切遲杜威 (CHD) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Church & Dwight first-quarter 2014 earnings conference call.

Before we begin, I've been asked 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 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 share our insights on the Company's business results.

I'll start off this call by providing you with my perspective on our first-quarter business results, which you read about in our press release this morning. I will then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with his perspective on the financial details for the quarter. When Matt is finished, I will return to discuss our earnings guidance for the year, and then we will open the call to field questions from you.

Let me start off by saying that I am very proud of my Company for the first-quarter business results that we achieved. Despite headwinds from continued weak US consumer demand and a highly competitive environment, the Church & Dwight team successfully executed the first phase of our innovation-driven strategy is by getting incremental retail distribution for all of our great new products.

As I stated on our last earnings release and at the CAGNY conference, we believe that (technical difficulty) is the key to delivering strong sales and earnings growth in any economic and competitive environment. Innovation has been a key driver of our past success, as shown by the fact that over 25% of our sales in 2013 came from products launched since 2007.

As promised, we launched a record number of innovative new products in 2014 across every one of our major categories and three new categories. This represents the first time in our Company's history that we launched a great new product in every one of our major categories in the same year and the first time that we moved into more than one new category in one year.

Our sales force did an incredible job in gaining incremental distribution from retailers in every category. Gaining incremental distribution is the key first step for driving future sales and profit growth, so we are off to a great start.

The second phase of our innovation-driven strategy is to drive consumer demand for the new products via the marketing program supporting their launch. This marketing support started at the very end of the first quarter on all but one of the new products, so it's too soon to judge the consumers' reactions to the new products.

However, one of the new products, our new premium-priced cat litter called ARM & HAMMER CLUMP & SEAL, began shipping in December 2013 before the other new products. Therefore, marketing support for this new cat litter began in January before the other new products. This new cat litter has been a huge hit with our consumers, as reflected in both our brand-share results and its impact on category growth.

Our consumption increased by 15% and our share grew by 1.3 percentage points to a record quarterly share of 18.5%, which enabled our brand to move from the number three brand position to a strong number two brand in the category. Just as important, our new product has been a major contributor to driving category sales up over 9%, the strongest growth in any of our categories and excellent growth for any consumer packaged-goods category.

This exemplifies our belief that innovation is the key anecdote for driving improved value creation for consumers, our customers, and our shareholders.

Overall, the first-quarter results were excellent on the share front, with share growth on three of our four mega brands, namely OxiClean, Trojan, and vitamins, and we held share in the total ARM & HAMMER brand, driven by increased marketing support.

Unfortunately, some of our competitors have not invested in developing new products and instead have increased their trade in coupon spending to defend their brands. This happened particularly in the laundry detergent category in the first quarter.

Church & Dwight is the only competitor that has grown share in the laundry detergent category every year for the past five years. We are now the number two player in the category, and one out of every four wash loads is done with a Church & Dwight laundry detergent.

The growth of our laundry detergent business has been driven by our value pricing, great new products, increased distribution, and higher marketing spending. Our largest laundry detergent brand, ARM & HAMMER, has posted year-on-year share growth for 17 consecutive quarters, including share growth in the first quarter of 2014. Our OxiClean laundry additives brand has posted year-on-year share growth for 10 consecutive quarters and achieved a record quarterly share of 45.1% in the first quarter, which is bigger than an X4 laundry additive brands combined.

In the first quarter of 2014, we launched innovative new products on our ARM & HAMMER laundry detergent brand, and to continue to support our remarkable record of share growth, we extended the OxiClean brand into the laundry detergent category and gained excellent incremental distribution by the end of the quarter.

Several competitors who lack innovative new products preempted the start of our marketing programs for our new laundry detergent products and for P&G's Tide Simply Clean & Fresh product by putting unprecedented levels of trade and coupon spending behind their brands to disrupt our launches. The increased competitive trade spending was a key driver of the 5% decline in the liquid laundry detergent category in the first quarter and has temporarily impacted the trial of our new laundry detergent products.

However, as you know from our long history of success, one of Church & Dwight's greatest strengths is our ability to respond quickly and effectively in response to changing circumstances. So, we have taken actions designed to restore our competitiveness and drive strong trial behind our great new laundry detergent products, just as we did on our new cat litter. I will not divulge or answer any questions concerning the specifics of what we have done, for competitive reasons. I will just tell you that I am extremely confident that these actions should enable us to deliver our 2014 sales and earnings-per-share commitments.

I am also pleased to report the continued strong growth of our most recent acquisition, the Avid gummy vitamin business. Despite increased gummy competition and some negative press concerning the benefits derived from taking multivitamins that hurt the overall category growth, we delivered double-digit consumption growth in the first quarter and are maintaining our double-digit sales and consumption growth outlook for the full year.

This sales growth will be driven by the launch of new vitamins for kids and adults, increased retail distribution across our full line of products, and increased marketing spending. These actions will help to maintain our strong number one share position in kids' gummy vitamins and significantly grow our number one share position in the adult gummy vitamin category by encouraging adults to switch from swallowing hard pills to enjoying our delicious-tasting gummy vitamins.

Please keep in mind that the adult vitamin category represents $6.8 billion in sales and gummy vitamins as a whole represents only 6% of the sales. The adult gummy segment has already doubled in size in the past 18 months, and that still leaves 94% of the total category as upside. We doubled our ad spending on gummy vitamins in 2013 and we are increasing our advertising spending by at least 30% in 2014 to continue to convert adults to our delicious-tasting gummy vitamins.

