切遲杜威 (CHD) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight third-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 are described in detail in the Company's SEC filings.

I would now like to introduce to you your host for today 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'll start off this call by providing you with my overview on our third-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 discuss our earnings guidance for the year. We'll then open the call to field questions from you.

Let me start out by saying that I'm very proud of my team for delivering the excellent third-quarter business results in such a difficult business environment. Despite headwinds from weak consumer demand and increased competitive pressures, the third-quarter results reflect double-digit net sales growth of 11% versus year ago, an all-time Company record for gross margin of 45.4%, which was 20 basis points above year ago. This was also the fifth consecutive quarter of gross margin expansion. An 8% increase in marketing spending versus year ago, which is supported share growth on seven of our nine power brands; a 15% increase in operating income; and an 80-basis point increase in operating margin versus year ago; a 15% increase in earnings per share versus year ago; and a 75% increase in free cash flow versus year ago.

In addition, I'm pleased to report that we have finished the integration of our most recent acquisition, the Avid Health Gummy Vitamin Company, across every business function. The Avid acquisition continues to deliver outstanding results, with double-digit sales growth and better-than-expected cost synergies.

So despite continued headwind, the excellent results of the first three quarters of 2013 make us feel very confident in achieving 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 more details on our third-quarter results. And then I'll return to provide some further insights on the results of our key brands and provide additional details on my outlook for the year.

Thank you, Jim, and good morning, everybody.

Third-quarter EPS was $0.76 per share compared with $0.66 in 2012, as Jim said, up 15.2%. Our reported earnings were up 11% to $804.8 million. Organic sales was up 1.6%, which was slightly above the midpoint of our previously communicated expectations of a range of 1% to 2 %.

I'm now going to review the segments. The organic sales of the consumer domestic business increased by 0.8%, primarily due to higher sales of ARM & HAMMER liquid laundry detergent, OxiClean laundry additives, Trojan products and First Response diagnostic kits. These increases were partially offset by lower sales of ARM & HAMMER powder laundry detergent, ARM & HAMMER cat litter, Nair depilatories and Spinbrush battery-operated toothbrushes.

Volume growth contributed 4.5% to the increase in sales and, as expected, was partially offset by 3.7% unfavorable product mix and pricing. In contrast, price mix in Q2 was a negative 2%. So the result is consistent with our plans to remain price-competitive in Q3 and also in Q4.

International increased organic growth by 3.7% in Q3 due to higher sales in Canada, France, Mexico and the UK. This increase of 3.7% was entirely driven by volume gains. For our specialty products division organic sales increased by 3.7%. This was a nice rebound from the weak second quarter. Volume increases drove a 7.9% increase in sales, partially offset by 4.2% unfavorable product mix and pricing.

Turning now to gross margin, our reported third-quarter gross margin was 45.4%, a 20 basis point expansion from year ago. This is our fifth consecutive quarter of gross margin expansion. The increase in gross margin is primarily due to the positive impact of productivity programs and is remarkable as we overcame considerable negative price mix in the third quarter.

Year-over-year commodity costs were relatively neutral for the quarter with the notable exception of resin, which many of you know, is at a three-year high right now. As a result of our Q3 gross margin performance and our expectation that Q4 will be the sixth consecutive quarter of gross margin expansion, we now expect gross margin for the full year 2013 to expand by approximately 75 basis points.

With respect to marketing, year-over-year marketing spend increased 8% to $99.7 million or 12.4% of revenues, which is a 30-basis point decline from the prior-year spend rate. We continue to support new product launches and grew dollar share on seven of our nine power brands. This is due to great execution by our sales and marketing teams. For the full year, we expect marketing as a percentage of sales to increase approximately 25 basis points.

SG&A year over year increased by $7.8 million in the quarter, primarily reflecting the inclusion of the Avid business. SG&A as a percentage of sales was 12.1%, down 30 basis points from a year ago in the quarter. For the full year we expect SG&A to be about 13% of sales, and that would be 30 basis points improvement from a year ago. And we continue to focus on SG&A as a lever to drive future operating margin expansion.

The reported operating margin for the quarter was 20.8%, which was 80 basis points higher than last year's 20%. Income from affiliates was flat in the quarter year-over-year. Other 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, as we expect a decrease of $14 million and other income on a full-year basis primarily related to interest expense.

Next is income taxes. Our effective rate for the quarter was 33.9% compared to last year's 35.7%. The full-year effective tax rate we now expect to be approximately 34%.

A little bit of history on the tax rate. Our effective tax rate in Q1 was 34%. Q2 was 34.5%, so we were already trending lower with respect to our effective tax rate versus our 35% call for the year. With the 33.9% rate in Q3, it's the obvious now the full year will be closer to 34%. So we got a couple pennies of benefit in the first-half versus our full-year expectation.

Cash flow, turning now to cash, we generated $376.6 million of net cash from operations for the first nine months of 2013. We have spent approximately $30 million year to date in CapEx, which is approximately a $19 million decrease from a year ago, which included the construction of our California plant. We expect to spend approximately $70 million on full-year CapEx.

There were no share repurchases made in either the second quarter or the third quarter and we have no plans for share purchases in the fourth quarter. That will leave us with approximately $220 million remaining on our share purchase authorization by year-end. Our cash balance right now is approximately $450 million and we expect to end the year with a cash balance approaching $500 million and levered approximately 1.2 times versus EBITDA.

So in conclusion, the third-quarter highlights include 1.6% organic sales growth, it's the fifth consecutive quarter of gross margin expansion, and 15.2% earnings-per-share growth. We expect fourth-quarter EPS of approximately $0.65 per share compared to $0.57 per share last year.

I'm going to turn it back to Jim right now.

Thanks, Matt.

I'll put us off the call today by adding a little color to our third-quarter results, which Matt just took you through and my outlook on the year.

