切遲杜威 (CHD) 2013 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Church & Dwight first-quarter 2013 earnings conference call. Before we begin, I have been asked to remind you that 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 uncertainty and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Jim Craigie, Chairman and Chief Executive Officer of Church & Dwight. Please go ahead Sir.

Good morning everyone. It's always a pleasure to talk to you, particularly we have outstanding results to report. I will start off this call with providing you my perspective on our first-quarter business results which are 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 of the quarter. When Matt is finished, I'll return to provide some more detailed information on the performance of our key brands and to discuss our earnings guidance for the year. We will then open the call to field questions from you.

Let me start off by saying that I'm very proud of my company for the first quarter business results that we achieved. Despite headwinds from weak consumer demand, the first quarter results reflect solid organic revenue growth on top of a very high a year ago base. A triple digit increase in gross margin versus year ago for the third consecutive quarter, higher marketing spending, which supported share growth on seven of our eight power brands, record quarterly operating margin of almost 22%, a 15% increase in earnings per share versus year ago, and strong free cash flow. In addition, I'm pleased to report that the integration of our most recent acquisition, the Avid Health company, is off to a great start. Driven by double-digit sales growth and better than expected cost synergies. This strong start to 2013 makes us feel very confident at this point in time toward the achievement of our aggressive annual EPS growth target of plus 14% versus year ago.

I'll now turn the call over to Matt to give you more specific details on our first-quarter results, and then I'll return to provide some further insight on the outstanding results of our key brands and provide additional details on my outlook for the year.

Thank you, Jim, and good morning, everybody. I'll start with earnings per share. First-quarter earnings-per-share was $0.76 per share, compared with $0.66 in 2012, and that's up 15% from year ago. Our reported revenues were up 12.8%, to $779 million, organic sales were 2% over the prior year high organic sales growth of 8.4%. The 2% organic calculation excludes the Avid acquisition, foreign exchange rate changes and is also net of a 1% reduction due to the estimated impact of our SAP implementation which took place on January 1, 2012. Of the 2% organic growth, approximately 2.4% is due to volume with 40 basis points of negative product mix and pricing. And once again, volume is driving our results.

Now let's review the segments. Consumer Domestics organic sales increased by 1.4% primarily due to sales of ARM & HAMMER liquid and unit dose laundry detergent, OxyClean laundry additives, Trojan products and First Response diagnostic kits. These increases were partially offset by lower sales of ARM & HAMMER powdered laundry detergent and Kaboom cleaners. Volume contributed approximately 1.8% to organic sales partially offset by 40 basis points negative effect of product mix and price. It is worthy to note that are domestic business is comping a 10% growth rate in Q1 2012.

Our international business increased organic growth by 5.2% in Q1 due to higher sales in Mexico, the UK and Australia. And this increase is driven by a 6.2% higher volume and is offset by 1% negative price mix. For Specialty Products division, organic sales increased by 80 basis points with favorable product pricing contributing 1.2% offset by 40 basis points volume decrease. And we expect to deliver organic sales for the company of 3% to 4% in Q2 and for the full-year.

Gross margin. Turning now to gross margin, our reported first-quarter gross margin was 44.9%, that's a 110 basis point expansion from the prior year. The increase in gross margin is primarily due to the positive impact of productivity. So, for example, the unit dose laundry production is in is in house, are Victorville plant which started up last year is now in full swing. The strong gross margin increase was also positively impacted by the growth of our high-margin personal care business and also faster than expected cost savings on the Avid acquisition. For the full-year, we now expect gross margin to expand 25 to this 50 basis points, up from our previously announced guidance of flat. And to the extent that we expand our gross margins in 2013, we intend to spend the incremental gross profit back on the marketing line.

Marketing spend for the first quarter was $79 million or 10.1% of revenues and that is a 30 basis point increase over the prior year spend rate and $10 million higher on a dollar spent basis. We continue to support new product launches and we grouped dollars share on seven of our eight power brands in the quarter. This is due to great execution by our sales and marketing teams. As in Q1, we plan to continue to invest any incremental gross profit in higher media spend to support our power brands in future quarters.

SG&A year over year was higher by $10 million. Remember that the vitamin business is now in our numbers. SG&A as a percentage of sales was 13.1% which is down 20 basis points from the prior year. And this primarily reflects the inclusion of the Avid business, but is partially offset by an increase in R&D expenses. For the full-year, we expect SG&A to be a proximally 12.8% which is down 50 to 60 basis points for the prior year. This is a reflection on our continuous vigilance over controlling SG&A.

Now operating profit. The reported operating margin for the quarter was 21.7%, which is 100 basis points higher than last year's 20.7%. 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 Nitronics joint venture. On a full-year basis, we expect a year over year decrease of $2 million in JV income. With respect to other income and expense, other income and expense was unfavorable year over year primarily due to interest expense related to the Avid acquisition. This holds true on a full-year basis as well, and we expect a decrease of $14 million in other income expense on a full-year basis primarily related to interest expense.

