切遲杜威 (CHD) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight second 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 risks and uncertainties and other factors that our 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 when we have good results to report. I will start off this call by providing you with my overview of our second quarter business results, which you read about in our press release this morning. I'll then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with his perspective on the financial details for the quarter. When Matt is finished, I'll return to provide 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 second quarter business results that we achieved.

Despite headwinds from weak consumer demand and increased competitive pressures, the second quarter results reflect double-digit net sales growth of 13.1%, a triple-digit increase in gross margin versus year ago for the fourth consecutive quarter, a 17% increase in marketing expensing versus year ago, which supported share growth on seven of our nine power brands, a 15% increase in operating income and a 20 basis point increase in operating margin versus year ago, a 9% increase in earnings per share versus year ago and a 17.8% increase in free cash flow versus year ago. 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 towards the achievement of our aggressive annual EPS growth target of a 14% increase versus year ago. I'll now turn the call over to Matt to give you specific details on our second quarter results. Then I'll return to provide some further insights in the key results of our key brands and provide additional details on my outlook for the year.

That you, Jim, and good morning everybody. I'm going to start with EPS. Second quarter EPS was $0.61 per share compared with $0.56 in 2012. That's an increase of 8.9% from a year ago. Reported revenues were up significantly, up 13.1% to $788 million. Organic sales for our global, domestic and international consumer businesses were up 3.2%. However the specialty products organic sales was down 11.2% due to a large drop in demand from our dairy customers as a result of the colder than normal Q2 weather. Our all-in organic sales was up 1.8% and of the 1.8% approximately 2.7% is due to volume with 90 basis points of unfavorable mix and price. Now let's review the segments.

The Consumer Domestic business's organic sales increased 2.5%, primarily due to higher sales of ARM & HAMMER liquid detergent, OxyClean laundry additives, Trojan products and First Response diagnostic kits. These increases were partially offset by lower sales of ARM & HAMMER powder laundry detergent and Nair depilatories. Volume contributed approximately 4.6% to sales, partially offset by 2.1% unfavorable effect of product mix and price. The International business increased organic growth by 6.3% in Q2 due to higher sales in Canada, the UK and Australia. We also had an easy comp year-over-year. This increase is driven by a higher volume of 2.8% and by 3.5% from product mix and price. For our Specialty Products Division the organic sales as I said decreased 11.2%; volume represented 10.9% of the decrease.

Turning now to gross margin, our reported second quarter gross margin was 44.6%, a 110 basis points expansion from year ago. The increase in gross margin is primarily due to the positive impact of our productivity programs. We have now had four consecutive quarters of 100 basis points or more of gross margin expansion beginning with the third quarter of 2012. When we started up our Victorville, California, plant we also brought laundry pods in-house and we increased cat litter prices. Our 2013 improvement projects have also contributed to the four-quarter gross margin of streak. Also in Q2 was the third consecutive quarter of personal care growth. The gross margin expansion in Q2 was better than expected due to faster realization and larger than expected cost savings in the gummy vitamin business.

For the full year, we now expect gross margin to expand 50 to 75 basis points, which is up from our previously announced guidance of 25 to 50 basis points. And to the extent we expand our gross margin, we intend to spend a portion of the incremental gross profit back on the marketing line as we did in the second quarter. Marketing spend for the second quarter was $103 million or 13.2% of revenues. That's a 50 basis points increase over the prior year's spend rate. We continue to support new product launches and we grew our dollar share for six of our eight power brands in the second quarter and this is due to great execution by our sales and marketing teams. We expect full-year marketing as percentage of sales to be up about 30 basis points to approximately 12.5%. SG&A year-over-year was higher by $14.6 million primarily reflecting the inclusion of the Avid business. SG&A as a percentage of sales was 13.6% and that's up 40 basis points from year ago and that reflects higher stock option expense but is partially offset by the leverage of the gummy vitamin business.

For the full year we expect SG&A to be approximately 12.9% of sales and that would be a 40 basis points improvement from the prior year. This is a reflection of both our constant vigilance to control SG&A as well as acquisition leverage. Operating profit is next. The reported operating margin for the quarter was 17.8%, which was a 20 basis points increase over last year's 17.6%. Income from our affiliates decreased year-over-year primarily due to a charge associated with one of our joint venture affiliates and other expense was higher year-over-year primarily due to interest expense related to the Avid acquisition. Next is income taxes. Our effective rate for the quarter is 34.5% compared to last year's 35.6%. We continue to expect the full-year effective tax rate to be approximately 35%.

With respect to cash, we generated $161 million of cash from operations for the first six months of 2013. That's a $28 million decrease over the prior year on a reported basis but remember that we deferred a $36 million federal income tax payment from December 2012 to January 2013 as a result of Hurricane Sandy relief. So apples to apples, cash from operations is up $8 million year to date. We spent the $20.1 million in CapEx, which is a $19.9 million decrease from a year ago, which remember included the 2012 construction of the Company's Victorville, California, plant. And we now expect full-year CapEx to be approximately $80 million. Regarding other destinations for cash, no shares were purchased in the second quarter and we have approximately 220 million remaining in our authorization. We did pay down $50 million of debt in the second quarter and so far this year we've paid down $100 million.