As stated earlier, those 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, continued high unemployment, 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 in the US that Church & Dwight operates in, 6 experienced lower category dollar sales in the third quarter versus the prior year. When a category is flat to down it creates a much more intense competitive environment, as the only way to drive organic growth is to gain market share through higher marketing spending, new product innovations and/or aggressive pricing. All consumer packages companies are fighting these headwinds. But 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 a unique product portfolio within the CPG industry. It consists of both premium and value brands, which puts us in the position to thrive in any type of economy, as exemplified by our ability to deliver double-digit EPS growth to the last 12 consecutive years.

In particular, our value brands, representing over 40% of our revenue base, have 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 brands cell for one-half to two-thirds less than premium-priced brands and deliver exceptional cleaning performance. Consumers love our value brand detergents 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 brands has resulted in steady share growth. In the third quarter ARM & HAMMER liquid laundry detergent achieved a record quarterly share of 10.1%, which was its 15th consecutive quarter share growth versus year ago and it's now clearly surpassed the All brand to become the number three liquid laundry brand in America. ARM & HAMMER was one of only two major brands to deliver share growth in both the third quarter and the latest 52 weeks.

Our other liquid laundry detergent brand, called Xtra, also achieved a record quarterly share in the third quarter. It is now the number two liquid laundry detergent brand on a wash-load basis, representing one out of seven wash loads in America.

As a result of the strong performance by both ARM & HAMMER and Xtra liquid laundry detergents, Church & Dwight was the only major manufacturer to grow total detergent dollar sales in the third quarter. The strong consistent share growth on 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's success, is that we have a proven record of building share on our power brands. We have over 80 brands in total, but 8 of our brands are our historic power brands which generate 80% of our sales and profits. We have now added a ninth 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 third quarter of this year, we grew market share on six of our eight historic power brands and seven of our nine power brands, including the gummy vitamin business.

Three key factors to why these excellent 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 third quarter of 2013, we increased our marketing support by 8%, or $7.5 million versus year ago. This increased marketing support was a key driver behind record quarterly shares achieved in ARM & HAMMER liquid laundry detergent, our First Response pregnancy test kit business and our OxiClean laundry additive business.

The second factor driving this 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 in almost 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 drove 70% of the total third-quarter sales growth on ARM & HAMMER liquid laundry brand, which enabled the brand and our total business to achieve its 15th 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 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. More detailed information on all these innovative new products is on Church & Dwight's websites.

Part of the increased marketing spending behind these innovative new products is increased sampling. For example, we are driving 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 are increasing in-store sampling by over 50% versus last year.

In addition to the increased marketing spending and innovative new products, the other key driver of share growth on our power brands is increased distribution. As a 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 space of our brands to meet the increased consumer demand and minimize out of stocks. The distribution gains achieved to date in 2013 across all brands has been the greatest of my nine-year tenure as CEO.

The combined effect of the innovative new products, increased marketing spending and increased distribution delivered share gains in seven of our nine power brands in the third quarter, which puts us in position to deliver stronger organic growth in 2014, behind an incredible 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 this point about my Company's ability to grow our power brands with the following Q3 share results on our other power brands. OxiClean powdered laundry additive grew its category-leading share by 1.8 percentage points to a record quarterly share of 42.9%. It is now over 2 times larger than its nearest competitor.

Trojan grew its leading position of the combined US condom, vibrator, and lubricant business by adding great new products that increased marketing spending. For example the new Trojan lubricant line, which was launched in the second quarter, has already achieved a 7% share of the lubricant category. And our condom business has an industry-leading 76% market share, driven by constant product innovations, which has resulted in Trojan having all 10 of the top 10 selling condoms in the market.

First response pregnancy kits achieved a record quarterly share of 31.8%, up 1.2 percentage points versus year ago. And it's been the number-one selling pregnancy test kit for 35 consecutive quarters. Nair achieved share gains in the third quarter to maintain its share leadership position for the 36th consecutive quarter.

And finally our new gummy vitamin business had a terrific third quarter. L'il Critters, our kids' vitamin brand, grew its dollar share to maintain its position as the number-one kids' gummy for the eighth consecutive quarter.

Vitafusion, our adult vitamin brand, grew its share driven by a 40% consumption growth. Vitafusion is the number-one adult gummy vitamin for the past eight quarters, with 6 of the top 10 SKUs and is the fastest growing adult vitamin brand for the past 52 weeks.

In total, Church & Dwight is the market leader in gummy vitamins with a 37% share. The gummy vitamin category grew 27% in the third quarter versus year ago, which is 6 times faster than the growth rate for the overall vitamin business consisting largely of hard pills.

We believe that the gummy category should continue to deliver double-digit growth for the foreseeable future as it only represents about 9% of the total vitamin business. In total, that's a pretty impressive scorecard for Q3 share results for our power brands.

Now let me quickly run through the five other key drivers of Church & Dwight's success. Number three is that we have a proven history of ferociously defending our brands. As evidenced by our ferocious defense of OxiClean when a large competitor entered the category several years ago. OxiClean not only deflected the impact of the attack on other competitors, but has now strengthened its leadership position through the record share levels achieved in the third quarter. OxiClean is now 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 strong sales growth and double-digit operating profit growth over the past five years. The growth continued in the third quarter with 3.7% organic growth driven by excellent results in Canada, France, Mexico and the UK. The International organic growth would have been even stronger, except for lower sales of our Nair brand, which was impacted by the cooler than expected weather this summer in Europe.

Factor number 5 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 targets. I am not aware of any other consumer packaging company that explicitly has gross margin targets in their employee bonus programs. This deeply ingrained focus on gross margins has enabled Church & Dwight to expand gross margins by 1450 basis points over the past 11 years.

Headwinds from higher commodity costs stalled our gross margin improvement in 2010 at 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 momentum continued in the first half of 2013, with 110 basis point increase in gross margin versus year ago in both the first and second quarters of this year.

