental amortization is $2.5 million. That's still an estimate, by the way, until we get the appraisal done. And then, we've got step up of $7 million. So, you rack those up and you're going to say that's $15 million. And then, if you want to add some more to that you would have the incremental interest also of $3 million, because we have got to finance the transaction. That's $18 million. A penny is about $2.2 million, so you can do the math from there. $0.08 plus.

Okay, okay. No, that's good to know. I guess, the second question, when you talk about the marketing shift from the third to fourth quarter, where are you looking, then, for the fourth quarter? Because, obviously, last quarter you guys were talking about third quarter was going to be higher marketing than the fourth quarter. And, clearly, I think a lot of us like the set up here that you will have strong momentum heading into '13 with the step up marketing in the fourth quarter. But, where should we end the year with marketing expense? And then, how should we think about that for '13 when you look at including Avid in there? Is 13% the right way to think about it as a long term target?

If you look at the trend over the last couple years, you probably remember we were at 12% -- we went from 12. -- back in 2009 I think we went up to 14%. Then we went down in 2011 to 13.1%. Yes, that's right. Then 2012 we think we're going to be more like mid-12%s. We have found that, given the growth of our value business that the mix has changed within the company and the 12.5% probably makes more sense on a go forward basis in order to support the growth rate. As you can see in the third quarter, we had mid-12%s marketing as a percentage of sales yet we had 4.6% organic growth, which is a good trend.

When you talk about '13, though, and saying you're going to invest more behind the brands, as well as Avid, should that trickle up but maybe not get close to 13%? I am trying to conceptualize what you are saying. I understand the dollar sales will be higher. Just so we have something to benchmark against.

I would use, just for round numbers, 12.5%. Remember, the other thing to keep in mind is Avid when we took over that company they have 6% to 7% historical marketing spend. We are going to say we are going to take that up to double digit. I don't know that we'll take it as high as 12% or 13%. But, I think 12.5% is a good walking around number for 2013 marketing spend.

Okay.

Hi, Jason, this is Jim. Always remember we start the year in the Q1 with our lowest spending of the year because it's before new products are launched. Then we steadily increase it. This Q4 will be the strongest quarter of the year in marketing support in the neighborhood of about 14%.

Okay, that's fine. I guess the bigger picture question is you guys blessed the 9% to 10% core for next year. Can you talk about the top line, how that's shaping up? This year you guys are going do better than 4%. 4% seems to be -- you always say, historically, 3% to 4%. But, you are going to start to comp up, again, some tough laundry comparisons, double digit type of growth, even starting in the fourth quarter. Personal care, very pleased to see that sequentially, that improved. So, I guess can you frame up how you see top line for '13 playing out, household verses personal care, as you start to think forward there?

Jason, we're still in the process of finalizing our 2013 plans. At this point in time I would tell you to stick within our 3% to 4% Evergreen target right now. And, the mix, we'd have to get back to you on that. You were right, we are very happy the household side continues to have strong growth. And, personal care just about came in flat verses being down in prior quarters. We're very happy with the improved mix which is being driven a lot by the new products. But, for right now just gauge 2013 in the 3% to 4% range.

Okay, fair enough. I'll turn it over to the next caller.

[Joe Lackey], Wells Fargo Securities.

Hello, Joe.

(technical difficulty) was down for four of the eight power brands, but I guess 78% of your volume is still up. I guess, maybe, if you could run through the categories where market share was down? And, maybe, describe the dynamics and what's going on there with your competitive position?

Yes, Joe. Again, ARM & HAMMER had a very strong quarter, XTRA a strong, OxiClean very strong, Trojan, record share, First Response was flat. So, really five of our eight power brands, and all our biggest ones, were up or flat verses year ago. The story of the three that were down is actually different by brand. Spinbrush, if you just look within the powered battery toothbrush category, was down a little bit. If you look on a total toothbrush category, when you add in the initial effect now with Tooth Tunes, it was actually up 1/10 of a share point. So, we are happy with that. And, Tooth Tunes will come on stronger in the fourth quarter and we have some big display support coming from that.

Nair, actually, had a great year. Nair sales were up high single digits. However, the category exploded with over 20% category growth driven by a new product from Proctor which did very well, a facial depilatory. We had a very good year on Nair and it was this one time unusual event of a new competitor in the category drove the category sales even higher than our sales. So, while share is down, we're very happy with Nair this year. The only brand that's having trouble is Orajel, that's an issue with private label right now. Plans are in place to improve that and the share results are already getting better on that. Quite honestly, of our eight product brands only one, Orajel, is one that had true share declines that are something to worry about and we're fixing that.