I will now turn the call over to Matt, who will give you specific details on our first-quarter business results.

Thank you, Jim. Good morning, everybody.

I'm going to start with EPS. First-quarter EPS was $0.73 per share, and that compares with $0.76 in 2013. That's 4% less than a year ago. The $0.73 was a little better, actually, than our $0.72 outlook for the first quarter. The negative drag of FX in the quarter reduced year-over-year EPS by 1.5%.

Our reported revenues were up 30 basis points to $782 million. On the organic side, organic sales was up 1.2%, which was in line with our Q1 outlook of 1% organic sales growth. So of the 1.2% organic growth, approximately 4.4% is due to volume, with 3.2% negative product mix and price. And of that 3.2% negative price mix, approximately 2% was attributed to investments in slotting and couponing in our US business. This is behind our 2014 new product launches, which we showcased in February when we provided our full-year outlook.

Now let's review the segments. The consumer domestic businesses' organic sales increased by 40 basis points in the quarter, reflecting sales of OxiClean liquid laundry, ARM & HAMMER CLUMP & SEAL cat litter, and higher sales of our vitamin -- VITAFUSION vitamins. These increases were partially offset by lower sales of ARM & HAMMER and XTRA detergents. Volume contributed approximately 4.4% to US sales, partially offset by 4% negative effect of product mix and price.

With respect to negative product mix and price in the US, slotting and couponings behind our new products accounted for 2.2% negative price mix.

International organic growth was flat year over year. The volume decreased approximately 60 basis points, while we had positive price mix of 60 basis points. Canada and Mexico contracted in Q1 net, which was offset partially by growth in year over year in the rest of the world.

For our specialty products division, organic sales increased by 12.4%. The animal nutrition business drove a 15.3% volume increase, which was partially offset by a 2.9% unfavorable price mix. The US dairy industry is very healthy right now, which is driving demand for our products.

As you saw on the release, we expect total Company organic sales for the year to be at the low end of our 3% to 4% range, and Jim will comment more on that later.

With respect to gross margin, our reported first-quarter gross margin was 43.4%. That's 150 basis points contraction from year-ago first quarter. The decrease in gross margin, again, is primarily due to slotting and couponing investments behind our new products. This alone accounted for 100 basis points of the drag year over year. [Hence] of the drag is due to -- primarily due to premium distribution costs that we experienced in the first quarter due to weather -- I'm sure that's no surprise to anybody, and also some negative mix driven by the strong specialty products results, which, of course, have lower gross margins.

Regarding commodities, our input costs trended up in Q1, and in particular this is due to resin, which is at a three-year high. Now for the full year, we expect gross margin to contract 50 to 75 basis points, largely due to price competition in the laundry category. We previously expected 2014 gross margin to be comparable to the prior year, and we will say more about that later.

Marketing spend for the first quarter was $88 million, or up -- or 11.2% of revenues. This is 110 basis points higher than the prior-year spend rate and $9 million higher in dollars. We continue to support new product launches and grew dollar share on three of our four mega brands in the quarter. This is due to the great execution of our sales and marketing teams.

Now, SG&A. SG&A year over year was lower by $12.3 million in the quarter. SG&A as a percentage of net sales was 11.5%. This is approximately a 160 basis-point decrease from the prior-year first quarter, and this is in part due to the absence of transition expenses related to the Avid acquisition that occurred in the prior-year first quarter, as well as lower legal costs. This is a reflection of our continued vigilance to control SG&A. And you may remember when we gave our outlook for the full year that we are expecting 2014 full-year op margin expansion to be driven by SG&A, and we got off on the right foot in the first quarter.

Now operating profit, the reported operating margin for the quarter was 20.7%, which was 100 basis points lower than last year's 21.7%, but again, this reflects our investment behind the new products.

Next is income taxes. Our effective rate for the quarter was 34.5%. This compares to last year's 34%. We were 50 basis points higher year over year. Remember that the Q1 2013 rate was favorably affected by retroactive reinstatement of R&D credits last year. We expect the full-year 2014 effective rate to be approximately 34.5%.

Next, I will comment on cash. We generated $102 million of net cash from operations for the first three months of 2014. This is a $30 million increase over last year, and we spent $6.3 million in CapEx in the quarter and it's a $4 million decrease from the prior year. On a full-year basis, we expect to spend approximately $85 million on CapEx.

I want to comment on the share buybacks next, but I'm going to preface my comments on the share buybacks was just a comment on cash flow. We expect full-year cash from operations to exceed $525 million in 2014. That would be a record for us, so we did deploy some of that cash in the first quarter. The Company purchased $260 million through ASRs in Q1.

You may recall in February at CAGNY, we said we had purchased $140 million of shares, and since then we did an additional $120 million, for a total of $260 million. And the way to think about the $260 million, of the $260 million, approximately $75 million was purchased under our Evergreen program, which was established to cover share creep, and the balance, $185 million, was purchased under our $500 million share repurchase program. So we have $315 million remaining under that authorization, and the Company anticipates purchasing additional shares in 2014.

I'm going to wrap up right now. The first-quarter results include 1.2% organic sales growth with a 4% EPS decline, as we invested behind the launch of our new products. We expect second-quarter earnings of approximately $0.61 per share, which is the same as the prior year. I'm sure many would have liked EPS to be higher; however, our plans for our new products require a significant increase in marketing spending, so we expect Q2 to be the highest quarter of the year for marketing spend.