I'm going to wrap it up now. The second quarter highlights include 3.2% organic sales growth for the global consumer business, 110 basis points of gross margin expansion, excellent progress from the gummy vitamin business and 8.9% EPS growth. Regarding the full-year, we now expect full-year organic sales to be approximately 2%. If we take the midpoint of our previous 3% to 4% outlook, so let's call that 3.5%, there are two factors that bring it down to 2%. First, 50 basis points is due to an expected full-year sales decline for our Specialty Products Division as we do not expect to overcome the weak Q2 results. The remaining 100 basis points is from negative price mix, which reflects our decision to be price competitive and respond to increased discounting in a few of our categories. That 100 basis points also reflects weak category performance including laundry which is expected to partially offset our significant distribution gains.

With respect to gross margin full year, we -- as I mentioned earlier, we expected to increase 50 to 75 basis points as we continue to gain the benefit of our productivity programs and capture synergies from our gummy vitamin business. And on the operating margin line we expect approximately 70 basis points of operating margin expansion in 2013, which is well balanced in that it includes gross margin expansion, a spend back into the marketing line -- increased marketing, and SG&A leverage as well. For Q3 specifically we expect 1% to 2% organic sales growth, which reflects many of the same factors I spoke about with respect to the full year.

Q3 gross margin will be comparable to the prior-year quarter. This is an improvement versus our previous thinking, given the performance of our gummy vitamin business. And remember we will be lapping some of the large benefits which began in Q3 of 2012 and we will be absorbing the impact of more negative price mix. And Q3 will also be marked by an increase in marketing expense to support our key brands. Finally we expect that 10.6% increase in third quarter earnings per share to $0.73 per share compared to $0.66 per share last year. Back to you, Jim.

Thanks, Matt. I'll finish off our call today by adding a little color to the second quarter results Matt just took you through and my outlook of the year. As stated earlier, those of you who haven't 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 by major retailers provides little hope for significant near-term improvement in the US economy. In fact, of the 14 categories that Church & Dwight operates in, five incurred lower category dollar sales in the second quarter versus the prior year and five more had category growth of less than 2% versus the prior year. Now all consumer packages companies are fighting these headwinds.

As I told you many times before, I believe no other consumer packages company is as well suited as Church & Dwight to deliver exceptional performance in a tough environment. There are seven key factors that support that statement. First, we have the most unique product portfolio within the CPG industry. It consists of both premium and value brands which puts us in a position to thrive in any type of economy as exemplified by our ability to deliver double-digit EPS growth for the prior 12 consecutive years. In particular our value brands, representing about 40% of our revenue base, have experienced strong growth in the 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 brands sell for one-half to two-thirds less than the premium-priced brands and deliver exceptional cleaning performance. Consumers love our value 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 steady share growth. In the second quarter, ARM & HAMMER liquid laundry detergent achieved a record quarterly share of 9.6%, which was its 14th consecutive quarter share growth versus year ago and enabled us to of to pass the All brand to become the number three brand in America. ARM & HAMMER was one of only two major brands to deliver share growth in both the second quarter and the latest 52 weeks. And I just learned yesterday that ARM & HAMMER liquid laundry detergent hit an all-time record monthly share of 10.1% in the month of July.

Our Xtra brand also achieved share growth in the second quarter and is now the number two liquid laundry detergent brand on a wash load basis, representing one out of seven wash loads in America. The strong, consistent share growth of 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 share on our power brands. We have over 80 brands but eight of these brands are our historic power brands which generate 80% of our sales and profits. We have now added a nine power brand with the acquisition of the Avid gummy vitamin business. From 2008 through 2012 we grew market share on each of the eight historic power brands in almost 75% of the quarters. In the second quarter of this year we grew market share on six of our eight historic power brands and seven of the nine power brands including Avid. Three key factors drove these excellent share results.

First, we have effectively reinvested some of the increased profits from the strong growth of our value brands to increase marketing support on our power brands. In the second quarter of 2013, we increased our marketing score by over $15 million versus year ago which represented a 50 basis point increase. The other factor driving the growth of our power brands is our robust pipeline of new products. Over the past four years new products delivered about 50% of the Company's organic revenue growth. We have launched innovative new products and hold every key category this year. A sample of these new products includes 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 enables dosage control for lightly soiled to heavily soiled wash loads.

This new product is driving incremental sales for the brand and as stated earlier, enabling the ARM & HAMMER liquid laundry detergent business to achieve its 14th consecutive quarter of share growth. Other new products that have been launched in 2013 or late 2012 include a new line of sexual lubricants under the Trojan brand name, a new spa clay line of products under the Nair brand, a new toothbrush under the ARM & HAMMER Tooth Tunes brand, which plays music by the One Direction boys band, a new single-dose cold sore treatment under the Orajel brand and a new dish washing booster product under the OxyClean brand. More detailed information on all of these innovative new products is on Church & Dwight's website. Part of the increased marketing spending behind these innovative new products is increased sampling. We will drive awareness and trial in our new Trojan lubricant line by providing samples in four million boxes of Trojan condoms. And to drive awareness and trials, our great-tasting line of gummy vitamins will increase in-store 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 in our power brands is increased distribution. As result of the consistent strong share growth in our power brands over the past five years, the Church & Dwight sales force has worked closely with our retail partners to increase the shelf base of our brands to meet both the increased 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. The combined effect of these innovative new products, increased marketing spending and increased distribution deliver organic growth on Church & Dwight's global consumer business of 3.2% in the second quarter despite the weak economy and the increased competitive spending. These share gains on seven of our nine power brands puts us in a position to achieve stronger organic growth in 2014 behind a strong pipeline of innovative new products in our core business, continued strong growth of the new gummy vitamin business and an improvement in the sales of our cyclical specialty products business.