Okay, okay, thanks. If you could just maybe talk a little bit about US category growth rates. If we look at track channels by your main categories, like liquid laundry, we are seeing the growth rate of the category as a whole slowing down. Maybe, if you could run through your bigger ones. Are you seeing an overall slowing here as we went in the third quarter? And, how are you seeing it starting to shape up in the fourth quarter.

Yes, Joe, I would just tell you it's stuck in neutral right now. Overall, we're in 12 categories we look at, 6 were up, 6 were down in the fourth quarter, but all relatively anemic. Up a little bit on some, down a little bit on others. It's been that way for several quarters right now. I would just say that the economy is stuck in first gear. And, I don't think there is any signs right now of getting better. I wouldn't say there is any signs of getting worse either. It's just stuck in neutral, overall.

Okay, thanks.

Bill Schmitz, Deutsche Bank.

Good morning.

Hi, Bill.

Is there any financial impact if you decided to look at the 72 brands that are, I don't want to call them non core, but I think you said 70% is name power brands. If you got rid of those financially, would there be decent savings above the gross margin and EBIT line? Or is it so small it's probably not that material?

Yes, Bill, this is Matt. I think like any CPG company there is a fair amount of tail brands that a lot of people don't talk about. These are brands that you don't advertise. They bump along. Many are flattish year-to-year and have a very loyal customer base. They absorb a lot of overhead in the plants.

As you know, we have picked a few things off over the past couple years. We got rid of Brillo, got rid of Lambert Kay. The brands we picked up on Orajel, there were six orphan brands that we booted as well. We continue to look at pruning. But, there would be no wholesale jettison for the minor brands. That wouldn't make any sense.

Got you. Great, thanks, so much. I know it's only a month, but if you look at some of the scan channel data, which sales in Wal-Mart, obviously, and some of the Dollar Store stuff, and BJs and Sam's, it looks like for the whole industry, the last couple months, showed a pretty big slow down. Is there any way to explain that?

Can you spell Obama?

Really? So, you just think it is people are just nervous ahead of the election.

Keep going.

That was actually the bulk of my questions. Thank you, guys.

Alice Longley, Buckingham Research.

Hi Alice.

Hi, so, my first questions is on Avid. Can you give us an update on what we should be adding into our model for its sales this year -- I mean, in the fourth quarter and then 2013? And then, what are its gross margin and EBIT margins ex all these charges for our modeling? Does that 45% gross margin guidance for the fourth quarter, does that include Avid?

No.

Okay.

So, as you probably know, and everybody on the call knows this, is we don't call out sales and gross margin in line items for any of our brands. We haven't done that historically, nor will we do that going forward. To give everybody a little bit of help on this, you may recall that we said that the trailing gross margins for this business were around 39% and we expect it to grow up to 43% by 2015. Some of that will start coming next year. But, most of it, we had $15 million of synergies, are going to come by mid-2014. We previously thought it would be earlier in the year, or early in 2014, but now we are thinking mid-2014. Those $15 million synergies are largely cost of goods sold. Some of it is SG&A. It is probably a two-third, one-third split. But, as we get into the business we're refining that.

As far as the EBITDA margins, that's a very good story. Our historical EBITDA margins for 2011 were 21.5%. We expect this year to be -- exceed 22% for the total company. This is Church & Dwight now. The business we bought had trailing EBITDA margins of 25%. That's un-synergized. We have a fair amount of synergies, since we said we had $15 million in synergies, which it's going to take that number up significantly as a percentage of sales. There will be some offset in that we said marketing spend was going to go up as well. But, we expect the go forward EBITDA margins fully synergized to be in the high 20%s, maybe as close to 30% which means this is a real cash flow generator for the company. Which, oh by the way, also influenced our thinking with respect to free cash flow for next year which we expect Avid to be a big contributor. And, consequently, we said we might even start our share repurchase earlier in the fourth quarter rather than wait until January.

Next year, just to remind everybody, we said we were going to grow 13% to 15%. We also said that 9% to 10% of our EPS growth was going to come from our core business. And, the rest is going to come from Avid. So, you could say two-thirds of our growth next year in earnings comes from the core business and one-third comes from Avid. I hope that helps you a little bit.