Next is income taxes. Our effective rate for the quarter is 34% compared to last year's 33.1%. The Q1 2013 rate was favorably affected by retroactive reinstatement of research credits, and the prior-year rate benefited from the settlement of an IRS audit. And we continue to expect the full-year effective tax rate to be approximately 35%.

Now let's talk about cash. We generated $72 million of net cash from operations for the first three months of 2013, and that is a $42 million decrease over last year. But remember that $36 million of that decrease relates to the deferral of our December 2012 estimated federal tax payments which was deferred to January of 2013 as a result of hurricane Sandy relief. This year's quarter also saw a larger increase in working capital. With respect to CapEx, we spent $10.4 million in CapEx, and that is a decrease from year ago. Stock buybacks, as previously mentioned, in February when we gave our full-year outlook, the company purchased $50 million, or 900,000 shares of its common stock in the first quarter. And that leaves us with approximately $220 million remaining on our authorization. We also paid down $50 million of debt in the first quarter.

I'm going to wrap it up now. In conclusion, the first quarter highlights include 2% organic sales growth, a wide expansion of gross margin driven by 2.4% volume growth and 15% EPS growth. Now I'm going to give you some comments on the second quarter. We expect second-quarter earnings per share of approximately $0.58 compared to $0.56 last year. And as we mentioned in the release, we expect Q2 sales in the 3% to 4% range and we also expect continued growth in our personal care business.

Secondly, gross margin will expand again in Q2, however, not at the same rate as Q1 and there are a few influencing factors. Here are a couple. We have the new distribution wins, that we've spoken about, are requiring much higher slotting year over year, and we have higher year over year couponing behind our new products. Most importantly, Q2 will also be marked by a significant increase in marketing spending to support our key brands to effectively drive share gain to offset a weak category environment. And finally SG&A in the second quarter will be higher both sequentially and year over year due to higher R&D spend behind our innovation efforts and also higher stock option expense. Back to you Jim.

Thanks, Matt. I will finish up our call today by adding a little color to the outstanding first-quarter results which Matt just took you through, and my outlook on the year. Most of you who have heard me speak before know that I've been a long-term pessimist about the business environment. The latest forecast of weak GDP growth, continuing high and employment, and weak same-store sales growth by are major retailers provide little hope for near-term improvement in the US economy. In fact, of the 13 categories that Church & Dwight operates in, seven incurred lower category dollar sales in the first quarter. Now, all consumer packaged goods companies are fighting these headwinds, but, as I told you many times before, I believe that no other consumer packaged goods company as well suited as Church & Dwight to deliver exceptional performance in a soft environment.

There are seven key factors that support that statement. First, we have the most unique product portfolio within the consumer packaged goods industry. It consists of both premium and value brands which puts us in a position to thrive that any type of economy, as exemplified by our ability to deliver double-digit EPS growth for 12 consecutive years. In particular, our value brands representing about 40% of our revenue base, have experience strong experienced strong growth in this recessionary economy as consumers are generally making smart choices by switching to and staying with our high-quality but lower-priced brands.

A great example of this is our value -based laundry detergent business which consists of two brands, ARM & HAMMER and XTRA. These brand sell for 50% to two-thirds less than premium price brand and deliver exceptional cleaning performance. Consumers love our value laundry detergent brands as proven by the fact that more US households buy a value brand than premium or mid-price laundry detergent brands. The great value delivered by our two value brand has resulted in outstanding growth.

ARM & HAMMER liquid laundry detergent has delivered 13 consecutive quarters of share growth versus year ago. In the most recent quarter, it achieved a record quarterly dollar share of 9.1% which enabled us to surpass the All brand to become the number three brand in America. ARM & HAMMER was the only laundry detergent brand with a unit dose form that did not incur lower year over year sales of its liquid form in the first quarter. Our XTRA brand also achieved share growth in the first quarter. It is now the number two liquid detergent laundry brand on a wash load basis representing one out of seven wash loads in America. The strong, consistent share growth with both of these brands has enabled Church & Dwight to increase its liquid laundry detergent market share by 50% over the past five years, and become the number two laundry detergent company in America.

The second factor which is a key driver of Church & Dwight success, is that we have a proven record of building our power brands. We have over 80 brands, but eight of these brands are our historic power brands with generate 80% of our sales and profit. From 2008 through 2012 we grew market share on each of these power brands in almost 75% of the quarters. In the first quarter of this year, we grew market share on seven of our eight power brands.

Three key factors drove these excellent share results. First, we have effectively reinvested some of our increased profits from the strong growth of our value brands to increase marketing support on our eight power brands. In the first quarter of 2013, as Matt told you, we increased our marketing support by over $10 million versus year ago, which represented a 30 basis point increase.