Let me just wrap up on this point about my Company's ability to grow our power brands with the following Q2 share highlights on our other power brands. OxyClean powder laundry additive grew its category-leading share by 1.5 points to 42.4% and is now over two times larger than its nearest competitor. Spinbrush, it's the number one battery-powered toothbrush across all classes of trade and is number one for both kids and adults. In fact this Spinbrush kids line has doubled it shares since 2009 and now represents five of the top ten selling SKUs including two of the hot new Tooth Tune products. Trojan grew its share to 76.2% of the US condom business, driven by having all ten of the top ten selling retail SKUs. The new Trojan lubricant line, which was launched in the second quarter, has already achieved a 5.5% share for the quarter and a 7% share in the month of June as it continues to gain distribution. First Response Pregnancy Kit achieved a record quarterly share of 31.3%, up 2.5 points versus year ago and has been the number one selling pregnancy test kit for 34 consecutive quarters.

Nair achieved share gains in the second quarter of 0.7 percentage points to 31.7% to maintain its leadership position for the 34th consecutive quarter. And finally, our new Avid acquisition had a terrific second quarter of 2013. Little Critters, our kids vitamin brand, achieved its highest dollar share ever based on 15.8% consumption growth. And Vitafusion, our adult vitamin brand, grew its share driven by 55% consumption growth. Vitafusion is the number one adult gummy vitamin for the past eight quarters and it's the fastest growing adult vitamin brand for the past 52 weeks. Now that's a pretty impressive scorecard for Q2 share results. Let me run quickly through the five other key drivers of Church & Dwight success.

Number three is that we have a proven history of ferociously defending our brands as evidenced by our ferocious defense of OxyClean when a large competitor entered the category several years ago. OxyClean not only fully deflected that attack but now has strengthened its leadership position through the record share levels achieved in the second quarter to be larger than the combined share of the number two, three and four competitors in the laundry additive category. The number four factor behind our continued success is the strong growth of our international business. While our international business represents only about 20% of our total revenues, it has delivered high single-digit sales growth and double-digit operating profit growth over the last five years. As Matt mentioned earlier this strong growth continued in second quarter with 6.3% organic growth driven by excellent results in Canada, the UK and Australia. The international organic growth would've been even stronger except for lower sales of Nair, which was impacted by the cooler than expected weather in Q2.

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. Driving improved gross margin is deeply ingrained in Church & Dwight's organization. We not only talk the talk but we walk the walk. 25% of every Church & Dwight employee's annual bonus is based on achieving our gross margin improvement target. I'm not aware of any other CPG company that explicitly has gross margin targets in their employee bonus programs. This deeply ingrained incentivized focus on gross margin has enabled Church & Dwight to expand 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 year ago in the third and fourth quarters of 2012.

This will benefit [to you] in the first half of 2013, with 110 basis point increases in gross margin versus year ago in both the first and second quarters. And as Matt and I mentioned earlier, the cost synergies from the integration of the gummy vitamin acquisition are exceeding expectation. So we expect to deliver gross margin results for the rest of 2013 that exceeded our prior expectations. The sixth factor behind our continued success is our ability to tightly manage overhead costs. As Matt mentioned earlier we expect to reduce SG& A as a percent of our net sales to decline again this year. This will enable Church & Dwight to continue to have the highest revenue per employee of any major CPG company.

And finally factor number seven is our strong record on free cash flow. Like gross margin, free cash flow is another one of the Company's key components in our annual bonus program for all employees. As result of having every employee focus on and incentivize to deliver higher free cash flow, we have quadrupled our free cash flow over the past 10 years. And over the past five years our free cash flow conversion as a percent of net income was 120% which was best in class in the CPG industry. As Matt told you a few minutes ago we continue to deliver strong free cash flow in second quarter. This cash flow and our strong balance sheet have enabled us to smartly invest in our future to 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 EPS target of $2.79, which is an increase of 14% over 2012 adjusted EPS.

We believe we can deliver this aggressive EPS target despite continued expected headwinds from weak consumer demand and increased competitive pressures. Our confidence to deliver this aggressive EPS target is based on two key factors. First, we believe we continue to deliver the market share gains on our power brands. These share gains are expected to result from our innovative new products, increased marketing spending and significant distribution gains across the majority of our power brands. Second, we now believe we can deliver gross margin expansion of approximately 50 to 75 basis points on our total business in 2013 including the new gummy vitamin acquisition. The higher projected gross margin will enable us to be price competitive and increase marketing spending versus year ago on our power brands in the back half of 2013 to deliver the share gains. Unfortunately these share gains cannot fully offset the weaker-than-expected category trends and lower-than-expected sales of our Specialty Products business the back half of this year. So we are now projecting organic sales growth of 2% for the full year.