Yes. And then, as a follow up, could you take apart your gross margin expansion in the quarter, the 100 basis points? And, tell us the components for commodity trends, mix, and promotional activity? I am wondering if promotional activity took more off of gross margin than a year ago, for instance. Thank you.

No, the promotional activity I would not say was a factor year-over-year. In fact, it was probably more of a help. Because remember, we had a price increase on cat litter that helped us. I wouldn't say that the trade rates are getting any worse either. Certainly sequentially, Q2 to Q3 or even Q3 to Q4. So, I think on shelf, as Jim said, we're sort of neutral.

Okay. And, mix, how much did that help gross margin? Or hurt?

I think mix was a help, actually, to the quarter. Because if you look at what happened with personal care, personal care was down in the first couple quarters of the year, year-over-year. Whereas in the third quarter we are only down 0.7% which is quite a sequential improvement. So, mix was a help to us as well as the price increase.

And, commodity trends, what was their role in the gross margin expansion?

There is some help in commodity trends, but overall I would say that was neutral. I think a lot of the work we do within the company to improve our unit costs, manufacturing, our good to great program. Remember, we brought unit dose in-house. We've got Victorville running now, we have less slotting. Slotting would be an element of price as well. We had five or six factors and all of them were contributors to the quarter.

I guess a final question would be how do you feel about the unit dose tax at this point? Are they disappointing?

Well, I would tell you Alice, the bottom line is they're about 6% of the total category. Church & Dwight is the only manufacturer whose liquid business grew in Q3. Of the competitors who had a unit dose form, we were the only ones who had growth on our liquid business. Everybody else suffered declines on liquid. I would tell you, overall, quite disappointing the total category of laundry detergent, including liquid, unit dose, and powder was down in the third quarter. The worse results of the year. First quarter was positive, second quarter was about neutral, and third quarter, total laundry detergent down about 1%. That's about 5% liquid was down, 20% powder decline, and obviously unit dose was all incremental.

In total, that only gave about a minus 1.3% hit on the quarter. I would tell you unit dose is not doing anything. In fact, it may be hurting the category. We have long maintained there is an issue with dosing that people tend to overdose liquid. Well, you can't overdose, really, unit dose. As people switch from liquid to unit dose it's reducing the number of doses they use for liquid. So, the net effect is -- all I can tell you is since unit dose was launched, pretty much in Q2 this year, it's been a decline in the total laundry detergent category.

Is that negative 1.3% for the category, is that dollar or volume terms?

That's dollar consumption all channel.

And, how much were you up?

We were up 5.4% in consumption and about 10% in sales dollars.

What would the difference between those two be?

The channels that are measure. There are some channels -- some of the club stores aren't measured. Some of the dollar stores aren't measured.

And, how was your -- what was the comparable numbers for your biggest competitor?

Our biggest competitor, no, go talk to Nielsen. Go call them.

Thank you.

Joe Altobello, Oppenheimer.

Hi, Joe.

First question is more of an industry question. You've got a couple competitors, one of which is in process of restructuring, another just announced a restructuring. I'm curious what your thoughts are on how that might impact competitive activity going forward, if at all.

I think they'll be in total chaos. We'll take advantage of it.

Both of them or just one of them?

Both of them.

Interesting, okay. And then, secondly, in terms of gross margin you guys have had a pretty robust Evergreen gross margin outlook historically. Can you give us a sense for where you're thinking about gross margin, maybe, for '13 and beyond? What that new Evergreen target might be with Avid?

Yes, Joe, that's a good question. It's a little bit early to go and call gross margin for next year. As you know for this year we presently have 25 to 50 basis points target. We think we're going to be at the low end of the range. My expectation is that we're going to have a reset here because we're going to have the Avid baked in, obviously, for the fourth quarter and then the full year. I would expect that -- think of it this way. 2011 gross margin was 44.2% for total company. So, if we get 25 basis points expansion on that then ex Avid we are around 44.45%. Baking Avid in for the fourth quarter, remember you got big step up charges and lots of things going on.

Transition expenses, things that are going to hit cost of goods sold, I would expect that, that would depress the full year down to around 44%. So, that will be the reported number, my guess, is on a full year basis. We'll see where that goes. Then, we're going to have full year of Avid next year. So, obviously, that will be a drag. You can do the math on if you got a business that's got sub-40% gross margins and it's $300 million. It's going to be a bit of a drag on us. Remember, the EBITDA margin and the operating margin will be helped by Avid.