A couple other comments. As we mentioned in the release, Q2 organic sales is expected to be 3% in the second quarter and gross margin is expected to contract 100 basis points, and again, this is primarily influenced by the remaining slotting investments and also more price competition in the laundry category.

I will turn it back to you now, Jim.

Thanks, Matt.

I will finish off our portion of the call today with a few words on our outlook for the full year. As stated in the press release, we have updated our 2014 guidance to reflect organic sales growth at the lower end of our 3% to 4% range and we have tightened earnings-per-share growth to 7% to 9%. These results will be driven by our balanced portfolio of value and premium products, the launch of our innovative new products, aggressive productivity programs, and tight management of overhead costs.

Our 7% to 9% earnings growth target is a tighter band than our initial 6% to 10% earnings growth target, but is still in the upper quartile of EPS growth targets in the CPG industry, consistent with our historical performance, and we believe we can deliver within that aggressive range despite the highly competitive environment and weak US consumer demand. The majority of our annual earnings growth is planned to occur in the second half of the year, since the first half includes a significant increase in slotting, couponing, trade promotions, and incremental advertising for our new product launches versus what we spent last year.

We're also aggressively pursuing acquisitions and have significant financial firepower to make them. As you know, we have a great track record of making highly accretive acquisitions because we are very selective about the type of businesses we acquire.

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

(Operator Instructions). Alice Longley, Buckingham Research.

I guess I will try two. You are saying your organic sales growth will be 3% in the second quarter and that's better than the first quarter. Can you break that out to US consumer versus specialty? I am just wondering if that is going to be driven primarily by specialty or will the US consumer be stronger than in the first quarter?

And then, my second question is on the SG&A ratio, which is down 150 basis points, and it's normally been, not just last year, but for several years, it's been more around 13% in the first quarter and now it was 11.5%. Is that you scurrying around and cutting costs as much as you can to make your numbers, or is the SG&A ratio permanently -- maybe for the whole year down 150 basis points, and can it continue to go down in the following year? Thank you.

That sounded like more than two questions, Alice, [that's all].

With respect to the first question, I would say, right, in the first quarter we were up 1.2% for the total Company, and as everybody can see in the release that the specialty products business was up significantly, with domestic up 40 basis points and the international business up -- actually flat year over year.

In the second quarter, we are expecting a similar performance from the specialty products business, but that is not going to be enough to drive us to 3%. My expectation is that the combined consumer business should grow approximately 2% in the second quarter and that the -- that would be US and international, and that the specialty products business might generate the rest. Those are round numbers, but that's the way to think about the second quarter. What was -- your next question was on SG&A?

Yes.

Do you have a second one on (multiple speakers)

First with the 2% for consumer, is the US going to be up more or less than that 2%?

No, I wouldn't want to get any more granular than that.

Okay.

I think that the combined will be up 2%, approximately.

Yes, and then the other (multiple speakers)

Year over year.

-- is the SG&A ratio.

Yes, so SG&A, so on the first quarter, you saw we were down 160 basis points year over year. And we called out a couple of things that happened in the quarter. One would be the Avid transition expenses. So of that 160, 40 that was attributed to those, too, so 120 for the rest.

I don't think it should be any surprise to anybody that we expect SG&A to drive our op margin expansion this year because, remember, when we started the year, what we said was that we would have flat gross margin and pretty much flat marketing, right? So we said 45% gross margin and 12.5% marketing, with all of our op margin expansion coming from SG&A.

So that is as expected and I wouldn't use the word scurrying around. There is not a lot of scurrying around here. We have a pretty tight plan with respect to how we are going to get to that save year over year, so we do expect that on a full-year basis we're going to be down probably over 100 basis points.

So, you are probably sitting there trying to figure out how you're going to get to the midpoint of the range and you're working on your model. So I will save everybody a lot of trouble. So if you are saying, all right, the Company said the low end of the 3% to 4% range, so then you would be at -- let's pick 3% organic sales, just for fun. And we will say organic -- we'd said gross margin was going to be 50 to 75 basis points down, so let's say down 60. That would mean your SG&A would have to be down around 150 basis points to get 50 basis points of op margin expansion on a full-year basis.

How about the marketing ratio for the year?

Say again?

Will the marketing ratio for the year still be flat, or --

Yes, yes, so the way I am talking you through it is if you had the low end of the range at 3% and you picked the midpoint of that gross margin around 60 down, kept marketing where it was at 12.5%, and you said, okay, SG&A down 110, that math gets you to 50 basis points of operating margin expansion. And clearly, we are well on our way with respect to how the first quarter panned out.

Excellent, thank you.

Dara Mohsenian, Morgan Stanley.

So you guys have a great history of delivering the double-digit earnings growth historically. I know you're pretty proud of that history. I'm just wondering as we think about this year and the high single-digit earnings growth, it seems like it's a pretty ambitious goal in light of the current competitive environment, and clearly repurchases and SG&A leverage are helping you drive that earnings growth. So, I guess it feels like you're stretching a bit more to hit goals. Is that a fair point?

And also, as you think about the strong innovation pipeline, how do you marry the need to invest behind the pipeline for stronger growth beyond this year versus potentially depressing EPS growth by investing behind that strong pipeline this year?

I would tell you to think of this year as a year where we are investing for the future and yet still delivering an earnings-per-share growth that I think is at the upper end of the industry. So, I look at it as a win-win. We always want to be in that top quartile in earnings growth.