While this outlook on organic growth is a bit lower than our national goal of 3% to 4% the share gains will put us in position to return to higher organic growth levels in 2014 behind a great pipeline of innovative new products in our global consumer business, continued strong growth of our new gummy vitamin business and the expected improvement in the sales of our cyclical Specialty Products business. In conclusion, 2013 is shaping up to be another challenging year. 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 a management team that has the track record of knowing how to successfully leverage that portfolio and drive cost savings to deliver consistently strong EPS growth. 2013 will be our 13th consecutive year of double-digit EPS growth and we believe we can continue to deliver double-digit EPS growth going forward.

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

(Operator Instructions)

Bill Schmitz, Deutsche Bank

Good morning

Hey, Bill

I was just doing the math on Avid and it looks like if you run rate it, it's up like 30% since your acquisition. So when you put it into the base can just you talk about -- and the Nielsen data by the way corresponds with that because if you look at your vitamin sales growth it's like 30% every month. What's driving that and do you think those trends can continue?

Yes, Bill, what's driving that is we've gotten significant distribution gains out in the marketplace through our great sales force execution and as I told you we are doing about, what, 60% more sampling than past years. So we are doing a great job in driving the distribution and sales of the brand.

The other thing, Bill, is the -- what you're looking at, the Nielsen data, is in all out with, right, so there are obviously unmeasured channels in there, as well, that affect what the number for us year-over-year. We did say double-digit growth going into the year, but of course we didn't go to -- define that any more clearly than that. If you want some color on the Avid acquisition, we did want to let you know that it's performing better. We're not going to be calling line items out with respect to the brand P&L.

We did say that it was going to be double digit. We are growing share. The gross profit is higher than we expected but our R&D spend is significantly higher than when it was a private company. And as far as the synergies go you may recall we called synergies of $15 million. We said $9 million of that was going to be this year at $6 million. Next year it's going to be more than $9 million. We're not going to be updating the number quarterly. We're just in -- we are really good shape with respect to Avid.

What are unscanned channels that wouldn't be in everything we get except for Costco? The AO, whatever they call it. What's unscanned?

Largely the club stores, Bill.

Okay. Got you.

But remember when we bought this business the club store channel was about 40% of the total business.

Okay. I didn't know that. And then, sorry to keep going on the Avid thing, but I think -- is there Santa Cruz I guess is the big competitor, the only other competitor in gummy and I think it just got sold to another private equity party. Does that impact the competitive dynamic at all?

No, we don't think so.

Okay. And then just in terms of your organic growth, I know that retailers change their planagrams midway through the year. Were there any distribution losses that are going to drive some of the shortfall in the organic growth relative to the previous expectations?

No, there's nothing significant, Bill

Okay. And then what are the categories that are becoming much more price competitive? Because I know you didn't really drill down to that level in your prepared comments.

Bill, we've got a careful what we say about price, but generally there's only -- there's only a few categories and generally it's just in laundry and cat litter

Okay, great. Thanks, guys. I appreciate the time.

Dara Mohsenian, Morgan Stanley

Morning, guys

Morning

Can you give us some clarity on how much worse the promotional environment has gotten in the laundry and cat litter category, and then also are you expecting a volume payback from these pricing adjustments because based on the lower organic sales growth guidance it doesn't sound like you're expecting much of a volume boost?

Good question. It's hard to quantify. Really again I can't go into details on the, in fact, pricing that much. There are issues out there. We decide to get price competitive again because of our focus on gross margin. The great news was that we were able to get price competitive and increase our marketing spending. So we feel fully we've addressed the issues out there and things should get better --continue to drive good share gains for us which we want as -- going into 2014.

Okay, and are you expecting to get a volume payback from these actions, or is it more just to reestablish price competitiveness versus the competitive set?

That's built into our forecast. Let me just tell you, we always want to be straight with you guys. We have these issues looking forward. We do want to be a falling knife in the sense of making a little adjustment, then another adjustment, another adjustment. We wanted to reset the year on organic side, and, if anything we are being conservative. But we will see. But it's just a case of we felt appropriate and we given it a specific call instead of a nebulous lower end of this or that. So we gave it a 2% but we think that's the bottom and hopefully things could be better than that.

Okay and then on the category weakness you referenced, is that just tied to the promotional environment or is that pricing related, or do you think it's also tied to underlying consumer demand in terms of the US consumer being weak?

I don't think it's -- there's nothing worse than the consumer environment; it's still weak. You know we had issues in the laundry category for some new products launched a year ago. The good news on that is that the laundry category is starting to head back up. It bottomed out at about negative 4.3% in the first quarter of this year, the second quarter is minus 2.6%, and we expect it to get better than that over the rest of this year and hopefully break into the black in 2014.