Okay. Okay. That's helpful. Thank you.

Bill Chappell, SunTrust.

Hi, Bill.

Just wanted to follow up and look at the ad and promo spend in the fourth quarter. Any way to quantify how much of it is offensive, in terms of new products, and how much is defensive, in terms of what you're seeing from competitive landscape? And then, maybe how much is laundry verses the rest of the business?

We can't get into a break down, Bill, but we spend, I probably would say, 75% of our advertising dollars on new products. So, you'll hear that we've got a couple of new ones coming in fourth quarter with the new Tooth Tunes coming out there. A new Orajel cold sore medication coming out there. We have been doing very well with the ones I talked to you about, the ARM & HAMMER version for sensitive skin, and that. We love to focus it there. People love to hear new news. And, it helps drive the business more than focusing on the base brand. Obviously, new news has a great halo effect.

It will be a lot on the new products. We have shifted maybe a little bit over to the personal care side to help that business more. But, in general I told you it would be in the neighborhood of 14% of net revenue in the fourth quarter spent on marketing which will be our highest quarter of the year. And, help us exit the year with great momentum.

Okay. Then, just switching to 2013. It seems commodities should be at least be a flat to a tail wind. Would you see the same thing in terms of ad and promo with the election year behind us and lower ad rates? How are you looking at that adding some operating leverage to the business?

Bill, the up front buy got good games. There is no leverage in terms of buying media. The networks are very successful in leveraging increases next year. Again, I think Matt told you earlier to stick in the range of 12.5% for advertise as a percent of net revenue going forward. We feel very comfortable there. We -- sometimes you guys criticize us for the marketing in a quarter. We enter a quarter looking at what we have to say and then we watch closely what competitors have to say and what they do. We adjust as we go in the quarter.

We leave about 25% or more of our media flexible. If we see competitive activity, we pour it on to defend. And, if we don't see it we sometimes defer it to the next quarter when we expect we might see it. We're very flexible in how we manage that. Again, the bottom line is share growth. We had our four biggest brands grew share this quarter. Several had record shares. We feel quite happy with the marketing we spent in this quarter even though it was a little less than a year ago.

Just last one on Avid. Maybe I missed it, but did you say what you had found, I guess, in the past two months to turn the business from slightly dilutive to neutral? Are there any other one time charges that will occur in 2013 or is most of that happening in this December quarter?

The difference with Avid simply is that we're in November now and before we were in August. There was a little bit of conservatism in that number, Bill, so we left ourselves a little bit room.

Was it operational you found or just lower financing?

The financing did help us, when we got sub-3%. Remember, that's only a quarter. That wouldn't be a big swinger. No, I would say it's just more we have -- now that we own the business we got a better handle on what the quarter forecast is going to be.

Then all the charges should largely be this quarter?

Yes, most of them will be. I did say in my remarks earlier that we do expect about $0.01 or less of transition expenses next year. That's baked into our thinking already.

Okay, great. Thank you.

Christopher Ferrara, Bank of America.

Hi, Chris.

Hi, how are you.

Good.

Just, I guess, for clarification real quick should the 45% Q4 gross margin, that is not a reported number? That excludes Avid but the EPS number, the $0.55, that does include Avid. Is that right?

Yes, that's correct.

Okay, okay, cool. Then, I guess, if you look at the nature of those charges that you just detailed, right, what's one time and what's ongoing. I guess it looks like $0.06 to $0.07 of those are going to hit Q4 and be one time. And, I'm curious, that right or wrong? As it reflects on your 2013 EPS growth rate, it looks like that's giving you -- just the elimination of those charges is giving you a few percentage points of growth? Is that right? Does that just leave you more flexibility? Is that how you're thinking about it?

Just to recap what we said with the charges in the fourth quarter that are one time, so you would have the transaction cost of $4.5 million, then you would have transition of $1 million and then step up of $7 million. Of course, the amortization I mentioned before does keep going on. So, the $4.5 million and the $1 million, it's $5.5 million, $7 million, $12.5 million, right? So, yes, it's about $0.06 of charges in the fourth quarter.