The other factors driving the growth of our power brands is a robust pipeline of new products. Over the past four years, new products delivered about 15% of the company's organic revenue growth. We plan to ship innovative new products that every key category this year to support delivery of our organic growth target of 3% to 4%. We expect these new products to be a successful as the new product we introduced over the past four years. And we expect these new products to drive improved category growth, by providing consumers with new and improved benefits.

A sample of these new products include ARM & HAMMER's new Ultra Power laundry detergent which provides consumers with a more concentrated liquid laundry detergent in a smaller bottle which is easier to handle, more environmentally friendly, and, unlike the new unit dose those products, it provides dosage control for lightly soiled to heavily soiled wash loads. We are also passing some of the savings from the smaller bottle back to consumers in the form a 20% more wash loads.

Other new products that have been launched in 2013 or late 2012 include Trojan's new Pure Ecstasy condom and a new-line of Trojan lubricants, the new Spa Clay line of products, Tooth Tune toothbrushes, which play music by the highly popular One Direction boys band, ORAJEL single-dose cold sore treatment, and OxyClean dish washing booster. Details for these great new products are on Church & Dwight's website.

Part of the increased marketing spending behind these innovative new products is increased sampling. For example, we will drive awareness and trial of our new Trojan lubricant line by providing samples in 4 million boxes of Trojan condoms. And to drive awareness and trial of our great-tasting line of gummy vitamins, we will increase the sampling by over 60% versus last year. In addition to the increased marketing spending and innovative new products, the other key drivers of share growth on our power brands is the increased distribution. As a result of the consistent strong share growth on our power brands over the past five years, the Church & Dwight sales force has worked closely with our key retail partners to increase the shelf space of our brands to meet the increase consumer demand and minimize out of stocks.

The distribution gains achieved in 2013 across all brands was the greatest in my nine-year tenure as CEO. And along with the increased marketing support and great new products, should drive continued strong share gains for Church & Dwight in 2013. Timing wise, the new products and distribution gains did not begin impacting retail results until late March. So while there was some minor benefit in the first quarter, the full benefit should start occurring in the current second quarter.

Let me just wrap up this point about my company's ability to grow our power brands with the following recap of Q1 results on our key brands. OxyClean Powder Laundry Detergent additive achieved record quarterly share 43.3% on a double-digit sales increase, and is now over two times larger than its nearest competitor. ARM & HAMMER cat litter achieved its 37th consecutive quarter of net sales growth. SpinBrush is the number one battery-powered tooth brush across all classes of trade, and is number one for both kids and adults. In fact, this new brush kids line has doubled its market share since 2009 and now represents five of the top six selling SKUs including two of the hot new Tooth Tune products. The Trojan brand achieved record quarterly sales and grew its share to 76.2% of the US condom business, driven by having all 10 of the top 10 selling retail SKUs in the condom category.

First response pregnancy kits achieved a record quarterly share of 31.5% and is been a number one selling pregnancy kit for 33 consecutive quarters. And Nair achieved share gains in the first quarter to maintain its leadership position in depilatories for the 34th consecutive quarter. And finally, our new Avid acquisition had a terrific first quarter. Our vitamin business consumption was up 38% versus total category growth of about 8% as measured by Nielsen all-outlet dollar sales. As a result, both VitaFusion, the adult gummy brand, and Little Critters, the kid gummy brand, achieved record shares of their respective adult and kids category.

That's a pretty impressive scorecard for Q1 results and as I said earlier, the first quarter results only reflect a partial benefit from the new products and increase distribution since the benefits did not begin impacting sales until late March. We expect to experience the full benefit of these initiatives and the remaining three quarters of 2013. But let me run quickly run through the five other key drivers of Church & Dwight's success. Number three as we have a proven history of ferociously defending our brand as evidenced by our ferocious defense of OxyClean when a large competitor entered the category several years ago. OxyClean not only deflected that attack, but now has strengthened its leadership position through record share levels achieved in the first quarter.

The number four factor behind our continued success, is the strong growth of our international business. While international business represents only about 20% of our total revenues, it has delivered high-single-digit sales growth and double-digit operating profit over the past five years. And as Matt mentioned earlier, this strong share growth continued in the first quarter was 5.2% organic growth driven by excellent results in Mexico, the UK and Australia.

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've expanded gross margins by 1,450 basis points over the past 11 years. Headwinds from higher commodity costs stalled our gross margin improvement in 2010 and 2011, but we were able to overcome these headwinds by the middle of 2012 to deliver two consecutive quarters of 100 plus basis point gains in gross margin versus a year ago in the third and fourth quarters of 2012. This momentum continues in the first quarter of 2013, with a 110 basis point increase in gross margin versus year ago despite the drag from the lower margin Avid acquisition. As Matt mentioned earlier, we now hope to deliver better than expected gross margin results for the rest of 2013.

