Church & Dwight Co., Inc.
Q2 2011 Earnings Call Transcript

Published: 5 Aug 2011

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Second Quarter 2011 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 forecast. 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

[James Craigie:]

Thank you, and good morning to everyone. It's always a pleasure to talk you, particularly when we have good results to report. I'll start off this call by providing you with my perspective on our second quarter business results, which you read about in our press release this morning. I'll then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with his perspective on the financial details for the quarter. When Matt is finished, I'll return to provide some more detailed information on the performance of our key brands and discuss our earnings guidance for the year. We'll then open the call to field questions from you. Let me start off by saying that I'm very pleased with the second quarter business results, which were in line with our expectations despite some serious headwinds. Since January, we have seen greater-than-expected increases in commodity costs and weaker-than-expected consumer demand in most of the categories in which we compete. Despite those headwinds, we delivered 3.3% organic growth in the second quarter, which was up significantly from the 1% organic growth achieved in the first quarter. This organic revenue growth momentum has continued into the third quarter, which is off to a very strong start. Like other consumer package goods companies, our second quarter margin was below a year ago. However, through aggressive hedging and cost cutting, we were able to keep the gross margin decline versus a year ago to just 90 basis points, which was better than most of our competitors. As promised, our marketing spending was up 220 basis points versus Q1 to support a launch of new products across every one of our power brands. And most importantly, we delivered a 12% earnings per share gain for the quarter, which was on top of an 18% EPS gain in the second quarter last year. Thus, we had a good start to what has been a very difficult business environment so far this year. All CPG companies are fighting the same headwinds, but I continue to believe that no other CPG company is as well suited as Church & Dwight to deliver exceptional performance in a tough environment. I'll explain that rationale for that statement in a few minutes after Matt provides you with greater insights on the financial results for the second quarter.

[Matthew Farrell:]

Thank you, Jim, and good morning, everybody. I'm going to start with EPS. Second quarter GAAP EPS was $0.57 per share compared with $0.51 in 2010. EPS was up 12% from year ago. Reported revenues were up 5.3%, and our organic growth was 3.3% for the quarter. The 3.3% was within our May guidance of 3% to 4% for Q2 and has put us in the position to deliver 3% to 4% organic growth for the full year. The 3.3% organic growth is driven by volume with neutral effect of price mix in the quarter. The competitive environment is still aggressive in our categories, but we are now lapping a year-ago period with similar aggressive trade spending and competitive price wars. Price mix for the 5 quarters ended Q1 2011 averaged negative 2%, so the good news is that price mix for the total company was neutral in Q2 compared to negative 2% for the previous 5 quarters. We expected to be neutral in the second half, as well, after a little less positive than 90 days ago when we expected price mix to turn positive in the second half. We are seeing increased trade spend by competitors in several of our key categories, and this has affected our view on second half organic growth as well as gross margins. The full year organic revenue call of 3% to 4% is comprised of 3% to 4% volume and price mix of flattish to a minus 50 basis points due to the continued aggressive spending and product mix, somewhat offset by our pricing actions in the marketplace, which I'll talk about in a minute or so. Now let's briefly review Q2 for the segments. The Domestic business delivered organic growth of 2.1% with 2.4% volume, partially offset by negative 0.3% price mix. This is a significant improvement from the previous 5 quarters, which was over 3% negative price mix in each of those quarters. With respect to price increases, we took a 5% increase on Trojan in May and a 12% increase on powdered laundry detergent in July. Turning now to international. International had 3.1% organic growth in Q2, which was driven by growth in Australia and export markets. This increase is driven by a volume growth of 6%, partially offset by about negative 3% price mix. This quarter, we had higher price mix internationally than the domestic markets, primarily due to year-over-year promotional spending behind Household Products in Canada. For our Specialty Products division, organic sales were up 13%, with volume up approximately 6% and price mix up 7%. The price mix in this division is driven by price in the animal nutrition area where we are recovering raw material costs. The organic increase is primarily due to growth in the animal nutrition business where demand for our products has surged due to the hot weather in the U.S. The hot weather reduces the milk production by cows, and our products do the opposite, they increase the milk production of the cows. Okay, gross margin now. Turning now to gross margin. Our second quarter gross margin was 44.5% and 90 basis points contraction from year ago. The decrease in gross margin reflects commodity costs, unfavorable product mix and higher trade spending. Price and product mix was a bit higher drag [ph] than expected but, for example, the dairy products that I just mentioned are a lower gross-margin product. When we entered the year, we expected 200 basis points of cost savings and 100 basis points of commodity headwinds on a full year basis. The current thinking is as follows

[James Craigie:]