In this case, we are below 10%. If it wasn't for foreign exchange, we would be in double digits, but we are slightly below 10%. But more importantly, we are investing in the future with all the great new products and the strong advertising support.

I would tell you to keep in mind some of our competitors are actually cutting advertising. Procter announced last year they were going to cut $1 billion out of their marketing spending, and we are keeping our marketing spending strong. And we also told you previously we are actually focusing that a little bit more behind our four big mega brands, so we are very excited about the fact we've got the best new product pipeline we have ever had this year. We are investing behind it. That's why the first quarter and the second quarter are down or flat versus EPS, and we will have [lou] set some very strong growth in the back half of the year.

But it is -- investment is the right way to think about it, but still delivering very strong earnings growth compared to our competition.

Okay, and then on the repurchase front, $260 million this quarter is a big step up from recent trends, so can you talk about what changed here to make you more aggressive on that front? And does it signal at all that acquisitions are less likely? I guess it didn't sound like that based on the commentary, but I would love to get an update there.

No, I wouldn't say that acquisitions are unlikely.

And with respect to share repurchase, the high water mark for the Company in the past was around $250 million a few years ago, so we have been at that level before, and so the way to think about what was built into the numbers and where are we now. So when you start the year, you are faced with question marks about retailer acceptance of our new products, consumer trial, the impact of Simply Tide. FX became topical even for us. You wouldn't know we were only 20% international, so that's more of an issue for us this year than in prior years.

Input costs have also been -- is also a question mark, and then you come to share count. So you have some levers that were all in question marks with respect to that wide range of 6% to 10%, which we have now tightened.

So our expectation was to purchase shares this year, up to around $250 million. So that's how we started the year, depending on how things would go. So that's why we did it in two pieces. We did $140 million in February and we did a little bit more in March, $120 million.

And then, looking at it right now, we would say, okay, we have $315 million remaining on our authorization. We don't expect to exhaust that or even exceed half of the remainder. But we will do some more before the year is out.

Okay, thanks.

Jason Gere, KeyBanc.

I guess I want to delve into a little bit on the consumer side, and maybe if you could talk about what you are seeing with consumer trends, the premium side versus the value side. So the laundry, I know right now, is a challenge with some of the external factors, and even, I think, when you go to some of your key retailers, you are seeing some outrageous promotions out there. Good for me, bad for you.

But at the same point with gummy in that double-digit range, can you talk more about the personal care innovation that is coming out this year? Because it feels like on the consumer side, maybe this is the swing factor to delivering better than what you thought. Last year's innovation I thought was good, but excluding Avid, it only grew very low single digits.

So can you talk a little bit about that and how much of that is a bifurcation between premium and the value consumer?

Yes, I would be glad to, Jason. First of all, if you look at the first-quarter results, we're in roughly 14 categories, and half of them were down and half were up. So, that's not great. We wish it was more than half were up.

We are excited about the personal care side of the portfolio this year. We got some great new products. Our First Response pregnancy kits we have is the first and only pregnancy kit that tells you six days before your missed period. Every time it has gone up a day, the first guy to have it usually benefits in the category, so that's very premium priced, so that's just launched. We are excited.

On Nair, we have a whole new line of products going out under an Argan oil new moisturizer in the products, new ingredient. That is hitting market and off to a great start.

And the vitamins, we launched a vitamins-plus line on both the kids side and the adult side. That's, again, got better-than-average Company margins on it. We expect that to do very well and drive double-digit sales growth this year.

Oral care, it's probably the best year we have had in a long time. We have a whole new line going out under the TRULY RADIANT name for both toothpaste and toothbrushes. It's got great new distribution. Our early share results are up there and we were very excited about that. We have a lady, the TV talk show The Biggest Loser, who is our spokesperson. The ads are terrific and that product is off to a very good start, and that is, again, all premium-priced products.

And on Trojan, we have some new condoms, vibrators, and lubricants going out. Again, very high premium price in terms of margin in that.

So no, we got a very strong portfolio on the personal care side of the world, and also, we told you before, on the household side, the cat litter is our star for the moment because it was out the earliest and doing great. But we have new laundry detergent forms. OxiClean, as you know, which is -- prior to the Company average margins, it has got a lot of tough stuff out there -- new laundry detergent, new bleach-like product, new dishwashing product out there.

So our guns are loaded. We are supporting it. The advertising is very strong. Matt told you before the second-quarter advertising is going to be the highest of any quarter of the year to drive the trial, and we have done stuff on the pricing side, as I say, to make sure we are competitive.

Okay, and then just on that point about you saying the marketing in the second quarter the highest, is that dollar or percentage of sales, and does that imply, I guess based on Alice's question, that the second-half marketing spending will be down year over year, just on the comparisons?

Yes, so we got it front -- it's more front-end loaded, right? So it's pretty much both on the percentages and the dollars as being the high -- been highest of the year for Q2, and that means, obviously, we are pulling things forward to get behind the new product launches.

Okay, good. And then just the housekeeping, just with the buybacks. Can you provide any color in terms of where we should model share count for the second quarter and just for the full year?

Yes, on a full-year basis, where we are right now, it's, round numbers, would be 139 million shares, and you can -- for average shares on the full year -- if you wanted to use a full-year weighted average number.

Okay, so then for the second quarter, we are looking for something in the high 130s, then?

Yes, I just want to make sure you understand it. So where we want to say where we are right now, we have bought back $260 million worth of shares. So your round-number denominator would be 139 million shares to calculate EPS, and I already commented on how much more we might buy for the remainder of the year, so you can do the math on that.