Okay that's helpful. Thanks

Alice Longley, Buckingham Research

Hi, good morning. I know you haven't given guidance to 2014 other than saying that you hope to return to the 3% to 4% organic sales growth. Can you say something about whether you can again turn in another double-digit EPS growth rate as you've done for many years? We won't have accretion from the Avid acquisition, and commodity costs look like they might be a little less benign. So what are things that could help you retain that double-digit EPS growth in 2014?

Alice, that's always our goal. We've done it for 13 years when this year finishes and I have every desire to keep that going forward in goal. But the thing that's going to help us do that is we have a great pipeline of new products for next year. We can't give any details right now, but I just love what I'm seeing in the product pipeline. We are going to be increasing marketing spending because we see gross margin being improved next year and then we expect some bounce backs.

The weather we wouldn't expect to be as bad as this year, which will help both our Specialty Products Division and our Nair business. I told you just a moment earlier [heard] I expect improvement in the laundry category, which will also help. It's already coming back. That will all lead to stronger organic growth along with the gross margin improvement. And you know we always tighten our belts on SG& A. And we believe that formula -- we won't give you the details yet, we don't have them yet, exact numbers for every one of the P&L items. But we believe that combination will once again for the 14th year lead to double-digit EPS growth.

Okay. And you just said that the detergent category is getting a little better, and yet you are projecting the same 1% to 2% organic sales growth in the third quarter. It's the second quarter. Will we still see Domestic Consumer up 2.5% with strong volume and negative price? And why wouldn't Domestic Consumer be better in the third quarter than the second quarter, given that detergents will be better as a category?

Alice, we don't call the organic growth by each of the three segments. We have a number out there of 1% to 2% and that's an all-in number including domestic, international and specialty products.

Will specialty maybe get worse and consumer better versus the summer?

No, no, the weather's gotten a little hotter. If you noticed, it was pretty hot July, so I don't expect SPD to be the same drag in Q3 as it is in Q2.

We are just -- we're taking a very conservative approach for the back half of the year, Alice. We feel it's appropriate and like I said we hope it's better than we're being called but we're going -- we decided to call a floor on it and then see what happens.

And in just sticking with detergents, were your detergent sales over all putting Xtra and ARM & HAMMER and powder and liquid all together? Were they up in line in the second quarter with that 2.5% for Domestic Consumer?

I'm trying to look at numbers.

Or faster, slower. Really what matters is detergents all together, right?

Yes. I don't have a number off the top of my head here, Alice. Our overall shares on laundry detergent, all channels including non-measured channels, was up. What you don't see is we had some very good results in the club store channel, brands like ARM & HAMMER liquid was up over 10% in the second quarter, if you count all channels.

So I don't have it in front of me, a total laundry detergent business. But we're -- I can tell you overall we are performing better than anyone else in the category. It's just the category is real tough. When the category's down several percent it's a little bit of a drag that's hard to overcome.

ARM & HAMMER liquid overall was up over 10% in value terms in the second quarter?

Yes.

All right. Well that sounds. Okay. Thank you.

Joe Lackey, Wells Fargo Securities

Hi, thanks. So it sounds like you have approximately 2% to 3% organic sales growth embedded in your guidance in the fourth quarter. And so I was kind of wondering what gives you confidence in seeing acceleration there. New products, I guess probably less of a drag from Specialty Products, maybe two months of Avid in the organic sales. Are those the things benefiting you or is there something I'm missing there?

No, Joe, the biggest factor is Avid goes organic in the fourth quarter.

Okay, fair enough.

We are being conservative on the rest.

Right Why was Xtra liquid laundry detergent lower in the second quarter? I'm assuming maybe some competitive action on pricing there, but at the low price point I would think you'd see a benefit from the consumer pullback. And then you've got this sell-in of some new fragrances and stuff like that. I'm just kind of curious on Xtra.

There was just a lot -- not a lot. There was some very aggressive competitive activity in there that impacted Xtra.

Okay. And then on gross margin, it sounds like based upon your guidance, probably slightly lower year-over-year in the second half. What are some of the puts and takes in gross margin there? Is Victorville done, or can we see some more incremental benefit from that? And is all laundry detergent production on the West Coast moved into Victorville, or is there still some more to come there?

Let's do them in reverse order. So with respect to Victorville, Victorville does make the lion's share of not only the laundry but also the cat litter that goes out to the West Coast but not exclusively. With respect to the benefit of it, to the extent that that business grows, we get significant leverage on variable margin. We've been running the plant for a year. We continue to get better in our reducing our product class and improving our conversion rate. So I would say that is still certainly going to help us, not only this year but going forward.

But back your question about the fourth quarter, in the second half -- if you look at the first half we've got 110 basis points in Q1 and Q2. So that's averaging about 55 basis points for a full-year basis if you were flat in the second half.

So, we do think that in the second half we are going to be up still a little bit more. I think Q2 -- Q3 I mentioned earlier would be flat, about the same as last year which was 45.2% gross margin. But you're right about the fourth quarter, and as you move into the year, yes, you're selling more of your new newer products. We try to launch new products that have higher than average gross margins. And we continue to get more and more benefits from the gummy vitamin business so that's higher than expected. And Q4 is a big quarter for vitamins.