Thanks, Matt. I'll finish off our call today by adding a little color to the solid second quarter business results Matt took you through and my outlook on the year. Our solid second quarter business results are directly linked to the 7 factors that support my earlier statement, that no other CPG company is as well suited as Church & Dwight to deliver exceptional performance in a tough business environment. First, we have the most unique product portfolio in the CPG industry. It consists of all premium and value brands, which puts us in a position to thrive in any type of economy, as exemplified by our consistently strong EPS growth over the past 10 years. In particular, our value brands, representing about 40% of our revenue base, have experienced strong growth in recessionary economy, as consumers are making smart choices by trading down and staying with lower-priced brands. A great example of this is the fact that XTRA, our extreme value-based liquid laundry detergent brand, achieved its highest-ever quarterly sales and is now the #2 brand in Liquid Laundry Detergent on a wash-load basis, accounting for about 1 out of 7 loads of laundry in the United States. As a result, our 2 value-based liquid laundry detergent brands, ARM & HAMMER and XTRA, grew their total share in the first half of 2001 by 1.5 share points. Only other competitor gained share, and that was around 0.5 percentage in total. Also, our ARM & HAMMER Powdered Laundry Detergent business is on-fire with 7 consecutive months of dollar share growth, its highest monthly dollar share in 6 years in the month of June, and greater shared growth year-to-date in any other powdered laundry detergent brand. The second factor, which is a key driver of Church & Dwight's success, is that we have a proven record of building our power brands. We have over 80 brands, but 8 of these brands are our power brands, which generate 80% of our sales and profits. From 2007 to 2010, we grew share on these 8 power brands in over 80% of the quarters. In the second quarter of this year, we grew share on 5 of our 8 power brands. Two key factors drove those excellent share results. First, we have smartly reinvested some of the increased profits from the strong growth of our value brands to significantly increase marketing support on our 8 power brands by a total of 290 basis points or $140 million over the past 3 years. While our marketing spending was relatively flat versus a year in the first half of 2011, please keep in mind that we traditionally save the bulk of our advertising dollars for the second through the fourth quarters to support the launch of our new products. And we do intend to spend more marketing dollars in the back half of 2011 to support continued share growth in our power brands. The other factor driving the growth of our power brands was a robust pipeline of new products. Over the past 4 years, new products delivered about 50% of the company's organic revenue growth. We are shipping innovative new products in every key category this year to support delivery of organic growth target of 3% to 4%. We expect these new products to be as successful as our new products over the past 4 years. A sample of these new products include the following. First, XTRA with OxiClean laundry detergent. This combination of 2 of our power brands has helped to drive significant distribution gains to the XTRA brand this year, which as I mentioned a minute ago, delivered record sales in the second quarter and should continue to deliver strong sales growth for the rest of this year. We launched the ARM & HAMMER with OxiClean co-branded detergent 2 years ago, and that new product now represents over $100 million in annual sales and has a higher market shares in the era and tier brands. We are also launching a new sensitive skin product for our Liquid Laundry Detergent business on the ARM & HAMMER brand to enhance the brand's appeal to the 52% of consumer households who have sensitive skin issues. This will to help to drive continued growth of the ARM & HAMMER Liquid Laundry Detergent business, which has achieved greater share growth in the past 52 weeks than any other major liquid laundry detergent brand and account for 1 in 10 liquid wash loads in the United States in the second quarter. Another great new product being launched in 2011 is a 40-pound large size of our ARM & HAMMER Double Duty Cat Litter. We first launched the ARM & HAMMER Double Duty Cat Litter line in 2010, and it's been a huge success. This product eliminates both urine and feces odors. The ARM & HAMMER Cat Litter brand consumption grew over 15% in the second quarter, leading to the brand's 13th consecutive quarter of net sales growth, 10 consecutive quarters of share gains and is now the #1 or #2 clumping cat litter brand in almost every major retailer in the United States. That's pretty impressive for a category, which we entered only 13 years ago. It also shows the strong consumer appeal in that ARM & HAMMER brand, which in total, has now passed $1 billion in sales. On the personal care side of our business, we have several exciting new products in 2011. First, on our ARM & HAMMER Spinbrush business, we are launching 3 exciting new products. One is called the My Way! Spinbrush for boys, which allows boys to personally decorate their toothbrush with popular peel and stick decals, which come with the products. We launched the My Way! Spinbrush for girls in 2010 and had a huge success. Our total My Way! Kids business achieved a record share of 51% in the second quarter, which strengthens our position as the #1 kids battery brand of the latest 52 weeks. We are also launching a new Spinbrush called Globrush, which lights up for 2 minutes to provide an appealing queue to kids for how long they should brush. And finally, I'm proud to announce an exciting new toothbrush called Tooth Tunes. Tooth Tunes is a manual toothbrush that plays popular commercial music for 2 minutes to encourage proper brushing. This brush will be available in 3 SKUs

[Operator:]

[Operator Instructions] Your first question comes from the line of Per Ostlund of Jefferies & Company.

[Per Ostlund:]

I know you touched on this a couple of times in the prepared remarks, but on the repurchase authorization, is there any timeline to it? And by that, I mean, is there any -- is there a mandate in the authorization that it expires on X date? Or alternately, do you have any sort of sense as to how it's going to be paced?