Despite the fact that we are now lapping the 100-plus basis point gross margin gain achieved in the third quarter of 2012, we still achieved a 20 basis point improvement in the third quarter of 2013, to achieve a record quarterly gross margin of 45.4%. And as Matt and I mentioned earlier, the cost synergies from the integration of the gummy vitamins acquisition are exceeding expectations, so as a result we expect to continue to deliver gross margin improvement versus year ago in the current fourth quarter.

The sixth factor behind our continued success is our ability to reduce SG&A as a percent of net sales, by tightly managing overhead costs and leveraging our strong organization via acquisitions. We reduced SG&A as a percent of net sales to 12.1% in the third quarter and expect to continue to reduce SG&A costs as a percent of net sales in the fourth quarter. This should enable Church & Dwight to continue to have the highest revenue per employee of any major consumer packaged goods company.

Finally, factor number 7 is our strong record on free cash flow conversion. Like gross margin, free cash flow was another one of the Company's key components in our annual bonus program for all employees. As a result of having every employee focused on and incentivized to deliver higher free cash flow, we have quadrupled our free cash flow over the past 10 years. Over the past five years our free cash flow conversion as a percent of income averaged 122%, which was best in class in the consumer packaged goods industry. As Matt told you a few minutes ago, we delivered a strong increase in free cash flow in the third quarter. This cash flow and our strong balance sheet has 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 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 EPS. We believe we can deliver that aggressive EPS target despite continued headwinds from weak consumer demand and increased competitive pressures. Our confidence in delivering this aggressive EPS target is based on two key factors.

First, we believe we continue to deliver the market share gains in our power brands. These share gains are expected to result in innovative new products, increased marketing spending and significant distribution gains across the majority of our power brands that I mentioned earlier.

Second, we believe we can deliver gross margin expansion of approximately 75 basis points on our total business in 2013, including new gummy vitamin business. The higher projected gross margins should enable us to be price competitive, and increase marketing spending versus year ago in our power brands to deliver the share gains.

Unfortunately these share gains cannot fully offset the weaker-than-expected category trends and the ongoing need to continue to aggressively compete on pricing in a few key categories. So we are now projecting organic sales growth of approximately 1.5% to 2% for the full year.

While this outlook on organic growth is lower than our initial annual goal of 3% to 4%, the share gains we have achieved on the seven of our nine power brands should put us in position to return to higher organic growth levels in 2014, behind a great new pipeline of innovative new products on our global consumer business, continued strong growth in our new gummy vitamin business and an expected improvement in the sales of our cyclical specialty products business.

In conclusion, 2013 has been and continues to be another very challenging year. But when things get tough you should place your bets on the Company with the 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 consistently 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)

Bill Chappell, SunTrust.

Jim, could you just talk a little bit more about the growth outlook for next year? I'm just trying to understand, obviously you have the easy comps on the specialty business and the Avid business and the mix, but are you expecting the categories to turn up? It would seem like you need some category growth to get overall growth for the Company.

Bill, yes, I actually do because I've hinted at it but I won't give any details. We have the most incredible new product pipeline ever in our history, coming next year.

We've always found historically that innovations help drive category growth. And I think that will be a key driver of that next year going forward. So I'm very excited about that.

I do think the economy is slightly turning here. But I think more importantly is the new product innovations that we're launching across a lot of key categories will be very, very impactful on the category growth next year.

Okay. And then Matt, I won't even ask the acquisition question. But at what point is too much cash earning 0.1% on the balance sheet inefficient?

Well, I'm sure many people who know our story know that if you went back to the year 2000, we had one power brand, that was ARM & HAMMER. And since then, we've added eight others to today, we have nine. And that was through acquisitions.

And we have proven that once we acquire businesses, we're able to grow their market share pretty rapidly. So that is a core competency of the Company and yes, you're right, it's a lot of cash that's building up on the balance sheet.

The destinations for that are acquisitions and number two would be buybacks. And we haven't been a Company that's done a lot of buybacks historically. And as I pointed out on our call, we do have $220 million remaining on our authorization.

But you're right, Bill, we have lots of cash but we look at that as an advantage with which to go shopping for new businesses. And the Avid business we've now owned for a year. We acquired it October 1, 2012. And we've done a great job integrating that business. So we are in good shape right now to take on another one.

But in terms of just share repurchases or even debt pay-down, there's nothing really you can do on the debt side for the foreseeable future?

No, the debt side, you're right. We have some commercial paper out there. The reason we have commercial paper out there while at the same time we have cash, is to keep our name in the market such that when we do do an acquisition we can avail ourselves of the CP market by keeping our name out there.

Okay. Thanks so much.

John Faucher, JPMorgan.

Just wanted to talk a little bit about the promotional environment. Jim, can you talk about what you're seeing from a, let's say, a channel shift standpoint in terms of consumers trading down by channel versus what you're seeing in terms of a more aggressive promotional standpoint from the companies themselves?

And then is there any particular price point -- you guys have lots of different products at all sorts of different price points -- is it more competitive at the lower end, at the high end? Just some sort of comments on that. Thank you.

Yes, John, I really haven't seen anything new in channel shift. There's just the general trends going on over time. That's not really an issue right now.

The competitive pricing situation is only occurring in a few key categories right now. Laundry's certainly one of them. We're seeing a bit of pricing pressure in there. But honestly, things have reached a point where I don't think they're going to go any lower.

So I think that that will stabilize in sales and I think you're going to see a lot of innovations in that category next year. So I think that will actually help drive the category growth back up. So in general it's been a little bit of a rough time lately, but I think things will definitely improve next year as I think all competitors will go back to focus more on innovations to drive categories. I don't think channel shifting is any more of an issue than it's been in the past.