Remember what we said also next year is that we are taking up the spend from 6% of marketing to in excess of 10%. So, 400 basis points on a $300 million business, it's another $12 million in marketing expend year-over-year. So, there aren't a lot of moving parts, Chris. But, I hope that helps you.

Yes, yes that does, thanks. I guess last quarter -- and again not to get into this advertising thing again, right, but I just want to get your perspective on it. Last quarter you said that the back half of this year would be about 14% of sales. Now, obviously, Q3 came in short of that. Q4 is going to be 14%. But, what drives the change? Why overall will the back half have less in advertising? Is it this mix shift that you're talking about? How do you feel about your share of voice in light of that?

Chris, we fell very -- you made a great point there. We feel very good about our share of voice. That's how we judge things all along. As I told you, we just shifted some from Q3 to Q4. The year is going to come out around 12.5%, so we feel very good. We are in our comfort zone, our share of voice is very strong in the categories. We are growing our share on all of our big businesses. That's how we judge it. We just stay flexible on it. We are not using it to make earnings.

We're just doing what's right competitively and keeping dry powder in our banks in case competitors explode with anything in a quarter where we've got money that we didn't use in prior quarters. It's a judgment thing we do, I think, very well. And, if the shares were going down you could beat us up. But, our shares are growing, hitting record shares. So, I think we're doing great.

So, you are saying nothing changed in the business that would have caused your back half advertising guidance to move lower?

No.

Okay. Thanks, guys.

Leigh Ferst, Wellington Shields.

Good morning.

Hi, Lee.

Good morning. Thank you for your comments on Sandy, and for keeping us on schedule with your earnings release. The whole thing seems a bit unfathomable, but you did mention that your outlook excludes any impact. Can you tell us how you are thinking about the potential impact positives and negatives?

Yes, Leigh, we are not able to determine the impact at this time, that it will have on the sales. As we said, the outlook does not include any EPS impact. Three of our plants were within the path of the storm. We had a plant in Virginia, a plant in New Jersey, and a plant in Pennsylvania. The great news is none of them suffered any structural damage and only one plant, the one in New Jersey, is out of power, as we speak, still. We expect that power to be restored by the middle of this week.

The great news, too, is we have enough finished inventory at that plant to meet shipments for now. There could be some disruption in coming weeks depending on the condition of, actually, suppliers to us, to that plant. But, again it's just been a week. We don't know at this time if the storm will have any impact on Q4 business results. That's for us. I would tell you, too, there are many retail stores, hundreds and hundreds of retail stores were shut down all of last week due to lack of power.

That will obviously have some impact on consumption in this very highly populated area of America. So, that will be somewhat common to all CPG companies. We are a little more Eastern skewed in our business than others. But, it's just way too early to assess what's going on as far as the impact on the business.

Thank you. And, can you tell us what kind of distribution you've gotten for Tooth Tunes?

Great. We don't give out numbers like that. It's been very good distribution. You'll see very good display support out at the retailers. It's just, really, we're very, very happy with it. Initial consumption and sales have been at or above what we expected.

You're still expecting that to be a big item for holiday sales?

I think it will be a huge item for holiday sales.

Yes, okay. Thank you.

Thank you.

Nik Modi, UBS.

Hello, Nik.

Hi, Nik, you got power in your house in Princeton, Nik?

I'm good. I'm good. We only lost it for a day, but we're back and running.

We were going to offer you a closet here to stay in but you're okay. That's fine.

The good think is I'm small enough I can actually live there, so that's good. The question I have is on Avid. You talk about the adult opportunity and I was wondering if you could give more perspective on that now that you have been running the business for a few months? What is the opportunity? How can you address that opportunity in a more meaningful fashion? If there a trial, sampling type of initiative you can do? And, if there is, what type of conversion do you typically see in those types of initiatives?

Nik, the first opportunity is a lot of distribution opportunities out there in the adult side. Which we plan to both increase the amount of distribution in current accounts and open up new accounts out there. That will be the first big wave coming through. We told you we're going to increase marketing support. A big part of marketing is sampling. The people who we bought this business from showed us quite conclusively that in-store sampling is a very powerful vehicle. We'll be doing a lot of that out there. When you taste this product I guarantee you it's awesome. I seriously get up every morning, it's a treat to actually put these gummy vitamins in my mouth and eat them. It's like candy instead of swallowing a hard pill.