Okay.

And you can adjust the 139 million downward.

Right, but in terms of the incremental what you might buy, is that in your guidance of 7% to 9% or not?

Yes.

That's in your guidance, okay.

Right, but it's a range.

Yes, yes, yes. No, I get that. Okay, great, guys. I will hop off.

Joe Altobello, Oppenheimer.

A couple of quick questions on the laundry category. You mentioned it was down 5% in the first quarter. Could you remind us what that number was in the fourth quarter in terms of the category decline?

The total laundry category, including liquid, powder, and the unit dose, was down about 2.9% in the fourth quarter of last year, and I believe the number -- we're pulling it right now -- is -- because we often confuse liquid and everything else like that. I'm sorry, it was down 2.2% in the fourth quarter and it was down 3.9% in the first quarter this year, all types of laundry products.

Okay, so a meaningful deceleration there.

In terms of Tide Simply, curious what you are seeing from the impact from that launch at this point? Is it still early to tell or are you seeing much in the way of any share loss there?

It's still early to tell, Joe. There is a lot going on in the category. Our new product launches, the couponing and trade spending by some of our competitors has clouded the water a little bit like that, it's just too early to tell.

We are very happy we got incremental distribution on both our ARM & HAMMER and OxiClean laundry products, and now we are starting to drive [prow] with the increased advertising and the trade and coupon spending.

Okay, and just one last one on Avid. I guess the VMS category did slow down a little bit in the fourth quarter. There was some negative articles being written, I guess. Have you seen that category start to accelerate again in the first quarter or is that going to take a couple quarters before that plays out? Thanks.

You are right. There was some press out there that unfortunately got blown out of sight. The press was very narrow. Actually, the studies done were very narrow about focusing on cardiovascular disease and cancer. The news people of the world expanded that to be some very broad headlines that multivitamins weren't effective, so it caused a bit of dent in the category.

We are happy and fortunate that we are on the growth side of the category and we had some incredible -- we're on the gummy side of the business, which has been and will continue to be the growth part of the business, so I think the category will respond.

We did a lot of due diligence when we bought this business and we were warned by people in the business that these kind of things will happen. They will be relatively short-lived, and then things go back. So, I think there will be a pretty quick bounce back in the category in this. Because most people take vitamins to supplement their nutritionary needs and most people have gaps in their nutrient needs, so I think this bad press will quickly pass through and the category will start growing again.

Thanks, Jim.

Jason English, Goldman Sachs.

I was intrigued by the other press release you guys put out this morning talking about Wal-Mart's initiative on sustainability and the implications potentially on laundry compaction. Can you talk about how that is progressing in your dialogue with Wal-Mart, what you expect in a go-forward, and what the implications could be for your business?

Yes, Jason, that's late-breaking news. We were very happy to see Wal-Mart announce that initiative of at least 25% compaction by 2018. We are very strongly behind all this. We think it's great for the environment and we will be working very closely with Wal-Mart to make this happen as soon as possible.

When they talk about compaction, do you think that includes the unit dose or is that just referring to traditional liquid?

They are referring to traditional liquid.

And lastly, on unit dose, it continues to capture more and more share of the overall category, with liquid really driving it. Any plans for you to get into the liquid unit-dose category?

Yes. Jason, I would question what you had said. The category flattened out around 8%. Procter launched their Gain version of it, called Gain flings!, and so the category -- the unit dose is up to about 10% and it's flattening out there. So, I think that's where we are going to see the category plateau at, and I don't care to comment about what we do in terms of new products in the future.

Okay, thanks a lot. I will pass it on.

Wendy Nicholson, Citi Research.

I just had two follow-up questions, and I'm not sure if I just misunderstood, but on the guidance for the revenue growth for the back half, two things. The reduction or the leaning towards the low end of the previous guidance, that's all a price mix issue, and so if you had given us volume expectations for the year, that would be unchanged. Is that right?

I can tell you what the expectations are for the year.

The question is (multiple speakers) -- you are saying it is a more competitive environment, but does that mean you expect less market-share expansion or less category growth on the volume side?

I'm not sure I follow your question.

You are effectively lowering your topline and I am trying to understand why.

We said that there is unprecedented price competition --

Exactly.

-- in the laundry category, so that's influencing the full-year call.

So that's affecting your market-share outlook or your pricing outlook?

It's pricing, not market share. As Jim said earlier (multiple speakers)

(multiple speakers) outlook for the year hasn't changed?

Say again? Our share outlook for the year hasn't changed.

And your volume, your underlying volume growth outlook for the year hasn't changed?

Right, that's correct. That's correct.

And then, my second question is if the full-year revenue growth, let's say, is going to be 3% on an organic basis, but it is only looking like it's 1.5% to 2% in the first half, why exactly is going to accelerate in the back half because I would think all your new product shipments are actually happening in the first half?

Yes, just remember even in the first quarter, we had a 200 basis-point drag on our topline organic because of year-over-year incremental slotting and couponing. So all that happens in the first couple of quarters of the year. The absence of that, then -- remove that boat anchor in the second half.

Right, and the great trial we're driving behind all the great new products will pay off more in the second half of the year without the drag of the coupon and slotting costs, which heavily hit the first half.

Got it.

All that is netted in our sales numbers in the first two quarters.

Okay, but for the back half of the year, you are looking for organic revenue growth closer to 4%?