Okay. Great. And then a follow-up on your comments on laundry. We have seen as you mentioned, a huge shift out of the middle of the category. Right? So the high-end with Tide has gained a little bit of share, but you guys have really gained a ton.

How much more share is there available from the middle to your brands there? It's been a big move over the last four or five years but there's still a lot in that middle. How much more do you think you can get?

A lot. The middle's been there section that's been kind of eroding for the past decade. There's still quite a bit of share left there. And I think consumers will continue to shift one way, either to the premium side or to the value side.

Because the middle, you can get the quality of those products with the premium brands and the value side offers a great quality at a great price. It's been the share donor for a long time and I think it will continue to be the share donor.

Great. Thank you very much.

Olivia Tong, Bank of America Merrill Lynch.

Wanted to talk a little bit about marketing spend. First, was there a shift from Q3 into Q4? Because if I remember correctly, you guys thought that Q3 would be up. And then how do we think about the spend in marketing versus promotion for 2014?

Olivia, marketing spending was only lower as a percent of net revenue third quarter. We actually spent on an absolute dollar basis, an additional $7.5 million. We always assess what we're spending more importantly as how we're doing on share growth.

And we had a great quarter in the third quarter. We grew share on seven of our nine power brands. We always watch what's going on there. We just always have our hand on the lever because we have to watch competition.

I remind everybody that Procter & Gamble has announced that they are going to cut over $1 billion in marketing spending going forward. So we watch that. We always stay competitive. But most importantly what we always gauge our marketing spend against is how we're doing on our share growth. Growing share in seven of nine power brands is a great, great result.

And on the promo versus marketing?

That's a thing where we always -- again, we consider that all part of marketing, whether it's advertising, consumer coupons or price promotions in stores. One of the great jobs of our marketing and sales team is always to gauge how to take the total pot of money we have and most effectively and efficiently deploy it in the marketplace. I would say we're pretty good masters of that, given our share trends over time. It's category by category customer by customer out there.

One thing about being a small Company and from me on down we watch that every day. And will shift levers as needed to again most effectively drive the best share results and the best sales results. So we're pretty good against that. It just changes all the time and that's why we have people in charge of the business and on top of it every day.

Got it. Thanks. One quick follow-up on the organic sales growth target of 3% to 4% for next year. How do you think about the mix between volume versus price for next year? Particularly considering the big looming February 2014 launch in laundry? Thank you.

Go ahead, Matt.

Yes. As far as the 3% to 4%, historically the Company has been dependent upon volume growth as opposed to price mix. I think it's too early to actually call or split that number between how much is going to be volume and how much is going to be price mix. Suffice to say that if in fact the current environment continues, it's possible it could be some price mix negative, certainly in the first half of the year. But we'll update that on the first week of February when we give our 2014 outlook.

Thank you.

Caroline Levy, CLSA.

I'd like to explore the vitamin category in a little more detail if possible. From what you've seen so far during your ownership, if you could update on any positive-negative surprises. The shelf space often looks like a big mess when you go into any of the stores, really, depending, no matter what the format is, a lot of private label. A little more in-depth look at how you see the next few years progressing?

Carol, this category in this business has been everything we dreamed of and then some. As I gave you some numbers before, the gummy side of the business continues to deliver very strong double-digit growth. Particularly on the adult side where, when we bought the business, the adult category of gummies was only about 3% of the business. Now that's growing rapidly.

But still in total as I said, gummies as part of the total vitamin business, is only about 9% of the total business. So as far as we're concerned there's 91% of the business to go. The gummy form has such huge advantages in the taste and all the mouth-feel benefits of it. And I have yet to meet a consumer out there who hasn't tried a gummy, who assures me that's the last time they take a hard pill.

We love the business. We're doing a great job of driving distribution gains out there. We've done a great job of driving the cost synergies. We've got a lot of new products coming.

It's funny you say about the shelves, we kind of share your opinion that the shelves could use some better management out there. Retailers tend to think the shelves are okay. They tend to segment stuff between kids and adults and gummies and this or that, and letter vitamins versus multi-vitamins and that. We're doing a lot of work there to try to help figure that out with the retailers, and try to make it more consumer-friendly.

As you know, vitamins overall is a great growing category given the health trends and aging trends, not only in our country but around the world. We are absolutely thrilled that we bought into this business and bought the hot growing part of this business, and see great things going forward.

And so I understand, given how much private label there is, and a lot of retailers have strong brand names, that doesn't keep price pressure on you guys? What's the price mix out look like?

Price mix is the biggest private labels in this category more than others. We've been able to -- We had a small part of the business. We bought it with private label. We've been able to keep it in that range.

I would say if you look at our product, our product itself has got a fairly decent value positioning in the category. So we feel fine about that. Like any other category, innovation's a hot driver category. Certainly you got a form here, the gummy form versus hard pills. Price pressures are really not a key issue in this category right now.

Thank you. And then separately, could you say what drove the improvement in specialty and how sustainable that might be?

It's pretty simple. The second quarter, you may recall, the weather in the United States was so cool such that the demand for our products completely fell off. The reason for that is, just to remind everybody, product replaces electrolytes in cows. And when it's really hot, cows lose electrolytes through sweat and they don't make milk. In the second quarter it was cool, so demand fell off tremendously in our animal nutrition business. But that recovered in the third quarter. It wasn't so much what we did, as it was business as usual in Q3.

Got it. And sorry, back to vitamins for a second, do you see this as both a double-digit top-line opportunity as well as bottom-line opportunity?

With the double-digit top line growth expectation for 2014, for sure.

And bottom line?

We don't call the P&Ls for the brands or products. We just only comment on top-line growth.

Great. Thank you so much.

Kevin Grundy, Jefferies.

Jim, first on the slight guide down for the year, in organic growth, I know it's modest. What's worse? I know that laundry declined sequentially versus 2Q. Is there anything else, specifically, that you'd call out other than laundry?