The sixth factor behind our continued success is our ability to tightly manage overhead costs. Church & Dwight currently have a highest revenue per employee of any major consumer packaged goods company. As Matt mentioned earlier, our SG&A costs were 20 basis points lower in the first quarter to 13.1% of net sales, supported by the leverage gains from the Avid acquisition which added significant sales with minimal additional overhead.

Finally, factor number seven is our strong record of free cash flow conversion. We have quadrupled our free cash flow over the past 10 years. Over the past five years, our free cash flow conversion as a percentage of net income was 120.1%, which was best in class and the consumer packaged goods industry. As Matt told you a few minutes ago, we continue to deliver strong free cash flow in the first quarter. 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 construction of more efficient new plants and the acquisition of leading brands.

All of these factors give me great confidence about our ability to deliver our aggressive 2013 business targets despite the very tough business environment facing all companies these days. In my biased opinion, no other consumer packaged goods 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 growth during the slow economic recovery and we are taking actions to ensure that we continue to deliver exceptional EPS growth going forward regardless of the future economic environment.

Let me switch gears now and specifically talk about our outlook for the rest of 2013. 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 $2.79, which is an increase of 14% over 2012 adjusted EPS. We believe that we can deliver this aggressive EPS target despite continued expected headwinds from weak consumer demand.

Our confidence delivering this aggressive EPS target is based on two key factors. First, we believe that we can deliver the market share gains in our power brand 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 strong marketing support. Second, we now believe we can continue deliver gross margin expansion of 25 to 50 basis points in our total business in 2013 including the new Avid acquisition. We previously believed that our gross margin of the total business would be flat versus a year ago as gross margin improvement on the pre-Avid business would be offset by the lower margin Avid business. The higher projected gross margin will now enable us to increase marketing spending on our power brands versus a year ago to deliver the stronger share gains that we need to offset the weaker than expected category trends. This will enable us to ensure delivery of our 3% to 4% net revenue growth target and very aggressive 14% earnings per growth -- earnings-per-share growth target.

In conclusion, 2013 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 in 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 to deliver strong EPS growth. This ends our presentation. I'll 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). Ian Gordon, S&P Capital IQ.

Yes, I guess I just wanted to ask, you gave some color on the Avid market share as I think maybe it was going a little bit fast. On the contribution to sales in the quarter was I think 12.8%, a tad lighter than it was in Q4, Would that be seasonality or any potential slowdown? And can you give any color as to maybe the underlining year-over-year growth rates that Avid's experiencing as we think about how that will contribute to -- over the first 12 months and then as it goes into organic sales?

Yes, the fourth quarter is typically the strongest quarter of the four quarters of the year for the Vitamin business, and no, there is no slowdown year-over-year in Q1. So, we called double-digit growth rate for Avid for 2013 versus 2012, and we are well on track for that, not only in the first quarter, but for the full-year. And the comment with respect to consumption being up 38%, remember that excludes the club class of trade, which is obviously a significant piece of the Business, as well. You may recall when we announced the acquisition that we had four customers that accounted for about 3/4 of the sales, and club -- Costco would be one of them.

Great, thanks.

Michael Seavey, Credit Suisse.

Good morning, Jim. Can I ask a follow up question on your comments with regards to the laundry segment? You made references in the past to increased distribution of the laundry brands in particular gaining more shelf space. To what extent was that a driver at the moment behind the continued growth despite the weaker category growth that you mentioned?

Yes, well Michael, in the first quarter, it had very minimal effect. Most of the distribution gain occurred right at the end of the first quarter. In fact, it is still occurring early in the second quarter. So, the second quarter is a much bigger impact from that in the first quarter than -- you eat a little bit more in the third quarter when the full distribution is out to all the accounts. As I said in my presentation, this is the biggest year of distribution increases in my nine-year history here and it reflects the retailers adding shelf space for our brands because of their very strong and continuous share growth.

Okay. Thank you.

Jason Gere, RBC Capital Markets.

Hi guys. I guess I want to talk a little bit about the cost of doing business, because one of the common themes we've heard during earnings season is that driving that top line is costing a little bit more than usual. The big dog, as you referred to them, is saying the promotional environment has not really changed, and we are hearing otherwise. So I guess, one, I wanted to see if you can flesh out a little bit more about sampling promotional spending that is out there? Would innovation and obviously without innovation, and then second, how do you feel about your cost savings program in order to drive some reinvestment back into the marketing line? I guess just wanted to get a little bit more color on that first.

Well, Jason, I would tell you our cost-saving programs has been a long part of the history of the Company. It is a terrific program. We are already looking at cost-saving programs three years out right now and working and planning on them. So, this isn't some sort of new culture at Church & Dwight, this has been part of our culture for long time. As far as, you said -- I think you made comments about the pricing environment out there or the activity out there, I would say we're seeing maybe a little uptick in the merchandising activity out there by some competitors, but nothing significant.