Yes, that's correct.

That's correct.

Okay, got it. Thank you very much.

Steve Powers, UBS.

I guess two more questions related to the laundry category. Aside from it being more -- there being more competition and more price intensity, has anything else surprised you in terms of the nature of that competition, who's driving it, which companies, which brands beyond Simply year to date?

Yes.

I guess (multiple speakers)

I will tell you my perspective on it. It wasn't really a total surprise. And I have been concerned about this happening for a while.

As you know, the weak economy that we have had since 2009 has encouraged consumers in a lot of categories to trade down. We took advantage of that behind our great line of value detergents by launching great new products, increasing advertising support, particularly on ARM & HAMMER. That's led to five straight years of share gains for us on ARM & HAMMER, and now, like we've told you before, we're now the number two detergent company.

So, our competitors were getting frustrated. We saw that. I feel P&G kind of threw the match on the gas by launching a half-priced version of Tide. We responded to that with innovations. We had a whole of ARM & HAMMER products called Clean Scentsations out there and we launched the OxiClean laundry detergent, but unfortunately a couple of our competitors, mainly Henkel and Sun, responded by lowering some feature prices and dropping a lot more coupons at higher values out there.

We would never lead such tactics, but we will be competitive, so we responded to that in the second half of the year to support our targets and that's where it is. But I think we are doing the right thing by driving innovation initially, but like I said, we will not be uncompetitive.

Okay. And then, I guess related to it, the second part is what are your retailer counterparts saying related to all this price investment? I guess their margins are benefiting from the trade spend, but category growth is obviously suffering, so what is their perspective on it? Are they getting frustrated as well? Is there pressure from that constituency to alter the game?

I think it's a good -- great question. I think it's too early to call that.

Don't forget, there is two parts to it. The retailers see the trade promotion dollars and that affects their same-store dollar range, and that drives into the category. What is not captured by the retailers and they don't get affected by it or by the [categories] is all the coupons, and all the coupons that are dropped through the papers and that have been pretty huge. Again, the retailer is immune from that because that doesn't affect the selling price they get.

So, it's a mixed bag there. But it certainly isn't good. We said in an earlier answer the category was starting to rebound in the fourth quarter of last year, and we were rather excited about that and looking forward to a year being driven by innovation, and then the competitive actions to lower prices has hurt the category short term, and I don't know how long it will last. I'm not sure, but we have the firepower to stay competitive on this and deliver our targets.

All right, that's great. Thank you.

Bill Chappell, SunTrust.

Can you talk a little bit more just on the gross margin side, taking out the pricing, marketing mix? Are there other initiatives going on? Would you, excluding that, see some meaningful gross margin expansion? And maybe talk about, have we exhausted everything out of Victorville or are there other initiatives on the horizon? And then, the commodity outlook, is that a headwind, a tailwind, any change in the quarter?

With respect to gross margin, the types of things that get all the fanfare and the headlines are new plants. We built the York plant and we built the Victorville plant. But even aside from that, we always have programs in place to expand gross margin because we are always dealing with inflation year over year. So that continues to be a hallmark of the organization.

So I wouldn't say that absent building plants that we wouldn't have continued to focus and have meaningful initiatives in place over the next three years to help us expand gross margin.

Yes, Bill, I would throw in, too, keep in mind things we have heard about that are still coming through the benefits are we put a cat litter line into our York plant a year ago, and that is paying huge benefits, and we're in the process of putting expanded capacity in for our gummy vitamin plant into our York facility, and that will generate cost savings, too.

So we have a good process ahead of us. We have a three-year pipeline of good to great savings we call ahead of us, so it's always been a hallmark of the Company. We're extremely aggressive about it. It's in the 25% -- everybody's bonus in this Company is based on hitting the gross margin improvement target, so a lot of focus on it around here and a great pipeline of projects, and some big -- and that includes some big projects.

Okay, and then on the compaction question, I know Wal-Mart said by 2017/2018. If it was sooner, like, say, 2015, when would you hear about it and how quickly could you convert to that?

Bill, this is honestly late-breaking news that's just come out there. Like I said, we totally support it. We believe it could happen sooner and bigger, but we have to work all that out with Wal-Mart in that. So that's all that we have seen. It's late-breaking news and we are, again, just -- we have always been a big supporter of compaction and we will be in the future.

Thank you.

Caroline Levy, CLSA.

This is [Brian Burl] in for Caroline. I just had one on laundry. Within the ARM & HAMMER brand specifically, I was wondering how much of an offset -- even though it was down, how much of an offset was the new product line and whether that will be maybe a bigger help over the balance of the year.

And then, my second question was on the model bridging the 5% or mid single-digit EBIT growth to 7% to 9%, on EPS, is that largely -- I realize share count is doing a lot of the work there, but I was wondering if there is any other benefit from either the equity earnings or other income line that you are also expecting there?

I will take the first one. If I recall my numbers right, the ARM & HAMMER brand's liquid laundry detergent share went up about 0.5 share point in the first quarter and the new product line, called Clean Scentsations, I believe, delivered about 0.7% share growth. So you can see it drove all the share growth and then some on the brand in the first quarter.

Second question, let me toss that one to Matt.

Yes, your question -- your second question is with respect if you wanted to get to the midpoint of the range, back to my earlier comments, what the impact of the line-item JV and other income and interest expense would be?

Yes, just whether those two would get any better?

It's not that they are going to get any better. I think on a full-year basis, I think a good estimate would be probably $6 million to $8 million improvement year over year.