No, Kevin. Laundry is the key culprit. We saw this coming. It's started to hit Q3. We expected some continued pressures in Q4. I can't call the future. We'll do whatever we have to do to say stay price-competitive. That was all we see right now. Everything else is minor at this point in time, but that's largely it.

Okay. And then you provided guidance now for 2013. It looks like only implies about 1.5% organic growth, which I thought you'd get from Avid alone. So is it fair to say you expect the base business to be flat? Is that fair?

No, Kevin, to make judgments about the base business is really premature with respect to 2014.

No, I'm sorry, Matt, I should have been more clear. This is just with respect to 4Q. And your guidance now implies about 1.5% organic growth in 4Q, which I thought you'd get from Avid now in the base?

Yes. Here's another way to think about it. When we were on the call at the end of the second quarter in August, we said we anticipated pricing pressures in the base business. And they've certainly materialized. You saw that in the third quarter with a huge price mix.

And although we expect market share gains in Q4, they will generally be in categories that we expect to be flat or down sequentially, compared to Q3. So Q4, on a reported basis for organic, is going to be similar to Q3. Only this time vitamins is the big driver. When we said a full year range of 1.5% to 2%, that translates into a pretty big range for the fourth quarter.

It would be more like a 1% to 2.5% range for the fourth quarter to get you to a full year range of 1.5% to 2%. So that question is okay, what's that range dependent upon? It's really a couple things. It's the success of our year-end promotions and our advertising across all categories, including vitamins.

The second thing is the severity of competitors' price actions. Anybody that's spending any time in the supermarkets right now, is seeing that there's tremendous amount of prices being slashed across the board.

So yes, we've got a pretty wide range in the fourth quarter,which drives the 1.5% to 2% for the year. But those two factors. It's our year-end promotions and advertising across all the categories, and how well would the competitors' pricing actions blunt our actions in the fourth quarter.

Okay. And then Jim, sticking with laundry, two interesting data points I've picked up from conversations with folks in the industry. I don't know if you can comment or not, or care to. First, that you guys are planning on a new product launch with Oxi into the premium tier of liquid laundry. And second, that five key retailers have indicated they are not going to pick up Procter's new mid-tier Tide product, given that the category continues to be in rough shape, and that it leaves open the possibility that more dollars come out with the potential for further consumer trade down. Can you comment on either one of those?

Kevin, I can't. Let me just comment that we're fully aware of the launch of the competitive product by Procter & Gamble. I just remind everyone that one of our key success drivers that I've talked about earlier, is our ability to successfully defend our brands as we've done for several years. And as we did when Tide attacked OxiClean a few years ago.

For competitive reasons we're not going to reveal the details of, what I would call, a ferocious offense that we're going to mount next year. But I also remind everybody that often happens in battles like this, it's the weaker players in the categories that are usually the losers and that's exactly what happened when OxiClean was attacked by Tide.

Tide did gain some share, but OxiClean also gained share. And the share gains that both of those brands achieved came out of the weaker brands. So I think that's the forecast I see for next year. I don't want to reveal what we're going to do. Just trust us that we have a long history and a good track record of defending our brands, and we look forward to a good battle.

Okay. That will do it for me. Thank you, guys.

Bill Schmitz, Deutsche Bank.

The CapEx budgets, so it seems like you spent $30 million year-to-date and there's like a $40 million expected investment in the fourth quarter. What's the big step-up for?

It's not so much a big step-up, Bill, as timing. We entered a year we thought we were going to spend in excess of $80 million. And we've only gotten through $30 million of it through the first three quarters of the year.

If you've ever worked in a manufacturing organization, it's a use it or lose it. So you got a lot of guys trying to get their projects get completed in the fourth quarter. So it's no one large project we can point to. It's lots of little ones across all the plants.

Got you. Would you be surprised if it came in below $70 million?

No. I think $70 million's about right. Because if you remember in August, Bill, we were calling $80 million, so now we knocked it down to $70 million.

Yes, I just thought $40 million, it seems like a lot of money to spend in three months.

Yes. It is.

Okay. And then what's the endgame in laundry here? Because you look at some of the price per unit numbers from Nielsen, and guys are taking 10%, 11%, 8% price decreases, and obviously you have to follow theirs. How does this whole thing end? Because the volume's not improving. It actually just continues to be flat.

Bill, I personally think 2013 has been a year more of pricing pressures and things like that. I think 2014 is going to be the year of innovation. I think consumers will respond to that and look at innovations that are going to come out across the category.

I think things will get better. I think it will. It's just there wasn't that much in the pipeline from a lot of it this year as far as really truly innovative product. I think you will see more that next year.

Got you. And your competitors, though? What are the telling the trade when they take an 8% or 9% price decrease? And then why would the trade want to accept that if it is just going to shrink the category because the volume's not responding?

That's a good question, Bill. I think you should ask the retailers that. (laughter)

All right. And then in cat litter, shares are still a little bit soft. It seems like you guys are starting a price war there, at least from the last couple months. What's the turnaround plan there?

New product innovations.

Okay, but in the short-term is there going to be a pretty aggressive pricing environment?

No. No. No. I would tell you we never try to start a price war. We only respond to what's going on out there and there's some pretty competitive activity out there. We have no desire to do that, but we will always do what's necessary to keep our brands competitive.

You're going to see something really big from us next year. We have historically launched a new product every two years. We did one -- so next year would be the year to launch a big product. This year we did not have a big new product per our usual schedule. Some activity took on that caught us by surprise and so we've had to deal with that. But next year we'll go back to what's always been successful for us, which has had a long history of success in this category, which a big new product innovation will be coming off from Church & Dwight.

Got you. I didn't catch the answer but the reason for not buying back stock in the fourth quarter?

Why would we want to buy back stock in the fourth quarter?

Why aren't you going to buy back stock in the fourth quarter?