Okay. And then I guess secondarily, when you look at your price mix it was negative in the quarter, so as we think going forward is that going to be -- how much is that going to have to increase though in order to keep driving the volume? Do you feel comfortable that it's going to be just a modest uptick or is this just more of -- more of what we've seen just out there?

Yes, Jason, this is Matt. Historically, our organic growth rate has been driven by volume and as you point out, in the first quarter, we had a 2.4% volume growth and 40 basis points off that negative price mix. Remember that 2.4% is also adjusted -- impacted by that 1% SAP adjustment, we felt was appropriate. But we do expect going forward in the future that volume is again going to be driving our results. And only business that has had been hurt on a volume basis historically has been our specialty products business that is driven more by price than volume, but on a consumer side, both domestic and international, we expect volume will continue to be the driver of organic growth consistent with the past.

Okay. And then just the last question and I'll hop off. When you talk about the marketing spending for the year, and obviously you have the step-up you are doing on Avid as well, can you talk a little bit, about in terms of the second quarter, because again similar to what we saw in the first quarter, I think street expectations are coming down because I think you guys are talking more about the marketing spend this quarter? Thankfully you came in better than expected. So, I guess I'm trying to contextualize the marketing spend in this quarter. When you say significant, how significant, and then for the full-year we think about marketing spending that's back at 2011 levels?

Well, the first quarter, the marketing expense was 10.1% of sales and that is up 30 basis points year-over-year. So, I wouldn't characterize 30 basis points as significant as an increase year-over-year. So, obviously, Q2 is going to be significantly greater than that on a year-over-year basis. And remember that our historical algorithm as a Company is that as we expand gross margin, we spend it back on the marketing line.

So, just as we held our EPS call for the year, yet we are saying that on a full-year basis were going to have 25 to 50 basis point expansion in gross margin. At the same time you would expect then that the marketing line would again expand at a similar rate on a full-year basis.

No, that is very helpful. Thanks a lot, guys.

Joe Altobello, Oppenheimer & Co.

Hey guys, good morning. Just wanted to start with category growth. You mentioned I think earlier that of your 13 domestic categories, seven were down in dollars. So, just back of the envelope it sounds like you're assuming roughly flat category growth this year. I'm just trying to put that 3% to 4% organic growth into some context that is all.

Yes, Joe, we don't have an exact prediction of category growth going out there. I'll just tell you, we're doing everything possible to drive category growth because I told you seven of our 13 categories we track were down in the first quarter, and that six of the eight of our power brand categories. So it is something that concerns us. The good news is that we are going to be launching -- the innovative products we launch are terrific and we're going to be increasing marketing spending behind it, and I would say early signs are terrific.

We mentioned on gummy vitamins our consumption growth was 38% and that is supporting an 8% category growth. Tooth Tunes had a first-quarter consumption growth of 12%, which is helping drive it category up 12%. ORAJEL Single Dose Cold Sore was up 45% consumption the first quarter, that helped its category grow 16%. And the OxyClean dish washing booster, another one of our major new products, has now achieved a 10% share in its first year, and it's helping drive a 10% category growth. So, we are very concerned about the environment out there with consumers and -- I mean the category stuff. And we view it as our role to in launch innovative new products and support them with strong marketing support to get these categories growing.

And also I didn't mention our biggest one of all is our Refrenel liquid laundry detergent. We are launching a new ultra power laundry detergent product. It's the new -- next level of concentrate, we call it 4x. Terrific product. It's a win-win-win across the board. It's a win for consumers; it easier to handle for consumers and stores, and it's environmentally friendly. It's more versatile than Pods. The consumers can adjust the uses to loads both big and small they can also pre-treat with it. And it's a better value.

Were giving consumers 20% more loads in the product. It's a win for retailers; they get reduced distribution costs, higher shelf return on investment. And it's a win for manufacturers. It's lower distribution cost in packaging. Again this is an liquid category which is 77% of the laundry detergent market out there, and we know from history liquid compacts with the proven winner the last round of compaction liquid laundry detergent drove the category up 5%.

Currently you've heard from folks are Clorox the current bleach compaction is driving their category up 6%. So this is something we want to really pound behind. Early results are very promising. We just started launching this product in late Q1. We got great distribution that was incremental to our existing laundry detergent line. Early-early-early sales results are promising and it looks like it's driving incremental sales.

So, we are taking the lead here to get growth going in the liquid laundry detergent category, which was down 10% in the first quarter. And that's not a good number on 77% of the category to be down 10%. So we are taking the lead on the next round of concentration. Think we got a great product that will be a winner for everybody out there, and maybe our competition will wake up and follow our lead.

Okay good, because that's where I was going to next, the liquid laundry category. It looks like -- it seems like there's a lot of confusion, because you've got base detergent, you've got unit dosing and you've got a compacted version now out there in the category. So, is it more that the consumer is confused or that you are not seeing the level of overdosing with the proliferation of unit dose now?