On a combined basis?

Yes, all in. JV, other, interest.

Great. Thanks very much.

Olivia Tong, Bank of America Merrill Lynch.

Two questions. First, given that competition is accelerating and macros are getting a bit tougher, can you talk about what gives you confidence that things do improve in the second half? And how much of your change to the lower end and the plus 3 is due to category growth rates? I assume that, if I heard you correctly, you expect your market share -- your market-share assumptions haven't changed. So, is it all category growth rates? And maybe you could elaborate a little bit on that. Thank you.

Yes, we're in a lot of categories, but overall, I would say we have always planned for the worst and hoped for the best, so we don't expect much improvement in the category growth rates much at all.

We are -- our plan is heavily driven by innovations driving improved share results. As I told you, our first big one out the door that is the first market [to report] was on cat litter. The results are spectacular to date, and we hope to see similar results like that because we think we have a great new product line. They have been tested thoroughly with consumers. Consumers love them, and we're putting our money where our mouth is in terms of spending to drive, first, the distribution in terms of slotting fees, and now the trial with advertising and couponing and trade support behind them.

So, we are not counting much on all about category improvement. If it happens, that's terrific. But we are mostly driving the share of our products through our great new product innovations.

And then on the second half, talk a little bit more about what gives you confidence beyond the new products, given that the environment has just gotten a whole lot tougher.

First, I would to say, too, we are holding up our advertising spending to where it was a year ago, and the word we have and our tracking measures all show is that almost all of our competitors have cut their advertising spending. So we expect our share of voice in the marketplace, which is always we measure our advertising spending by, to be greater than our share of market, and that's the formula we have had in the past and it will be in the future to drive your business results. So we expect to be very competitive and actually be driving growth of our brands through our strong advertising spending.

And then, you put that behind a great new pipeline of products and you got it. And our sales force has done an excellent -- the incremental distribution we got was tremendous. So, again, the whole thing about Q1, the first step was getting incremental distribution. We got it.

Q2, we are turning on the gas in terms of marketing spending. We got it. And I just think that's a great formula that will kick in. And as Matt said, in the second half of the year we get relief from the fact of all the slotting fees and that that we spent in the first half go away to help drive the gross margin, which gets [into the net] selling prices positive.

So, this is an age-old formula, but it works and we do it very well, and it starts with the great new products and then executing. And we have got a great sales force and marketing team, they execute on it, and it's done it before and we think it will do it again.

All right, thank you.

Bill Schmitz, Deutsche Bank.

Jim, this laundry battle that is going on right now, is this like an all Friday? So is this a conflict that will last a couple of months or is this a full out war? Because you go back to historical battles like this, even the cereal stuff in the 1990s, and it was a two- or three-year period where people got really stupid. And there was no end game. All it was was zero sum and the slight trajectory down. So, maybe some commentary on how long you think it will last and what the end game is for everybody to do this.

Bill, I really -- I don't control that at all. Obviously, I just have my side of it. I don't know.

I can say one point of view, that the actions by the competitors were simply to take their users out of the marketplace before our great new products hit and some of the Procter products hit, so it could've been a short-term defensive action to just try to pull aside their users.

But as I said to you before, if they want to continue this out, we will not lead it, but we will be right there with them, competitive, and we will see what happens. I really can't go any further into that whole issue for both competitive and legal reasons.

Got you. And so, would you go nuclear, though, and [abandon] the EPS algorithm if it persisted?

I would never do that.

Okay. All right, and then just a follow-up. I am going to try to get two questions in one so you don't hang up on me. These OTC deals, like the Merck-Bayer thing, I am not sure they want the sun care and Dr. Scholl's business there. Was that something you guys would be interested in at all?

And then, lastly, how much of that SG&A reduction is going to be reversed in incentive compensation accruals, because I know gross margin is a big component of your payout and obviously you're not going to hit it this year?

Bill, in M&A, you know we can't comment on things like that.

We have very defined criteria for finding deals and looking for products that are number one or two in their categories, have higher gross margin than our category, have future growth capability, in our eyes, and have asset light. That's what we prefer. That's what we comb the marketplace for. We are very aware of everything going on out there, so we are always open and looking at stuff and we will make judgments. I hope the Street and our shareholders respect the fact we are very diligent and disciplined about how we look at acquisitions, and we will continue to be that way. So, that's that.

Yes, your other question, though, was probably for the benefit of the 3,500 employees that are listening (laughter). Incentive comp.

They have been (multiple speakers)

Remember, we have four components to our incentive comp, right, sales, gross margin, EPS, and cash, and as we pointed out in the release, expecting a record year for free cash flow. Or cash from operations, I should say. But look, it's still early, Bill, so we wouldn't be making comments on that at this point.

Okay, great. Thank you, guys.

Michael Steib, Credit Suisse.

Good morning. My question relates to Avid. Jim, you reiterated your double-digit sales growth outlook for that business for the full year in your prepared remarks, and you called out specifically significant distribution gains. I wonder what are these as-yet-untapped distribution opportunities that you still have, and is that really the main driver of that business's growth at this point? Thanks.

Thanks, Michael. It's not -- it's one of the key drivers. When we bought this business, we saw that it was way underdeveloped in terms of distribution.

The company we bought it from was a wonderful little family company, but they didn't have a lot of resources. They largely had one salesperson. That person largely covered just five accounts and didn't have the time to get out to the hundreds of other accounts out there, particularly in the food and drug trade.