[Matthew Farrell:]

Yes, Per, this is Matt. The answer to that is no. There isn't an end date, so it's open-ended. So the way it's worded, essentially, is that we can purchase from time to time in the open market. That does not preclude us from doing a 10b-5 filing so that we can actually buy through blackout periods. In that case, you would actually specify the amount that you would be buying. But we don't -- is that enough for you?

[Per Ostlund:]

Yes, that works. I mean, I guess maybe you also touched on that it won't preclude any sizable acquisitions. Does it signal anything in terms of just the availability of anything that's that attractive of size?

[Matthew Farrell:]

One thing to think about, Per, is that our year-to-date share creeps has a run rate of about 2 million shares. And we have talked from time to time in the past with investors about the significant free cash flow that the company generated -- generates even after paying dividends. So to the extent that we would take share creep off the table, I mean, a run rate of 2 million shares at a price of $4 to $50 would be $80 million to $100 million annually, which we would pay out of available cash. And remember, we have $615 million of undrawn lines between our revolver and our asset securitization facility, so in no way would this affect our ability to fund acquisitions.

[Per Ostlund:]

That's excellent. Maybe just one quick one on your organic sales forecast, so you kept at the same here at 3% to 4%. Looking sort of to the back half, do you see the trend kind of continue or that specialty behind the animal nutrition really kind of continues to be the above trend? Or do you see may be the 3 reporting segments sort of normalizing all around that same level as the consumer side picks up behind some of the innovation?

[Matthew Farrell:]

Yes, I think fall and winter will eventually come so the temperatures will come down. And the effect [ph] we're seeing right in the dairy products is going to fade.

[James Craigie:]

Yes, then we expect stronger growth of the summer domestic and continued strong growth international in the second half. Yes, Per, and FPD [ph] will fade to back to normal growth levels.

[Matthew Farrell:]

Yes. In the first quarter, our consumer business in the U.S. had 1% organic growth, so we're 2% now, so domestic business is accelerating Q1 to Q2.

[Operator:]

Your next question comes from the line of Caroline Levy of CLSA.

[Caroline Levy:]

So, couple of things. Have you commented or could you comment at all on the outlook for 2012 commodity costs?

[Matthew Farrell:]

Not at this time.

[Caroline Levy:]

And not even on the percentage that hedged, perhaps?

[Matthew Farrell:]

We could do that. We're about 10% to 15% hedged for next year, and a lot of our decisions with respect to hedging in our long-term contracts will be made between now and when we get to the end of the third quarter.

[Caroline Levy:]

Okay. And then could you tell us how the Trojan condom business did and if you're losing share to Durex and if there's been any change in behavior by the Durex leadership?

[James Craigie:]

Yes. The condom business is doing very well. We've lost a couple of tenths to share point this year so far, but that's not a problem. Our sales are up. We took a price increase in effect in Q2, and competition has followed. We're also launching higher-margin new products, which is helping the profitability category. Quite honestly, the competitions coming from the Ansell company, they've had some gains in distribution of that that have cost a couple of tenths off us. There's been no sign of any increased activity out of Durex, which is part of SSL, which is now part of Reckitt.

[Matthew Farrell:]

There's some timing also going on, so in condoms, we had some account resets that happened in Q1 this year that would normally happen in Q2. So it is a little bit lumpy, but all in all, the business is healthy.

[Caroline Levy:]

Okay. And this higher legal cost in the second quarter, is that going to continue through the rest of the year, do you expect?

[Matthew Farrell:]

Yes, I do, I do. It's expected to also be a factor in the third quarter.

[Caroline Levy:]

Do you know -- could you quantify it?

[Matthew Farrell:]

No.

[Caroline Levy:]

Okay. You talked about international having strong growth, the 9 -- we estimate about 9% with currency, so the base business, maybe up 3% or so, 3% to 4%?

[Matthew Farrell:]

Well, the organic business was up 3%.

[Caroline Levy:]

Right, so is that not at that rate you expect, or do you expect to be able to grow faster than that over time?

[Matthew Farrell:]

Your FX calculation is correct for Q2. I want to make sure we're on the same page. What you got, around 9%?

[Caroline Levy:]

Yes.

[Matthew Farrell:]

Right. So the organic was 3% for the second quarter.

[James Craigie:]

And we expect continued organic growth in that area of 3% to 4%, 3% to 5%.

[Caroline Levy:]

Okay. And then you talked about OxiClean has lost a bit of share, you're going to be sure to defend. Can you give us just a little more color on what's going on in the marketplace? Who's taking share and why, and why you think that -- what do you think it takes to reverse that?