Well, we have an authorization. We've chosen not to. That's a decision we look at every quarter. Management and the Board discuss it and we've opted not to. So we do have a lot of ability to buy back shares next year. And we certainly have the balance sheet to do it.

Okay.

Don't be a pig, Bill.

(laughter) Well, thank you, guys. Appreciate it have a good weekend.

Chris Ferrara, Wells Fargo.

I want to make sure I understand the Q4 sales outlook. I hear you, that response to your marketing plans, you competitors' marketing plans matter, but that's always the case. But your outlook for Q4 does -- it's 0.5 to 2.5 points of growth implied by the full year. It does seem to imply a sequential business slowdown, especially in light of the fact that your ferocious defense could be starting in that quarter. I want to understand how you're thinking about it.

You're right. As I said before, if you have a full year range of 1.5 to 2, that means that the range for the fourth quarter is going to be pretty wide, like 1 to 2.5. So there's a lot of room in there for success or failure of our promotions with respect to the competition. And I would say it has gotten sequentially more difficult, Chris, as far as if you look at Q3 versus Q4, and what's going on on shelf. We recognize that, so we have a pretty wide range in there for the fourth quarter.

Back to be Tide Simply launch. I know you don't want to divulge too much on your defense plans, but you're guiding to the high end of your 3% to 4% for the year. It really doesn't sound like you're terribly concerned about what's going on there. I was wondering if you could give a little color on your thoughts. Is that right or you think that other businesses are going to take the lead from a growth perspective next year?

Oh, no. I don't think take anything lightly from the Procter & Gamble Company. It's a major initiative by them.

But like I said, we have a quite strong record of ferocious defense. We've taken them out on the past when they attacked OxiClean head on.

Again, I would just remind you the endgame. When two big players go to battle like this, and we'll do similar what we did with the OxiClean defense, with innovative new products, increased marketing spending, increased support overall.

Often the end result is with us and Procter, Coke and Pepsi, usually it's the other players who take the hit. Because the two guys going head to head often end up both winning and the other smaller competitors often end up losing.

So please believe me I take is absolutely seriously. We've been all over this for months and I feel very confident, though, that what we'll announce to you next year will delight you. We'll do what we need to do to deliver, what we're calling, is organic growth at the high end of our 3% to 4% range, with laundry being a key player of that.

Great. And one last one on that Oxi defense. Obviously that was very successful. But that was Procter coming into a category where they didn't have much of an equity.

Now they're swimming downstream where they do have a pretty strong equity. You just haven't seen too many examples of that in these categories and how are you thinking about that dynamic? I know you're viewing maybe the Oxi example as informative. I'm wondering what the differences are in that you have a bigger brand with an actual equity in the category swimming downstream?

I wouldn't say Procter has no equity in the laundry additive category. Procter is the giant in the overall laundry business with products in almost every segment. They entered in that category with the Tide name, which is an incredibly powerful brand. I consider that a very strong analogy to what's going on here.

Yes it's laundry detergent, there's a lot of brands in there. They're obviously a head of that category also, but we're the strong number two. Again, the best way to fight that is to go out with innovative new products and increase marketing spending and have at it. And I feel confident that what we're going to next year will deliver those results we need to deliver the kind of business results were going to tell you about in February.

Great. Thanks a lot, guys.

Alice Longley, Buckingham Research.

Another question on detergents. Is the increased promotional activity in detergents coming mainly from your biggest competitor above you? Or from the other two players or equally from everybody?

Sort of the latter, Alice, but it's all in different formats. The other competitors are mostly doing price. The big dog is mostly flooding the market with coupons. So it's been from all angles and that. So it's a bit of a war going on right now. We are hanging in there pretty well, our share growth up record levels in Q3. We know how to fight those kind of wars and we'll do what's right to defend our brand.

We know that Procter's got a bunch of innovation coming in detergents and you apparently do. Do you know if the other players have innovation coming too? Or are they going to keep fighting on price?

I don't know that, Alice. I can't comment on that.

Okay. And then some housekeeping stuff, can we expect gross margins again to be up in 2014?

We're not going to comment on that until the first week of February, Alice.

All right. And then the other one is Avid. You've said for sure it will grow double-digits next year. Are you more comfortable with a number closer to 10% or closer to 20%? I'm trying to figure out how fast that double-digit momentum is. Alice, I just won two bets about you. Keep going.

Yes. Well, it's not 99, Alice. It's double-digit. That's all we're going to say.

All right. But is it just barely double-digits or is it something stronger than that?

Yes. I commend you for your persistence (laughter), but you can see in the Nielsen data how this category's been growing --

Yes but that's not very complete data.

Well, Alice, we invite you to the CAGNY event next February in Florida.

Then how fast is Avid growing overall at this point, including all channels?

On a pro forma basis it would be growing in the 20%s.

Thank you.

So if you looked at 2012 versus 2013, assuming we owned it in 2012, it would be in the 20%s.

Including in the third quarter, not just year-to-date?

That's right.

Okay. Thank you.

Michael Steib, Credit Suisse.

I have a couple questions on the costs. First relating to your commodity costs, it was flat in the quarter. What's your outlook and how much visibility do you have as you enter 2014? And then secondly, have you realized all the cost savings now from the Avid acquisition? Thank you.

With respect to commodities, Michael, we have eight commodities that represent -- that are our most volatile commodities. We typically look at what percentage of those are hedged going into the coming year. And right now we're at about a 30% hedge.

Some of those commodities would include everything from resin to diesel. Soda, ash, paper products, fatty acid distillate, et cetera. So as far as Avid goes, when we bought that business we said we saw $15 million of cost synergies. That number's going to be higher. We just don't update numbers like that after an acquisition.

The way the $15 million split was $6 million of SG&A and $9 million of cost of goods sold. The cost of goods sold number is certainly going to be higher. We're making really good progress with respect to expanding gross margin on that business.