Historically it's the biggest quarter of the year. So there are number of things that are influencing the gross margin year-over-year. So I would say flattish in Q3 and then up a little bit in Q4

Joe, don't forget we had some major productivity programs kick in in Q3 a year ago, being the Victorville plant. We brought the unit dose product in-house. We had a cap price of [three cent] cat litter. So we benefited for the four quarters that followed that quarter all the way through Q2 of this year. Now we'll start lapping that. So that's why we still have productivity programs going on like Matt said. They'll still drive in the back half some improvement versus a year-ago back half, but we are now lapping beyond those major programs.

Right. All right, thanks.

Bill Chappell of SunTrust

Good morning

Good morning, Bill.

Just want to follow up a little bit actually on the guidance for the rest of the year, especially as you talk to the fourth quarter. If Avid is running plus 20%, 30% it's going to add a couple points to the organic growth in the fourth quarter by itself. Are you expecting the business to not -- the core business not to really improve from current levels through the whole back half of the year?

Bill, we are not going to comment on the breakout between domestic, international and SPD. You're right that the gummy business is a big driver in the fourth quarter. Obviously, we do expect growth from the consumer business in both Q3 and Q4, but not as much as we had expected historically.

Okay then on that same line when I'm looking at the margins, with Avid growing faster than expected, are we getting close to having Avid at corporate gross margins or are we -- can we exceed that by the end of this year because it would seem to me to have some improvement by the fourth quarter, which is weighted towards vitamins

Yes, it would be really unusual for us to announce to retailers and competitors what our gross margin is for that or any other business, frankly. You remember we bought a business at 38% trailing gross margin and we said that we are ahead of schedule, but we are not -- I don't expect today or in the future to call out gross margin by quarter. But I can say that we are very happy with where we are today.

Okay and then on the detergent side, you had talked about price competition. You look at the leader they're way -- much higher than you on price, so are you seeing new competition from some of the flankers from -- that ar priced more in and around All, I mean ARM & HAMMER and Xtra?

Bill, I really don't want to get into that. I don't want to name names. There's four key competitors in the category. It's always a very competitive category. And I'll just tell you in the past we're very good at it. That's why our share's grown consistently, and we do what we have to do to continue to drive share growth in the category

All right. Last one for me. Animal husbandry, is this just people drinking less milk because of the weather, or was something with the cows not getting out to the pasture or anything I'm missing?

Animal husbandry? That's a new one

Actually this will be the Discovery Channel portion of the earnings call. So the product that we make actually replaces electrolytes in cows, so sodium potassium, etcetera. When the whether is really, really hot what happens is cows start making milk. So by replacing that they start producing milk. When it's cold there's no need for a number of our products. It's as simple as that.

Perfect. Thank you

Olivia Tong of Bank of America Merrill Lynch

Good morning. Thanks. Wanted to talk a little bit about restructuring, given heightened competition domestically. I don't -- it doesn't sound like that's going to end anytime soon. So is there a need to do something a little bit more drastic in terms of cost cutting, more restructuring in order to fund the incremental promotion, incremental activity that needs to be done to defend your share within your categories?

Olivia, you said more restructuring. We don't to -- we never have restructure and we are not going to restructure. We started small; we're going to stay small. We have the highest revenue per employee in the industry. So, we always look for across the line how to keep our overheads tight, and through cost-saving programs and leveraging acquisitions we've been able to steadily take our SG&A and some of net revenue down over years. So we don't have the problem other guys do because we are already very low on overheads, but amazingly find ways to keep taking it lower. But not through major restructuring programs

Got it. And then longer term where do you think that advertising goes over a longer term? If we are at the 12.5%-ish this year does it go back up to where it has been in the past, or is longer term 12.5% still the right number?

Yes, we've said in the past that 12% to 13% is the sweet spot for our marketing as a percentage of sales and that a far more important measure is tracking your share voids versus your share of market. So what you're spending is always in relation to your competitor. So we follow that very closely, and we're typically over indexed, meaning that our share of voids is significantly higher than our share of market

Got it. Thank you

Thank you

Joe Altobello, Oppenheimer

Hey, guys. Good morning. Just wanted to start with Avid. In the past you've talked about cost savings this year, I think of about $9 million, then $15 million total. Obviously because things are going better than you expected there. So, could you just update us on what your expectations are on the cost savings side for this year, and then for next year, as well?

Yes, a really short answer--no. (laughter) We've -- you're right, we said $15 million; we said $9 million this year and $6 million next year. And of the $9 million this year was split 50/50 between COGs and SG&A, and next year was up $6 million. Next year was all SG&A. And what I said earlier is that we are ahead of schedule. This year is going to be more than $9 million and the total is going to be more than $15 million.

But it's very much like all the other acquisitions we've done in the past. Typically when we require a business we identify cost synergies. We generally base the acquisition on the cost synergies, so we always hit them. And the goal is to exceed them.

Okay, understood. And then secondly, Matt, you mentioned earlier that there was a charge at one of your affiliates. What is the size of that charge?

It's $0.01.

Okay, $0.01. And then just lastly in terms of your logged distribution. Obviously, you talked about you're gaining a lot of distribution mostly this quarter, I thought. So I was a little bit surprised at the slowdown in household growth. But obviously you talked about pricing there, etcetera. Have you guys maintained most of that shelf space gains and do you expect anything incremental in the back half?