[James Craigie:]

Yes. OxiClean is the one business which kind of surprised us this year in the sense that the category was very weak in the first quarter, almost down double digits. Now that followed 2010 in which there was a major competitive war as a large competitor entered the category. A lot of spending was put behind that, a lot of spending was done to defend against that. As I said, we defended very well and held our share and other competitors took the loss as this new entry gained some share. And then surprisingly, I mean, the category's very strong last year, and then surprisingly this year, the category started very weak. We're still trying to figure out why, quite honestly. We're not sure if there's a lot of pantry-loading last year with all the trial incentives and all the defensive spending or whether possibly this category is a premium category, is sort of a luxury category that people could back off. I know the good news is the category came back a little positive in the second quarter. So -- but it did surprise us. Our share basically is flat in the first half of the year, which is okay. It was strong in the first quarter, down a bit in the second quarter. But overall, flat on the year. But the good news there is it looks like that's a sign of category growth is coming back, which is important to us, and we have some good initiatives planned in the second half of the year that continue to maintain or hopefully drive some share growth there. But it's the one surprise of the category that surprisingly went very weak in the first quarter of the year on us.

[Caroline Levy:]

And then...

[Matthew Farrell:]

Carol, we got a long queue here. That's kind of last...

[Caroline Levy:]

Go ahead. That's fine.

[Operator:]

Your next question comes from Bill Chappell of SunTrust.

[William Chappell:]

Just can you give us a little more color on the step-up trade promotion? I mean, is it across the board or is it -- are you seeing it more just in the detergent category? And then are you seeing pressure from a specific player that's making you step this up? Are you doing this proactively to kind of build your market share?

[James Craigie:]

Yes. Bill, it's largely the household side of the business, a little bit in oral care. It's competitively driven. What I said a year ago when a certain big competitor started price wars -- price wars are not good for everybody. Those who start it usually win some share at first, and then they upset the guys who lose it. We also won last year in fighting back, but some other competitors lost, and gee, guess what those competitors who have lost last year are being very aggressive this year with spending and forcing the rest of us to continue aggressive spending. So that's where it is. Overall, again, liquid laundry is always just one of the biggest categories there. We've done very well in the category. We're very good fighters in that category, and our value positioning puts us in good position, but there has been an unexpected high level of trade spending continuing in that category, a little bit in litter, I would tell you, and oral care also has been very competitive.

[William Chappell:]

And just to kind of dig into that, I mean, my understanding was part of, at least, P&G's price increase taken in June was a rollback on trade promotion on the liquid side. Does this imply that, that's not happening? Or are you just seeing trade promotion from the other players more in kind of the mid- and lower-tier side of the market?

[James Craigie:]

Well, all the trade [indiscernible] spend back was talked about in the second half of this year. So we still don't have a clear picture of whether that's going to happen. And the real driver of spending is Henkel out there right now, which again was the one who lost share last year and is trying to get it back this year. But we're still -- the issue of hopefully lower trade spending, it's still, jury is still out on that one. I would say it doesn't look hopeful, but jury's still out.

[William Chappell:]

Okay. And last one, did you say you wouldn't say what the legal expenses were for? Or you just wouldn't quantify the cost?

[Matthew Farrell:]

Yes, we weren't going to forecast the cost for the second half for legal.

[William Chappell:]

But can you tell us why, I mean, what the issue is that's stepping it up?

[Matthew Farrell:]

It's just related to the legal -- some litigation we have described our 10-Qs. There's no new ones there, it's the same ones we've had for a while.

[Operator:]

Your next question comes from Wendy Nicholson of Citi Investment.

[Wendy Nicholson:]

I just wanted to clarify and follow up on Bill's last question, just on the commercial spending because, if I look at the last couple of Nielsen reports, particularly the last one, it looked like your promotional spending was up dramatically, and Procter's was down. So I just want to clarify, and I know it was only Nielsen, and it was only one month or whatever, but just to be clear, you want to maintain the same price gap that you've had historically in most of your categories or in laundry specifically. Is that correct? So if they take more pricing or if they back off promotional spending, you'll follow in time, is that right?

[James Craigie:]

In general, that's right. We will, but they're not the only competitor in the category, and we also have to be competitive versus our value players in the category. [indiscernible] That's where the problem is right now, that Henkel lost share big time last year and is being very aggressive on trade spending this year, which will affect everybody in the category. And we have defended very well and, in fact, grown our share despite that, but it has caused us to spend more trade spending than we would like.

[Matthew Farrell:]

The announcement by Henkel with respect to pulling back on trade promotional spending is not obvious to us at this point in first week of August.

[Operator:]

Your next question comes from Joe Altobello of Oppenheimer.

[Joseph Altobello:]

Just a couple of quick ones. First in terms of pricing, you obviously mentioned this morning you've taken a couple of pricing actions. You led in condoms, and I think you followed in detergents. What are the chances that we see additional pricing in the back half of this year in other categories?

[James Craigie:]

Slim to none.

[Joseph Altobello:]

Okay, that's helpful. And then secondly on the gross margin side, the change in gross margin guidance this morning, you also mentioned there were 3 factors there

[Matthew Farrell:]

I mean, it's a range, Joe. So just to repeat what I said, product mix is certainly effect in gross margins. And yes, we got the prices increases, but because of how aggressive some of our competitors have been in some categories, it's not flowing through, getting the help that we thought we were going to get from it.