Dara Mohsenian, Morgan Stanley.

For 2014, you didn't guide to EPS growth despite the top-line guidance. Why is that? Are you still comfortable conceptually that double-digit earnings growth is the right range longer-term as you look out to 2014 and beyond?

No. We just don't normally give a forecast at this point in time. We're still dotting the Is and crossing the Ts in our planning process. We've always historically done that when we come out to the CAGNY meeting at 2014.

Okay. Because last year at this time you had given it, so I was just wondering what the difference was versus last year.

Yes, last year at this time you may recall we had just acquired the Avid business, so a lot of interest in how much we thought the Avid business was going to contribute to 2013. So we felt like obligated to call a number for the year at 14%. And that's what's coming in too, by the way.

That makes sense. And then for 2013 earnings guidance, I'm a bit confused why your earnings guidance isn't moving up. The tax rate's more favorable, gross margins are coming in at the higher end of your range. Should we think about where sales growth is, maybe at the low-end of your new range? Or is it conservatism or something else that's offsetting those favorable factors?

Look, there's always a lot of moving parts in the P&L. We were calling 2% organic growth up until this call. Now we're saying 1.5% to 2% so obviously there's some earnings impact as a result of that, so there's some room there. As far as taxes goes, we got the benefit of a lower tax rate already in the first and second quarter.

We were at 34%, 34.5% in Q2. We stock at 35 midyear because we were anticipating some things to happen in second half that didn't. So then we posted a 34% again in Q3. So the whole year is going to be by 34%.

It's not like we woke up to the entire benefit in the fourth quarter of tax rate change. It's just that we came down off the number today.

Okay. Thanks.

Wendy Nicholson, Citi Research.

I just had a question about your gross margin. Jim, the comments you are were making at the beginning about how you pay your people partly on gross margin. Can you give us a sense of what the range of gross margins are. You don't even have to tell me what detergents are versus vitamins specifically, but within the Company how big a range of gross margins there are. I'm trying to get a feel for how much some of the negative pricing you're doing might be hurting your gross margins versus favorable mix is boosting your gross margins.

Yes. The only thing we've said historically with respect to that question is, just as a walking-around number, that would be 20 margin points difference between an average household versus average personal care, personal care being higher.

And so as you think out over the next, forget about next year, but over the next three to five years, obviously you've made two huge improvement over the last four quarters. But over the last three years you've been in that 44% range.

Do you think that with the benefit of favorable mix you can break out sustainably and more consistently to 45%, 46% 47% type number? What are you thinking about in terms of motivating people internally? Or is that hard to come by?

The things that move our gross margin is several things. One is the new products. So new products that we launch are typically going to be higher than the brand average. So that's a mover within the business. Obviously people are incentive to develop products with higher gross margins.

The second thing, you're correct, personal-care has been a bit of a drag, at least certainly in the third quarter ex-the vitamin business. That's the higher-margin stuff. That's the side of the business we would need to get rolling on a consistent basis because we had some fits and starts over the last year or two where we were growing and then we were not growing.

The third thing is acquisitions. So acquisitions that we buy typically are gross margin-accretive. That wasn't true for Avid because when we bought them it had a 38% gross margin. But we did say that over time we expect to get that to corporate gross margins and we're still committed to that. And so that's going to help us as well as we come up the line on that one.

So it's new products, it's personal-care improvement, it's acquisitions. And finally the most important thing in recent history is our Good to Great Program, so our continuous improvement program. Think about the third quarter where you have a huge negative price mix and at the same time you're expanding your gross margin, it's really remarkable.

The way this program works is we're always looking ahead the next two to three years, see where we can de-bottleneck plants and change formulations, negotiate with suppliers, through CapEx automate our manufacturing processes, such that we can reduce the cost per unit of our products. That is central to our gross margin strategy going forward.

Let me just jump in and say to that, that's why 25% of every employee in this Company's bonus is based on hitting the gross margin target. So that has been a major change in the culture of this Company, going back about over five, six years.

I hear everybody in this Company talking gross margin. It really pays off when that happens. That's how we keep getting all these improvements in gross margin. It's been a terrific result.

Terrific. Thank you very much.

Joe Altobello, Oppenheimer.

Just want to go back to Avid for a second and try to tease out the growth for next year. Obviously you've got a nice tailwind from market growth. But you also, I thought when you bought it, had a fair amount of innovation that was still in the pipeline that hadn't come forward yet. And also you had a nice distribution opportunity as well. So can you update us on what's going on in both of those fronts?

Joe, we do have a lot of new products come in. The distribution gains happened over the course of the year. So we'll get a full-year benefit in the next year. There's more distribution gains to come. We're still not where we want to be on that. There's a lot of upside there.

Always keep in mind that gummy vitamins as a whole business, a whole category, is only 9% of the total vitamin category, but growing at about five to six times the rate. There's tremendous upside left to the gummy vitamins out there. The retailers see it, they're supporting it. The sampling which we are driving hard, that's the best way to get people to understand the whole.

We've more than doubled the advertising on the business, but the sampling's crucial. When somebody tastes a gummy the just can't the same vitamin nutrient as in the hard pill is in the gummy that tastes so great.

We're just going to keep pounding that. We've got a tiger by the tail here and we're going to be doing everything from increased marketing spending, new product innovations, increased distribution, increased sampling. We're just going to keep pounding it and delivering double-digit growth.

Where is the biggest opportunity for distribution expansion in 2014?

Still the traditional food channel. Not only because the prior owners of the business literally didn't have the arms and legs to call on that channel, we do. So we're in there big time doing that. There's some other distribution opportunities in other channels too, but the biggest difference versus where we want to be I would say is still in the traditional food stores.

Okay, that's helpful. And switching gears a little bit. For you, Matt, in terms of the organic growth, you mentioned 1% to 2.5% in the fourth quarter and then 4%-ish for next year.