I think as people experience that, especially adults, I think they'll be switching in droves over to the gummy vitamins which has same efficacy as hard pills. Distribution, increased sampling, increased marketing support. And, we have new products coming out over the course of the next 24 months which I think will be very appealing to consumers.

Great. That's it for me.

Bill Schmitz, Deutsche Bank.

You already had your turn, Bill, what's --.

You didn't hear my first comment when I said it seems like you took a lot of vitamins this morning. Looking at the gross margin mix going forward. The 1,500 basis points is amazing. But, wasn't a lot of that personal care driven? So, you brought in a lot of these personal care brands which drove that gross margin up. When you look at it going forward, I think Avid was a little bit gross margin dilutive. But, maybe that's just a temporary thing because you haven't really integrated it yet. But, how do you get the gross margin moving, not necessarily for the next quarter or two, but maybe for the next three to five years?

Yes, Bill, the past was driven by a combination. Yes, there was acquisitions of higher margin brands. But, yes, there was also a lot of growth of the gross margin on the core business. Remember we had compaction in the laundry a few years ago that was awesome, we built a big new super plant in Pennsylvania. We have -- this cross saving program in house is fantastic. In perspective though, keep in mind we are up around 44%, 45%. The big dogs in our category are up only in the high 40%s and they have all premium high priced brands out there.

So, that's why we no longer can do 100 basis points a year as we are coming closer to the ceiling out there with some of the guys. But, we feel very comfortable we can get this business up to about 50% gross margin. The Avid thing will set us back slightly because it's a little bit of a drag. You got future things. I would hope sometime in the next year or two we'll see another round of compaction on laundry which I will not quantify but was hugely impactful to us in the past. It's our biggest business. It makes a lot of sense to go do it. But, we need the whole industry to do it. I think we will get the 50% over time through internal programs and we got more restructuring to do and some of our plants will help out too.

Got you. Maybe I'm just reading to deeply into the press release, but it looks like you said that sales in Europe and Australia were strong. Everyone else had a disaster quarter in both those regions. Are you getting distribution there? Is there a Nielsen value category emerging that you guys are starting to participate in or was that just better growth off the base business?

Yes, Bill, it's Matt. It's just two things. It's Nair is doing well and Batiste, remember that brand we bought last year?

I do.

Batiste is doing very well both in the UK and in Australia.

Got you. But, there's not an opportunity to enter that value share where consumers are struggling a little bit? I think it would probably do pretty well.

Are you referring to Batiste now?

No, no, no, no, no, I meant on the household products side.

Yes, but, remember outside the US we are largely personal care.

That's what I was asking. You haven't launched household products internationally really, or materially.

Canada we have and Mexico.

Got you. Thanks for letting me jump back on, guys.

Thank you.

John Faucher, JPMorgan.

Hi, guys. Actually, I'm fine. Bill actually ended up asking my question. So, I will just say that's it.

Thank you.

(Operator Instructions)

Joe Lackey, Wells Fargo Securities.

Well, we are getting back, got back --.

I guess I have been thinking about this since the Avid call. Speaking of long term -- looking at long term EPS growth, previously your Evergreen target was always 10% to 12%, to low double digits. I guess it remains 10% to 12%. But, I guess -- I know you'll get the one time benefit of Avid. So, you are projecting 13% to 15% next year. But, you will get ongoing synergies going forward. And, obviously that acquisition is accretive. Why can't the business grow 12% to 13%, 13% to 15% when you include Avid? I mean, are you projecting a slow down in the core business over the long term?

No, no. When we said -- do you remember the call when we put out the release in August that we were calling 13% to 15% EPS growth for 2013? We also said at the time in August that we projected total shareholder return of 10% to 12% going forward there after. Right? So, now we're talking 14%, 15%, 16%. So, you're asking can that number be higher? I think it's a little bit early to be taking that number up. Our algorithm is still delivering a 10% to 12% TSR in 2014 and beyond is intact right now. As far as taking it up, we'll talk about that again in the first week of February when we call 2013.

Got you. Thank you.

There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

Okay. Well, I thank you all for tuning in this morning after a very trying week last week. I just want to say we had a fantastic Q3. We are very thrilled with the results. We've told you all about the outlook for the rest of the year and for 2013 is preliminary at this point, but we feel very strong about that. I want to thank you all for taking the time to tune in. Hopefully, you love our results. Thank you.

This does conclude today's conference call. You may now disconnect