[Joseph Altobello:]

Okay. And then just one last one, any thoughts on a detergent using POD technology similar to what P&G is working on or about to launch?

[James Craigie:]

Yes, we have lots of thoughts, thank you.

[Joseph Altobello:]

Anything in the pipeline?

[James Craigie:]

We have lots of things in the pipeline.

[Operator:]

The next question comes from Tim Conder of Wells Fargo Securities.

[Timothy Conder:]

Just a couple here related to the pricing and especially in the value category, gentlemen. Is your sense that it's just Henkel being extremely aggressive to try to regain that share? Or is there something else afoot here in the category linked to the consumer?

[James Craigie:]

No, it's primarily just an aggressive competitor out there. I mean, I should mention good news is the liquid laundry category, which was down about mid-single digits in the first quarter, was down only about 1% in the second quarter. So the category looks like it's coming back, which is good news. And it's just that competitor who lost badly in share a year ago who was trying to regain the share this year. But again, as I told you on my call, our share growth is the best of anybody in the category, and we will defend ourselves aggressively, but that is meant that we kind of spend some trade spending to neutralize the actions of this competitor.

[Timothy Conder:]

Okay. And then Jim, on the acquisition, you outlined again it's going to give you more scale in your U.K. operations. What's your acquiring here, is it transferable to other markets? What other things that this acquisition give you? And how do you see the opportunity, I guess, to ramp the sales base here fairly quickly?

[James Craigie:]

Again, 80% of sales are in the U.K., but 20% are on the other countries, including other parts of Western Europe and United States. We do see opportunity to grow with in all of those markets. It's a very unique product. Dry shampoo is in one way is an old product but a very hot product recently. A lot of hair care companies are telling women not to shampoo their hair every day because it will strip their hair of oils, and as a result, this business has had quite a little pop out there. Again, the comp on average growth rate of almost 90% over the past 4 years over in the U.K., was quite impressive to us. The margins were impressive. The product's made in cold packers today, but we have the ability to bring that in-house possibly. And we just think it's got good growth potential, so it was kind of a unique product that we got at a fair price, and we think it has good growth potential going forward.

[Timothy Conder:]

And other immediate plans, Jim, in meaning of the next 2 years or so to roll, to expand that very quickly in other markets outside the U.K.?

[James Craigie:]

We're still in the process of making those kind of decisions.

[Timothy Conder:]

Okay. Final question is related to the share repo. Generally -- historically you haven't really had any. I guess, following on alluding to an earlier question, should we view this anything more than to offset the share creep, I mean, as far as your opportunities with the available excess cash?

[Matthew Farrell:]

Yes, you're right, we haven't bought back shares since the year 2000, and we've been generating an increasing amount of free cash flow over the last couple of years. Earlier in the year, we doubled our dividend because we had significant cash flow that we were generating, as I said before, $350 million annually after CapEx. The dividend is about $100 million requirement on a full year basis, so that leaves us $250 million. And as I said before, we have tremendous amount of available lines, existing lines of $615 million, and we can actually expand our revolver in addition to that if we want to do something larger. So there's no message with respect to the announcement other than we have the ability now to take share creep off the table.

[James Craigie:]

Yes, I would just add to that. We have a great cash machine. Matt and his crew have generated the greatest percentage of free cash flow of any competitor out there. It's just to the point now where we probably have no debt. We are working hot and heavy on acquisitions. And this in no way will inhibit that, given the amount of cash we have, the borrowing capacity we have. So please don't read into this any change in our desire to continue to be a great acquirer in this category, and that's it, just don't. This is just an opportunity to buy back some shares because we have so much damn cash.

[Operator:]

The next question comes from Alex Longley of Buckingham Research.

[Alice Longley:]

Alice. Your guidance assumes gross margins are up in the second half. Can you mainly tell us why you think they'll be up? Some of the companies are guiding to even worse gross margin declines in the September quarter than the June quarter. And could you tell us what we're going to see in terms of gross margin comps in the third quarter versus the fourth quarter, as well?

[Matthew Farrell:]

Alice, we would never forecast the gross margin by quarter year-over-year. As we've said before, we have lots -- the things that influence year-over-year gross margin is the timing of our cost savings programs. And you probably remember that we accelerated some of -- to pull those some into the year. We started the year expecting $200 million or probably 200 basis points of costs savings, and we're now at 200 to 250. So across savings programs that we pulled into year are going to influence the second half of gross margins. The other thing, too, is we have the launch of some of these new products that Jim made reference to, the Tooth Tunes and neti pot, which are also high-margin products.

[Alice Longley:]

So if that's the case, won't mix be better in the second half than it was, you called it out as a negative, this quarter?

[Matthew Farrell:]

Yes, we expect price mix in the second half to be neutral. It could be neutral to up a bit. But actually thought it was, we -- 90 days ago, we were pretty convinced it was going to be a positive trend in the second half. And now, we think, it's going to -- it won't be, and that's the reason why we went from 50 to 100 to 0 to 50.