No, I would say, Joe, it's a little bit of good news and bad news. The bad news is that Pods is clearly driving decline in the laundry category, and the second big factor is the price decline by our friends in Cincinnati and powder. The good news is that Pods penetration of laundry has flattened out at 8%. It was 8% in Q4 of last year, it's 8% in Q1 of this year.

The other piece of good news is we will shortly be lapping the launch of pods that was started Q2/Q3 last year and so that will -- that impact will be behind us, and we feel proud of the fact that our laundry detergent -- liquid laundry detergent brand ARM & HAMMER was the only one that launched a unit dose form that did not suffer lower sales going out there. So, we feel we're in good position. We are glad, hopefully, that pod impact is shortly behind us. And again, we are going forward to focus on something to bring attention back to the liquid category which is 77% of the market.

Okay. Great. Thanks, guys.

Bill Schmitz, Deutsche Bank.

Hello, if you look at the Nielsen data, it looks like sales accelerated throughout the quarter, and then the latest April data looks actually really good. So, what's driving that and is that trend continuing? When did Walmart come in with new sales space? Lou should be pretty proud of the way that set looks, and is that helping incremental sales also and should we read forward on that acceleration as the quarter progresses?

Well, Bill, as we said, the new distribution and the new products both came on very late in Q1. So, yes, I do think you're seeing a little bit acceleration of our share results and some sales results. Then again, merchandising is lumpy. Sometimes you have a lot of merchandising in one month and then a month where you don't have it, and then a month back. So, it's somewhat of a combination of the new distribution of new products and new merchandising and yes we had some very, very strong results in April, but it doesn't mean it's going to be every month like that. But overall, we feel very confident now that will deliver the 3% to 4% sales growth that we have, and that's -- in the old days that would've been an okay number, but when you're doing 3% to 4% against category growth that's basically flat, that is even a more terrific result.

Great. And then, Matt, when you look at the gross margin change versus your previous guidance, is that more the Base business or is Avid's gross margin coming in better than you thought.

Yes, the Base business is starting off really well this year there is no doubt about that. And it's also true that Avid is improving faster than we thought. With respect to Avid, just to refresh your memory, we had targeted $15 million of synergies by mid- 2014, and that synergy, those were both COGS and SG&A. Now, the thinking right now is, we still think -- we feel really good about $15 million by mid-2014, but $9 million of that is going to be in 2013, $6 million in '14 and the way that would split out is the $9 million this year, think half-and-half. Half is COGS and half is SG&A. And then in 2014, that $6 million would be all COGS.

And how much of you gotten so far?

Oh, as you know, we don't, for competitive reasons, we don't talk about gross margins with respect to our brands and products.

Is it more less than $9 million?

(Laughter)It's less than $9 million, the other thing too, with respect to gross margin and thinking about the second quarter, we are up gross margin Q1 110 basis points and marketing was up 30. So, you can expect that the reverse is going to happen in the second quarter. So, gross margin is not going to be up as much, but marketing is going to be up quite a bit. And the impact there is, as Jim pointed out, we have super new distribution so we've got higher slotting, that happened Q2, and then we have lots of couponing going on, as well behind our new products, as well. So, so that's kind of Q2 is kind of an inverse of Q1.

Got you. Great, guys. Thank you very much.

Caroline Levy, CLSA Limited.

I'm sorry, I just hopped on the call, so I don't know which questions have been asked or not because that have been an overlap with Estee, but did you are ready elaborate on the Laundry business?

Yes, we did.

Okay I'll follow-up, thank you.

Christopher Ferrara, BofA Merrill Lynch.

Can you clarify a little bit the strategy on concentration on this new round of compaction that you guys are running? Do you guys need this to end up driving another round of traditional compaction, or is this product -- do you happily have this product exist as sort of a niche product that maybe you can gain or you have gained incremental sales shelf space, but maybe you gained a little bit more? How do you think about it over the long-term? Does it need to drive another round?

Well, Chris, our desire would be to drive another round of compacting all liquid laundry detergent products out there. Again, that was a huge proven winner four plus years ago, drove the category up and it's a great win. It's great for the environment, it's great for sustainability as they call it. So, the consumer wins, the environment wins went, the retailer wins by saving money on distribution costs, and gets better shelf return, you get more better bottles on the shelf, (inaudible) stock. In this case though -- this case something new is we pass some of the savings on to consumers. We are putting 20% more loads in the bottle. Consumer's aside, getting easier to handle and store, and helping the environment, less waste out there, they get 20% more loads.