So we have a full-scale sales force supported by brokers, and we have leveraged that to get the full product line out there in all channels of distribution on that, so that's been a big plus. But also, we have been -- I told you we doubled the advertising last year. We are going to take it up at least another 30% this year.

We're putting out new product lines, both the kids and the adults. And we are doing -- driving tons of trials through sampling and that because the big opportunity for us is really on the adult side. We already have over a 50% share of the kids' business, and the adult side, we are number one, but -- in the share position, but the issue is it's a very small piece -- like I said, only 6% of all adult vitamins out there, and I think the adult category is 20 times the size of the kids' category.

So in our view, we are sort of like Coca-Cola. There is -- only X percent of the world drinks colas. We look at the fact only 6% of adults who use vitamins use gummy vitamins, so we believe the upside is 94% to go because I haven't found one person ever in my life who has tasted a gummy vitamin and hasn't preferred it to the hard pill they take. So we're just all about that as great upside. We are chasing with getting the distribution out there, getting the advertising, getting the more new products out there and driving that. So, we love the business.

Okay, thank you.

Connie Maneaty, BMO Capital Markets.

Just one question. Could you just discuss the strategy of taking OxiClean into three new categories this year, you know, in auto, dish, and bleach, as well as detergents? And why you didn't choose to keep it to detergent this year with maybe greater focus on it? I'd like (multiple speakers) your perspective. Thanks.

Yes, thanks, Connie. Yes, OxiClean is probably -- of all the brands we have -- we have over 80, but of all the brands we have, it probably has the greatest consumer loyalty of any brand we have. People just rave about OxiClean.

I told you to start with it has been nothing but gaining share in the laundry additives category, bigger than the next four players involved, and those next four players include people like P&G and Reckitt, and we just keep growing it.

We saw that loyalty. We actually did two years ago go into the dishwash additive category over there and did quite well. It's proved to have license to expand in dishwashing, all behind the brand. The brand has -- the incredible strength of that brand is fighting stains, which are key to these other two categories.

Obviously, fighting stains was key in laundry, because [what is a more] laundry additive, and we just saw -- we saw a hole. We saw that people weren't really talking about that laundry detergents as much. They were all focused on other things on the side, and we just thought we're the kings of fighting stains. We thought we had the right to take that into a full-scale laundry detergent, because additives aren't used by everybody out there. So that made a logical choice to go do that.

Like I said, we tested our toes into the auto dish world two years ago, got great results [happening] as an auto dish additive, so we went there. And the bleach, well, where we are today, the additive side is a very close cousin to the bleach. We often say in our own advertising we're better than bleach because you don't run the risk of staining clothes if you accidentally have bleach in there with colored clothes. So, that was a natural for us.

So we just see this brand as our next great mega brand, and we thought let's just take it all at once into these categories. It made total sense for us to start with the equity of that brand is, which is great stain fighting, and just pound that home into logical extensions. We tested it to death; it made total sense. The products are terrific. Consumers love it and we just let it loose this year.

Thanks.

Kevin Grundy, Jefferies.

I am going to head back to M&A, I guess ask it from a little different angle, Jim. So you still, I guess, sound a bit less bullish than you did going back to CAGNY. I guess maybe you can talk a little bit about the pipeline. We spoke during the quarter and you said some M&A, some of the valuation multiples from an M&A perspective seemed a bit full, given what the implied multiple is for Merck's consumer health assets, at least in terms of what is being reported. So, A, what are you seeing? Are you more or less bullish that you were back in February and are the multiples still looking a bit stretched from an M&A perspective?

Kevin, I really can't say much. I would just say I think you see overall the M&A market is heating up out there with lots of deals happening. That's generally a positive thing because sometimes companies buy other things. They don't want the entire portfolio, and we bought brands in the past off that. But we're always looking. We're always scouring.

But I go back to what I said a few minutes ago. We are very diligent and disciplined about this. We are protectors of the shareholders' capital, and we have set of rules we follow and we are doing them. We promise you we are looking everywhere and we're looking for the right deal, and when the time is right and everything else is right, we will make that deal. We have plenty of firepower, even with the share buybacks. So we're in a position to have our cake and eat it, too, as far as buying back the shares we have done and still having the firepower to make a big acquisition.

And how high would you take the debt leverage and would you be willing to issue equity for the right deal?

I think that would be very unusual for us to issue equity. As Jim said, we have the ability to borrow a significant amount of debt, up over $2 billion of debt, and still be able to hold onto our credit rating.

By the way, the share buyback is not being funded by debt. That's being paid completely out of -- starting the year with $500 million in cash and generating close to $300 million of cash after dividends and CapEx.

We have a great ability to lever up and maintain our BBB-plus credit rating, largely because historically what we do is when we do take the leverage ratio up, we immediately direct all of our free cash flow to reduce our leverage ratio. And the rating agencies are well aware of that practice and we would follow it again in the future.

Okay, folks, I have an analysts and shareholders' meeting coming up here shortly. So I am going to thank you for your time this morning.

I just want to leave you with the message we are very excited. First quarter is right on track for us. We accomplished what we wanted to in getting all of our great new products out there, and the great distribution. And we're all set up to continue that momentum into the back three quarters of the year here and right on track to make our target.

So, very excited. Year of innovation. Think about innovation, we've got the best innovation portfolio out there, and we are putting our money where our mouth is and supporting it. So we feel very confident in making our targets. So thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a good day.