[Alice Longley:]

And the way to think of price mix is that maybe price and mix together are plus 2 and dealing is negative 2?

[Matthew Farrell:]

Yes, on a full year basis?

[Alice Longley:]

Well, for the second half.

[Matthew Farrell:]

One thing that is probably worth pointing out is that, if you looked at our gross margins last year, our lowest-margin quarter was the third quarter where we were at 44%. And if you look at our trend so far this year, first quarter was 44.9%, and second quarter was 44.5%. So you can kind of do the math on what you think the range will be in the second half. But that, so the comp actually has influenced it as well year-over-year.

[Alice Longley:]

Well, it's reasonable to think that gross margin's going to be up in the third quarter, right?

[Matthew Farrell:]

Year-over-year? Yes.

[James Craigie:]

Yes.

[Alice Longley:]

Yes, okay. And then my other question is on the dividend, which you doubled last February, I guess. Could you sort of comment on your leanings for increasing that another 50%-plus when we come to the February whatever?

[Matthew Farrell:]

Well, we doubled it, as you said, earlier in the year, and we do evaluate our uses of cash flow all the time. And the #1 destination for us is M&A. And as far as return of cash to shareholders, we've made one move with respect to doubling of dividend, and now we have decided we're going to address the share creep. But it is something that the management and the Board does address regularly. And I think at this point we wouldn't comment any further on our intentions.

[Alice Longley:]

Okay. And then on detergents, I guess XTRA was up more than ARM & HAMMER this quarter. Should we expect that to continue to the rest of the year?

[James Craigie:]

That's probably a pretty good assumption. And again, that's a good news bad news story. There's tremendous consumer appeal for our valued brands. And so when the ones -- the good news is XTRA has that tremendous growth and a record sales quarter in Q2. We expect that to continue be strong. The bad news on that, it's obviously a lower-margin product, so that affects some of the mix. But no, we think our value detergent business will continue to be very strong overall in the second half of the year.

[Alice Longley:]

But you're expecting ARM & HAMMER alone, as a franchise, to also gain share or not?

[Matthew Farrell:]

Yes. Yes.

[Operator:]

Your next question comes from Jason Gere of RBC Capital Markets.

[Jason Gere:]

I was just wondering if you could just talk maybe about the delta between the track and untracked channels, what you're seeing out there in terms of -- I know consumer demand is pretty bad out there, but can you talk a little bit about the difference between the 2 channels right now?

[James Craigie:]

Well, first of all, the untracked channel is going to change a lot because Wal-Mart is going to become part of Nielsen shortly. So that'll be a huge -- so that was a wonderful move, to put a major competitor in there. The untracked channels are generally done very well. That's where the flow is towards the mass merchants and towards the dollar channels and some of the club. But I wouldn't say any major change in that over time. It's just their -- for a long time have flowed that way.

[Jason Gere:]

Okay. And then, I guess, as I'm just trying to think about the organic sales, and I appreciate the color that the consumer Domestic should see acceleration into the back half of the year with the spending. Can you just talk maybe about that 8 power brands versus the tail brands and then kind of how you're managing those tail brands right now? Like in the quarter, that 2%, how does it split between the 8 power brands and the tail brands? And do you see the tail brands starting to stabilize? How are you managing those businesses?

[James Craigie:]

The bottom line of that one, Jason, is we always have put our focus more and more on the 8 power brands. They're all doing, like I said, we grew share of 5 out of the 8. We generally grow share on that 5, or 6 or 8 out of the 8. We put the focus there. The tail brands have done pretty well now. Matt mentioned earlier we intentionally, in the first half of this year, discontinued some bonus packs on our value toothpaste, which honestly were unprofitable and we took them out. And so that was part of reason our organic growth went down a little bit. And those brands lost some share, but it was a wise move for us terms of gross margin by getting rid of business that made no sense. Otherwise, our other tail brands are -- some are actually growing, doing well. This comes with our [ph] value base. But we manage those quite well, and the decline on those is very minor.

[Matthew Farrell:]

Jason, this is Matt. Just to give you some -- a number. The value toothpaste that Jim made reference to, so Aim and Close-Up where we ended some unprofitable bogoes [ph], from a top line standpoint, that was a 30 basis point drag on our organic growth in the second quarter, but it was a conscious decision on our part.

[Jason Gere:]

Okay, and that drag should continue. I mean, I'm just trying to get a little perspective there.

[Matthew Farrell:]

Actually, it was bigger in the first quarter. It's actually been tailing off, so it'll less of a factor in the second half, but it certainly affected the second quarter.

[Jason Gere:]

Okay. And just the last question. I think back at your meeting back in February for the year end. We were talking about SG&A, that this year, you were expecting to see some good SG&A leverage coming through. And I know there's been some legal costs and I'm sure there's probably some FX too. But when you look at the back half of the year, do you expect SG&A to get some leverage? Especially as the top line accelerates, you have some easier comps. And it sounds like the sales are a little bit second half weighted. So how should we be thinking about that?