Abso -- no, we gained a -- Joe, starting in Q2 and we certainly have maintained them since then. It's way too early to have any reversal of that, but we don't expect it. Everything we've gained has proven to be gold for us and the retailers, so everything is good so far.

Anything incremental in the back half?

Only if we were to launch a new product or two, and sometimes we do that in the back half. But most of it's in the front half of the year, but there may be one in the back half.

Okay. Got it. Thank you.

Leigh Ferst, Wellington Shields.

Good morning. There are a lot of questions about vita already, but I just was wondering also about next year. It seems like it could be a significant portion of your organic outlook -- organic growth with outlook with it in the base. I realize it's early, but can you comment on that with respect to the vitamins versus the rest of the core business?

Yes, Leigh, it's because of the distribution gains that we've been picking up over the course of this year and we expect more in the back half of this year. I would just tell you top line to expect continued double-digit revenue growth on the vitamin business in 2014.

But as a portion of your organic growth outlook for next year it seems like it's a major portion still like it would be in the fourth quarter?

Well, no. Well, keep in mind that the Vitamin business is only about less than 10% of our total revenues. So put that in perspective with that kind of growth.

Okay. And I guess I should know this but are you going to count it in your premium value mix? Which piece is it in?

Vitamins would be premium

Okay, and with respect to your cost cutting, you've done a great job for a long time, and you sound confident that it can continue but at what point do you feel like you are cutting too close to the bone? How do you look at that over a long-term perspective?

No, Leigh, we're not anywhere near the bone. We're very lean and mean, but I don't see my team -- as I told you before it's 25% of their bonus every year and their incented to keep finding ways to deliver gross margin improvement. And then when it's that much in the culture and in the pocketbook, trust me, they keep finding ways through efficiencies from efforts within the plants, the product lines, putting out new products with higher gross margins.

We'll be doing things again next year at some of our plants to make them more efficient in that. Product mix, trade spending, all that. We are all over that every day. And again my teams heavy incentive for their bonuses and that to stay on top. And it's just part of our culture.

It's just -- it's an incredible thing here at Church & Dwight and it's shown up this year. I told you before we fought off the headwinds from higher commodities from prior years better than anyone else, and we came out of it strong now with four straight quarters of 100 basis points or more growth. And so, I expect gross margin improvement to be no problem and continue to improve in the future

Thank you

Caroline Levy CLSA

Good morning.

Morning

Couple of things, just looking at Avid you'd talked about increased R&D. Can you elaborate on how this business might be different in an R&D -- from an R&D perspective. Was it simply there wasn't much done before and you're taking it to normal levels. And a follow on to that, do you see a lot of opportunity to expand beyond the existing products that you offer for Avid?

Carolyn, this is Matt. Yes, you're right in that this was a -- is a privately owned business before, and obviously the capabilities that we have from an R&D perspective are far more expansive than what they had available to them. We obviously have grand plans for this business, so we are immediately getting after ideas we have to expand the business. So it is significant -- we are spending at significantly higher than what they would have spent in the past.

I would tell you too that -- sorry I piped in. While we're the number one Gummy Vitamin business we are only 3% of the total Vitamin category. So to us there is still tremendous upside in this business. And part of that's growing in the distribution base, part of that is putting more marketing spending behind the Company. But part of that is also expanding the product line.

It's wider than you may think right now. It's quite an expansive product line. But we see bigger opportunities in the future and for competitive reasons I won't go into what. But we love the vitamin category. It's one of the fastest growing categories in the world. It's been that way for a long time and now we have what we think is a competitive advantage in that category with the Bummy business. And we're just, as Matt said, putting lots of R&D spending behind it to make sure we can capture all that growth.

Okay, that makes sense. So we could probably expect a number of new products over the next two to three years?

The next 20 to 30 years.

Okay, but short term, as well?

Absolutely.

Okay and then you have a couple of your focus brands that aren't doing as well. I believe Nair was one of them. What do you see happening on those couple of underperformers and what do you imagine you could do to change that?

Yes. Well, Nair as I said, Nair is the good news because it grew in share. The bad news was the weather really hurt that business this year. The category was down over 10% in the second quarter. So that was just totally driven by bad weather. And Nair is actually a bigger business for us outside the United States than it is in the US, and the foreign markets also had weather. So Nair is just totally due to weather problems.

The other categories, there was just some competitive things going on and we'll be addressing that with new products and marketing spending. But again, the overall story is seven of our nine power brands grew shares. So we feel pretty happy our new products are working and only a few had minor problems. Nair actually grew its share, but the category was really hurt by the weather. So, next year I expect a total rebound on Nair to help us.

And dare I ask, but you did venture into some interesting line extensions with electronics, and it's not a core business, sort of electronic expertise, and I'm just wondering how that's doing?

Well, I'm sure you're talking about the SpinBrush business. No, just kidding.

No, I'm not. Yes. (laughter)

That business of doing fine. It's a small business. We are getting generally about double-digit growth on that. It's a very, very, very small base and I'll be honest. I think this issue we have there is getting more retail distribution on that product line. We're working on it over time. But it's a little harder given the sensitivity of that business than anything else we have. Everything else retailers have no problem with. We're having a little bit of some set -- retailer resistance on that.