That's a like for like number in the sense that it's got Avid in both periods. I'm curious if you could bridge the gap between the 1% and the 2.5% this quarter and the 4% next year. It sounds like you're assuming some moderation and promotion activity and some new products as well driving that? Thanks.

Well, the new product introductions are the biggest factor. We won't talk about those until the first week of February. We still have vitamin growth next year. And we have the improvement in the cyclical specialty products business.

So remember that business collapsed in the second quarter from a volume standpoint. And by itself, took our full-year down by 50 basis points from an organic standpoint. So that will come back as well. It's really those three factors, new products, vitamin growth and improvement in the cyclical specialty products business.

Okay, great. Thank you.

Lauren Lieberman, Barclays.

Two questions. First thing is I want to know is the implied increase in marketing spending in the second half is actually really -- it's quite large. It felt like you talked a little bit more about the promotional aspects so I want to make sure I'm correct, that you're also planning a pretty significant increase in more advertising-type marketing spending?

Yes. In the fourth quarter, Lauren?

Yes.

That's true. That's the plan right now.

Okay. So that's not necessarily against new products, it's another way to combat the environment. Perhaps a little bit higher quality than just pure promotions?

Right. It's again, we have continued to support the brand. The battle won't be fought completely with respect to price.

Okay. And then the second thing was, Jim, I was struck by your, for you especially, relative optimism about the competitive and consumer environment for next year. And also by the fact that you commented on innovation being the key. Almost as if the innovation hadn't been that interesting this year.

It didn't really feel like consistent with how you spoke about innovation from Church & Dwight at the start of the year. You had the laundry compaction. There was a lot of exciting stuff at that stock exchange meeting. Is it really just a similar year in terms of innovation? You're more optimistic about how it plays out in the market? It just seemed a little bit different for you, especially.

Lauren it's just a relative thing. We had a good pipeline of new products this year. It's just next year by far will be the biggest amount of new product launches we've ever had.

And like I said earlier in a question, as planned we didn't have this new cat litter product planned for this year. We will have a big one planned for next year. Laundry will be doing things next year that we would normally have been doing, plus maybe a little more, because of some of the competitive activities going on.

And the other categories too all really have some terrific stuff. I don't want to tip my hat right now on some of those things we're doing. When you see this the first week of February, you will see -- we've always had good new product innovations in past years, this will blow your mind next year.

Okay. Great. Thank you.

Leigh Ferst, Wellington Shields.

I also had a question about Avid distribution. Can you tell us what gains you've made so far and if you are where you want to be in terms of how you planned it for the last year?

Obviously -- I'm not going to go into specific detail. I will just say we've had significant distribution gains so far across almost every -- across every channel, period. And but I would still tell you there's a lot more to go.

And so we've got our sales force every day is cracking accounts out there. What happens is, accounts don't all make their decisions on the same day every year. It's throughout the whole year accounts -- some accounts make decisions on distribution in the first quarter, some in the second quarter, some in the third quarter, some in the fourth quarter.

We just have to go with that timing. And so our sales force is in these accounts constantly out there. We've had success over every quarter this year. I think we'll be able to have a lot more success going forward.

All I'll tell you is there's some accounts out there that are close to where we want to be distribution, but the large majority aren't. We want to all get them there. And then we have a great new product pipeline coming. Great success in 2013, but still a long ways to go in 2014 and beyond.

Okay. And you mentioned in your comments that you have achieved distribution to offset some out-of-stocks in certain brands. Can you give us any more detail on that?

I think I made the point that our sales force -- our shares have been steadily growing in laundry, it's up 50% in last five years. When you have that kind of share growth, you need more space on the shelves to keep up with that, otherwise you would be out of stock.

And that's where our sales force has done a great job of going out there and going over those numbers with the retailers. The retailers, yes, they see that. They realize they need to give us more shelf space or they will have out-of-stocks. It's been a big benefit to us that we've had a big gain in distribution in a lot of categories this year to hopefully minimize the out-of-stock situation.

Don't walk away thinking out-of-stock has been a significant problem for us, it's not. Because our sales force did a great job of getting increased distribution in all the categories where we had great share growth.

Okay. And you've had great track record making acquisitions. It sounds like you want to make another one, but obviously it takes two to tango. Will you be able to achieve your goals next year without an acquisition, if for any reason you're not able to consummate one?

Yes. The goals we announced in February will not be based all on an acquisition. We never do that. If in the course of the year, we make an acquisition, we'll update the information. We don't ever base our annual plan on hoping to make an acquisition, because you can't guarantee that.

Thank you.

One more question.

Connie Maneaty, BMO Capital Markets.

I was hoping you would comment on the impact of compaction. Initially when you launched ARM & HAMMER, the new concentrated version, you put it on store shelves next to the regular strength. I'm wondering if the shelf space has migrated entirely to the compacted version. If competitors have followed as they did on the first round. And whether or not the increased profitability of that comes out of a concentration like this that's been funding a lot of the increased promotional activity?

I'll try to answer those 27 questions. The compacted form of ARM & HAMMER we call it 4X or Ultra Power, has done very well this year. I think I said 70% of the share growth that ARM & HAMMER achieved in the third quarter came from that product. It's out there doing very well. Nobody has followed it yet. And I say yet.

Out there, but it's doing very well, we're very happy with it. It has not -- we gained distribution far beyond that product in the laundry category last year. So it was not the only gainer. The price set a nice contribution to us on sales and profits, but it wasn't the source from which we sourced any money for promotion dollars on that. It's overall a good new product for us.

We're very happy with it. Obviously going forward strongly. I would wish my competitors would take a closer look at that. But we'll see. I can only control what we do and I'm very happy with the success we've had with that product.

Thanks.

Okay, everybody, I want to thank you very much for participating in the call today on a Friday. I hope you have a great weekend and thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.