[Matthew Farrell:]

Yes, you're right about the legal costs, and those are things that are hard to predict and hard to forecast, so that is, as you would characterize, is a headwind. But we still -- since we have opportunity to get leverage on SG&A year-over-year but I wouldn't call a basis point number right now.

[Jason Gere:]

Okay, so that implies the second half should -- built into your guidance, is that there some improvement as a percent of sales in SG&A?

[Matthew Farrell:]

Yes.

[Operator:]

Your next question comes from Chris Ferrara of Bank of America Merrill Lynch.

[Christopher Ferrara:]

So just wanted to go back to the shelf space gains, right? You said in the power brands, you've been getting space, and I know that's been ongoing. But can you just talk more recently, I guess, about the trends and how much visibility do you have? Have shelf space gains accelerated and -- or distribution gains accelerated? And then, how much of that is coming from innovation versus what you think is just retailers emphasizing value products?

[James Craigie:]

I don't quite know how to answer your question about acceleration. We actually put a chart out in a presentation recently at Wall Street, which indexed our distribution gains over the last several years, and I'd be glad to give you that afterwards. So -- and those are pretty much over for the most part of this year as far, because we usually cap it on the second quarter. And so we again had very good distribution gains across our 8 value, our 8 brands. To your point, it's probably innovation, and it's probably value. It's that our value brands have done very well. Our retailers are making smart moves to get more emphasis in the shelf for the value brands, so value brands like in XTRA and to some degree, ARM & HAMMER laundry detergent have achieved some of the share gains on the value proposition, but they've also had great new products. The XTRA with OxiClean has done well. The ARM & HAMMER for the sensitive skin has done well. So it's kind of a combination of both, Chris, but it's -- the bottom line, which was very good, is our new product innovation and our value-oriented portfolio have helped us to gain share almost across the board in all of power brands.

[Operator:]

Your next question comes from Bill Schmitz of Deutsche Bank.

[William Schmitz:]

Matt, can you guys, can you just help me with the earnings other than now? Because sales were held the same, gross margin was brought down, you're going to keep the advertising level still in the same range. So how do you hold the guidance? And I know you said there's not a material change in the SG&A ratio, so is it lower interest and lower share count, is that the way to think about it?

[Matthew Farrell:]

Well, I mean, our primarily levers when it comes to EPS are revenue, gross margin and SG&A. We would say marketing would be secondary because it's real important to how we drive the business. And revenue and gross margin are, certainly we got ranges in there. And SG&A, as I said to Jason before, we do see an opportunity to get some more leverage year-over-year on SG&A. And in the second half, of course, we have these new product launches that are also influencing factors. So we've got that built in as well in the success to Tooth Tunes, in particular, and that neti pot. So it's -- there are pieces, but we do see definitely a way home here for 10% to 11% EPS growth.

[William Schmitz:]

But is it more share repurchase driving at the point? Because I get all those things, but if you look at the guidance, you're still the 3% to 4%. The only change was the gross margin is worse than before.

[Matthew Farrell:]

Now remember, we have a $0.03 range for the year, and the share repurchase at best would be $0.01. You're limited to what you can buy, and as I said, the run rate is 2 million shares a year, so even if we're to take [indiscernible] off the table, the best it would get you is around $0.01. So, I mean, that's not a big swinger.

[William Schmitz:]

Okay, so the delta, I guess, is just better SG&A leverage? But I thought you said that's not going to be hugely -- You know what I mean? Because it's like, there's like a 50 basis point gap on the margin side, isn't there, with the sales the same?

[Matthew Farrell:]

Well, it depends on where you come out with your top line, right?

[William Schmitz:]

Yes, but that doesn't change, do you know what I mean?

[Matthew Farrell:]

Yes, but where you're going to come out within the range, it's going to -- we haven't tightened it, so we weren't able -- we were going to tighten it to give you a better guidance, but we left it where it was.

[William Schmitz:]

Okay, no, that's fair. And then just on gross margins side, would you'd want to quantify like how much of a drag the big specialty growth was in the quarter? Because I know mix has called out pretty aggressively. Was that primarily because the specialty business grew so much faster and maybe in the back half? I think you said you assumed it to slow a little bit and some of the consumer business were going to accelerate. Is that a big driver?

[Matthew Farrell:]

It is a factor in the second quarter. But I wouldn't say it would be a big swinger for the full year just because I've said it. It'll tail off the whole dairy product spike in the second quarter. You're going to get a little bit more in the third quarter. But yes, specialty would influence this quarter, but it would be muted by the fact that you got 3 other quarters in the year.

[William Schmitz:]

Okay, yes, that's great. And then one quick last one for Jim maybe. This dry shampoo acquisition, does this signal, like, a bigger portion to traditional personal care category? I know, like historically, you haven't really been big in, like, skin, and obviously the deodorant business has been a little bit tough recently. Does that change at all?