So this does drive the category out there. Consumers do love liquid. It's still 77% of the business. They can adjust how they use liquid, you can't adjust the pods, you can pre treat with it. It only makes sense - consumers have little loads, big loads, heavily soiled, lightly soiled you can't have the versatility of liquid out there. So we're trying to bring attention back to the big dog in the category, which is liquid, and do something which we think will be good for, again, the consumer, the retailer, and the manufacturers in this category. And we're taking the lead to show everybody and hopefully everybody else will realize this. They should, history proves that, the bleach guys are proving it right now out there, that being a win-win-win -- so we decided to take the lead, even though we are not big guy the category.

And I guess is it realistic to think something like that could happen while unit dosing is running its course? And I guess as a follow-up to that, at an 8% share, where do you think retailers are? And I know you have that the view that retailers are going to look up and see that the category growth rate is suffering. Do you still think that 8% is too small and this product will go by the wayside? And do you need that to happen for anyone to realistically think about another round of compaction?

No, Pod is here to stay, but as I told you earlier, it's flattened out. It was 8% at Q4 -- of Q4 last year, and 8% of this year. So it's serves a need. It's a nice product. All the major brands have their version of pods. So it is out there.

I would tell you it's overshelved. It's about 20% of the shelf space, so I think retailers ought to bring it back to about 8% of the shelf, in line with its percent of the marketplace. In just -- go forward it's been a nice little addition to the category, but it's only half the size of powder, about almost 1/9 the size of liquid. So let's put the focus back in the category and what is a big part of the category to get this category growing again.

And then, finally with Proctor bringing on your new capacity and Pods and probably likely to lunch another flurry of promotion and advertising in that -- just for the format of unit dosing to begin with, you've got to think 8% is going to go higher, no?

Well Chris I don't understand something. Two years they predicted this category, that pods would be 30% of the category, two years later it's 8%, so why are they out of capacity?

Yes, thanks, guys.

Bill Chappell, SunTrust Robinson Humphrey.

Good morning. Maybe to start off looking at the commodity outlook and what you are seeing now, maybe where you're hedged, and what ability you have with, I would think, more tame commodity environment to do any additional pricing this year?

Yes, Bill, there are eight inputs that account for most of the volatility in our COGS, and we are 65% hedged at this point. And I should think most people know that commodity headwinds have abated. So I think that is one of the reasons why, if you look at what is happened to us in Q1, that a lot of our productivity efforts have dropped through because we have less of a commodity headwind. And so, going forward, certainly and for the remainder the year we are not expecting that commodities are going to restart, climb higher. And as everybody has read that a lot of people think the big cycle on commodities could be ending.

And then in terms of looking at the gross margin, you may have touched upon this, but do you expect to gross margin to be up every quarter, and was there any incremental benefit this quarter from the timing of slotting fees year-over-year?

Yes -- second quarter is what is going to be impacted by gross -- by slotting and couponing, Bill. So, what I said earlier is that in the first quarter, gross margin is up 110 basis points, and we don't expect the second quarter to be nearly up that amount because of slotting and couponing behind the new products and new distributions, etc. As far as calling each quarter individually, it's a little bit too early to do that.

Okay, and then just last one, I think over the past two or three years you have made some movements with your cash balance in the first quarter, be it a share repurchase or stepping up the dividend, or what have you. Is the thought now, post-Avid, you want to just build up the cash balance for a while and look at other acquisitions, or would you look to do other things at these levels?

Yes, but when we announced our earnings in the first week of February, we raised the dividend, so we are committed to maintaining a 40% payout. At the same time, we are generating lots and lots of cash here, so we did pay down $50 million of our debt. But, as you know, we expect to generate $400 million plus of free cash flow on an annual basis. So, we are always in the hunt for new acquisitions. As you know, we are not regarded as a shopper, we are regarded as a buyer. Consequently we are aware of just about everything that does come to the market, and we continue to look, but we wouldn't comment on any activity that were engaged in with respect to M&A.

Okay. Great. Thank you.

Lauren Lieberman

Good morning. Just wanted to talk about marketing spending. So, first off, I was surprised in the quarter because I thought just simply the mix of having Avid in the P&L would make marketing expenses look like they were lower as a percentage of sales, and yet they were up. So did you increase on the Base business that much this quarter, or was it just you started already accelerating the spend on Avid?

Just one, and then two, on the same topic is just, last couple of years as gross margin was a little tougher because of commodity costs, the flip side was trimming marketing and top line held up great and clearly was in an actual issue, but that is the dynamic we saw in the P&L. This year goes in the reverse. So, I guess what is the incremental benefit you're thinking you'll get from the higher marketing spending while the top line has already been so solid with you pulling it back to lower level?

Thanks.

Lauren, this is Jim, let me take the second one first.