Got it. Okay. And then on a big product, laundry category, you've been vocal that you think pods have not -- are not a good thing for the category. Can you update us on your thinking. Also very clear in the P&G conference call yesterday, and the way they've structured their management reporting that the US is an enormous focus for them. So any update on your thinking on laundry category?

Yes. The laundry category was a steadily growing category until pods was introduced. And it was introduced last Q2, and the category shrank 0.2%; in Q3 the category shrank 1.3%, in Q4 the category shrank 3.2% and in Q4 it shrank 4.3%. Now that four quarters -- we're coming out of it. The category only shrank 2.6% in the Q2 of this year and we think in the back half of the year it will get better versus those numbers as we lap the pod.

So I think it definitely had an impact. It wasn't the only thing going on in the category, but it definitely had an impact. But I think the brunt of that impact is behind us and I'm optimistic that by 2014 the laundry category will get back into a positive growth mode, which would be wonderful.

Thank you so much

Lauren Lieberman of Barclays

Thanks. Good morning.

Good morning.

First just, sorry laundry again, I just was curious how the ARM & HAMMER unit dose is doing, and if when you guys talk about powder laundry if that includes unit dose or not, because I think in Nielsen it does, that they categorize it in powder.

It's doing okay, Lauren. We've got a little bit less than our fair share, but still a healthy mid single digit share number on that and we are doing fine. We don't look at it within powder; we look at it as a separate category and track that. Keep in mind too for us good news, for maybe somebody else, not good news. The unit dose or you may call it pod category is still -- is leveled off at 8% of total laundry. It was 8% last Q4, it was 8% in Q1 of this year, it's 8% in Q2. So we are happy to have -- that's leveling off. And we are fine with our share in the category.

Okay, so the powder laundry decline still separate conversation from unit dose performance?

Right. And keep in mind liquid is still 77%, 78% of laundry. That's where focus should be. Powder is about 15% of laundry and pods is only 8%. So our focus -- that's why we put our focus more this year on launching the Ultra Power, a new ultra concentrated form of liquid, because we want to help spur the 77%, 78% of the category rather than worrying about a new small category. We are players in the pods category but our focus is more on liquid

For sure. Has there been any trade off on distribution -- to the new distribution for Ultra replacing unit dose, your unit dose product?

No. Absolutely not. We only -- we told the retailers we would only give them the ultra power if they put it in incrementally and they all did. The product is doing fantastic. It represents over half of our share gains on ARM & HAMMER liquid this year so it's coming in very incremental and the results are very positive. I would just say on concentration, I want to talk about for a second, the next round of concentration. I can't give your timeframe but it is an absolute winner for the category.

It's been historically proven in this category back several years, it grew the category mid to high single digits. It's being proven again right now in the bleach category as you probably heard in the Clorox call yesterday, their mid to high single digits category growth. So, when you talk about a product that's good for the category, good for the environment, good for retailers, good for everybody and the consumers have embraced it, it's a winner. And I think sometime in the near future, here, you'll hopefully see the whole laundry -- liquid laundry category go through another round of compaction, which will be great for all players.

Great. And then just on the International business, was the price mix benefit, that was a pretty big jump. Was that more mix or more price?

It was more mix actually. Remember we had a goofy comparison year-over-year. Remember, we were down last year so we had an EPG comp.

Okay. So going forward we should -- there isn't necessarily an incremental pricing element that we should be thinking about modeling for International?

It's hard to say. The international markets are just as competitive as the domestic market. So whether or not that price sticks it remains to be seen, the price piece of it

Okay. All right. Thanks very much

Thank you

Connie Maneaty of BMO capital markets

Thanks. Did the sales decline in the specialty business have a positive impact on the corporate gross margin and if so, by how much?

(laughter) It's a good question, Connie. I don't have the number for you, but the answer is, yes, and that's because the gross margins for the Specialty Products business are half of what the consumer business is. But I don't have that math for you handy.

Okay. And also can you -- do you ever think of how these specialty businesses fit into the portfolio on a strategic basis over -- going forward?

Connie, the Specialty Product business has been a long part of this Company. On a gross margin basis, it's -- as Matt just said, about half the Company average. But actually on a bottom-line margin bases it's very comparable to the Company, because we don't spend as much marketing money there. Cows hadn't listened to our ads in a long time, so we gave up. So, no, it's a very good business in the bottom line, and I don't see any reason why we would change that going forward.

Okay. And this just of course a question on laundry. What is it that you have announced to the trade about your changes in either pricing or promotion. Will there be list price changes or is it increased trade promotion or more couponing what's --

Connie, that's a no-no. I can't go into that kind of discussion.

Okay. That's it for me. Thanks.

Thank you.

Thank you. This concludes the Q&A session of today's call. Participants, you may now disconnect. Thank you for participating.

All right. Thank you all very much for taking the time to listen to us today. Just want to reiterate we stand behind the full-year outlook in our earnings release and again hope we gave you all details. If you have any questions, give Matt a call after the conference today and we will do our best to answer them. So thanks very much. Bye-bye.