[James Craigie:]

No, Bill, not honestly. It's just we're agnostic as to which way we go in household personal care and that, and this was just a great opportunity to personal care category, so we took. But no, it doesn't indicate any swing one way or the other.

[Operator:]

Your next question comes from Lauren Lieberman of Barclays Capital.

[Lauren Lieberman:]

I just wanted to first follow up on personal care sales. I'm just a little bit confused because sales were flat in the quarter. You talked -- I saw it in the press release it says that condoms were down, but then earlier, in an answer to your questions, you said condoms were up. We know that value toothpaste was up, and that Nair was good. So where was the softness in personal care this quarter?

[James Craigie:]

As far as the different businesses within the personal care side, you mentioned right, we did lose some business. Matt quantified it when he told you the toothpaste.

[Matthew Farrell:]

Yes, we had a good quarter, 6, somewhat offset the weakness in Trojan. With respect to Trojan, we said Trojan was lumpy. So up Q1, down Q2; but on the half, up, and also saying our prospects are good for the second half as well in the Trojan category.

[Lauren Lieberman:]

Okay, so Trojan was really -- Trojan plus toothpaste, there really that -- it's simply that's what it is in terms of personal care in the quarter that was soft.

[James Craigie:]

The Trojan was a quarterly shift, and the toothpaste was unintentional getting rid of profitable bogoes [ph].

[Lauren Lieberman:]

Okay. Can you explain that, just the shift in Trojan for me? Just what was it that pulled sales into Q1?

[Matthew Farrell:]

Well we had some accounts that reset in Q1 that normally would reset in Q2. And the other thing is we had a May price increase as a lesser factor, but you have a little bit small that swung into Q1 as early buy.

[Lauren Lieberman:]

Okay, cool. And then for new product launch activity, and I might be misunderstanding, but I know that you guys highlighted your new products in the press release, but it sounds like some of the things like the sensitive laundry, the XTRA plus OxiClean -- have those launched yet, or are those still coming? Because I have -- maybe it's misunderstanding, but I thought they were more of a 2Q launch with the plan?

[James Craigie:]

No, everything else is launched. The ones we mentioned were back half new launches on the Simply Saline neti pot items and on the Tooth Tunes. So everything else launched in Q2, and that's why we started to ramp up our marketing spending by over 200 basis points versus Q1. And we'll keep up and spend more dollars in the back half of the year. But those 2 are new ones, and especially we're really excited about this Tooth Tunes item. It's honestly an item, it's an item we bought from Hasbro company who launched it several years ago and delivered in the neighborhood of $40 million to $50 million in gross retail sales out there. They couldn't handle the product, the SKU complexity of the product. They couldn't handle the retailers that wasn't their normal retailers. And they discontinued the product. But it was a terrific product and we bought the rights to it. And we're relaunching it in a much, I think, smarter way in terms of fewer SKUs. We got some of the hottest artists out there, and the retail reaction so far has been phenomenal.

[Lauren Lieberman:]

Okay, great. And then my final thing was, I thought it was -- Jim, when you mentioned working with non-competitive CPG companies to maybe consolidate purchasing, that -- really interesting. So anything you can share on that? How new is this? Is it something you're kind of starting now and hope to get some benefits in 2012? And just how broad is the work that you're doing?

[James Craigie:]

It's new. I can't share with you who it is, but it's -- you can think we often talk to you about what our largest ingredients are, from things like corrugate and surfactants on that. And we're finding companies out there that we don't compete with that buy those materials from some of the same suppliers, and we're talking to them. And it'll have, begin to have some impact in 2012, but probably more after 2012. But it's a good move to create greater bursting [ph] leverage, so it will help us in the future on our gross margin.

[Operator:]

Your last and final question comes from Lee First of Lincoln Shield [ph].

[Unknown Analyst -:]

I have a question about the Simply Saline neti pot. Is that going to -- can you talk about the distribution for that? Would you be using like maybe similar or different from what -- where you are already?

[James Craigie:]

No, it's very similar. It'll be out there in drugstores, mass merchants and very similar to every place we have Simply Saline today, which is in all type of accounts.

[Unknown Analyst -:]

Okay. Because it -- what about the natural foods or natural products channel, are you in there at all?

[James Craigie:]

We do have few products in there, and that is an interesting opportunity for that channel. Thank you. We'll take a look at that. But mostly right now, we're going into our traditional channels, which are 98% of the volume in this country.

[Operator:]

And there are no further questions. Are there any closing remarks?

[James Craigie:]

No. I want to thank everybody for taking the time today to hear our call. Again, we're very happy with the first half, especially in this very, very tough business environment. And we feel very encouraged about the second half. Again, I told you, the month of July was an exceptional month for us. We're off to a strong start, and we certainly hope it continues. And we'll deliver the numbers we promised to you. So thank you very much, and have a great day.

[Operator:]

This concludes today's Church & Dwight Second Quarter 2011 Earnings Conference Call. You may now disconnect.