You're exactly right, as we are now showing gross margin improvement, and as Matt said, we will be spending back roughly half of that on the marketing line, so we have increased our marketing support. Old days, you would say that would help the net revenue line, but what we are facing now that we have faced before is weaker categories. So with the weaker categories we need to be spending more money to get your 3% to 4%, where in the past that wasn't necessarily necessary to get there. So that's the story on that one. As far as the A&P on the Avid we have increased it, but, no, we spent more in the base business that has helped out. So, Avid is going to increase, we said we'd double the spending on that business. It was are pretty low before got it, but were going to get it up in the double-digit range on that to drive sales.

Okay. Great. Thank you. And just quickly on unit dose. I know I missed most of the conversation, it think, on laundry, but I was curious if you think there is much substitution going on that maybe some of the drag you're seeing in the powder business is people switching to your unit dose product? Because your unit does looks and smells like powder in a capsule, and that maybe some of that is just cannibalization within your own portfolio? Does that make sense?

No. (Laughter) Yes, come I see where you could make sense of that, but no -- it's a good question -- 90% of our business of unit sales are coming from liquid. Which is more in line with the fact that liquid is 77% of the category. So, no come our result market research so it's highly cannibalistic of the liquid business for all manufacturers.

Okay. Thank you.

Alice Longley, Buckingham Research Group.

Hi, and I apologize if you've given out some of these numbers. So you say your categories have slowed. What is their growth this year versus maybe what it was last year? And what is the category growth for detergents overall? And when do you think detergents growth gets better?

Yes, Alice, we quoted the fact that seven or 13 categories were down in the first quarter. We don't really call a number on the year. We just feel in our hearts, that given what the economy is going, we're not going to see much improvement out there in the categories. That is the reason behind with the gross margin improvement we're going to be spending back about half of that to help drive stronger share gains, and the share gains will help us to get to the 3% to 4% revenue growth out there.

On liquid, you know the liquid -- the laundry detergent category overall -- liquid, powder, unit dose, was down 4% in the 1st quarter. Liquid was down 10% so not a good situation going on, and as I've told some people were going to be working hard with spending more money in the category and launching the new Ultra Power form, which is the next concentrated form, to try to get the focus back on the 77% of the business which is liquid and drive better results in that category.

When -- in the 2nd quarter, could you tell us what your share was, up or down in the first quarter? And then how much you think it will be up, I'm hoping, in the second quarter, and what will drive that the most? Will it be the concentrate, will it be the incremental shelf space? What drives your share change into the second quarter?

Yes, I don't have -- both ARM & HAMMER and XTRA shares were up in the first quarter a couple of tenths. I can't give you exact -- I think it was 9.1% in ARM & HAMMER, and I don't remember the exact number and XTRA. The second quarter we will drive our Business through a combination of things, Alice. We do have more distribution out there in a lot of major retailers and we have new products out there and the form of the Ultra Power. So, we expect that to drive some continued strong share gains. I'm not going to call a number, but we do expect share gains -- we need share gains to help deliver our -- the business results we expect.

And do you think it's the incremental shelf space that's helping more, or the innovation?

Both.

Alright. Thanks.

John Andersen, William Blair.

Morning. Sorry if this is already been discussed. I just jumped on. I went to ask about the International business, which strengthened from a top line standpoint on a tougher comp in the quarter. Just a little more color on where you're seeing strength there, what is driving that, and how you're thinking about the organic sales growth for the full-year in that part of the Business?

Yes, it the International business historically has grown in a similar fashion as the Domestic business. We have a 3% to 4% algorithm and they have been able to meet or exceed that historically every year. The businesses that are doing well in the quarter are three countries. One is the UK, there is Mexico and the third is Australia.

I'll start with Mexico since that's probably the biggest winner. We've been making great inroads down there with respect to our household products and ARM & HAMMER south of the border. In Australia, Australia has historically been our fastest growing business, and if you look at any of our prior year earnings releases you will see Australia is almost always one of the drivers, and we got some terrific products over there.

Curash is a local brand that's been growing year-after-year, which is a children's rash brand as you can probably guess. And finally the UK, the UK has had some success with respect to pricing and pulling back from trade still without losing any of our volume. And by the way, you probably also wondering what the Batiste brand, which is our dry shampoo which we bought over in the UK and it's been growing very, very rapidly and continues to drive results in the UK.

That's the one that is about 6% share of the hair care category, is that right?

That is correct.

Okay second question just on Victorville is, where are we in terms of the benefit from that facility in terms of gross margin? Have you hit run rate in that plant, or is there more to come there?

No, I think there is more to come out Victorville, but generally what we build the plant, this plan has been going full blast since July of 2000. So once you get into a full year, you're pretty your pretty much rocking. And we have put more capacity in there and too the extent that we are able to leverage our fixed costs will obviously driver gross margin.

And there's no further questions this time. Sir, give any closing remarks?

I just want to thank everybody for taking the time to listen to our call today, and like I said in my first opening I'm very proud of my Company. We had a great quarter. And we are looking forward to having a great year. So, thank you very much.

Thank you for joining today's conference call. You may now disconnect your lines.