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Church & Dwight Co. Inc. (NYSE:CHD)

Q4 2008 Earnings Call

February 5, 2009 12:00 pm ET

Executives

James R. Craigie – Chairman & Chief Executive Officer

Matthew T. Farrell – Executive Vice President & Chief Financial Officer

Analysts

Connie Maneaty – BMO Capital Markets

Operator

Good afternoon, ladies and gentlemen. And welcome to Church & Dwight’s Fourth Quarter and Full Year.

James R. Craigie

Good afternoon. I want to thank you all for taking the time to join us today. By the way this is being webcast and also to tell you that any comments we make today about forward-looking statements let the buyer beware.

As you all know, the entire business world is in uncharted waters today. Consumer confidence is at all-time low. Retailers are struggling to survive. Commodity costs and foreign exchange markets remain extremely volatile. I personally believe that the worldwide economy will get worst before it gets better. This business environment makes it very difficult to forecast accurately, as they say I don’t know what I don’t know.

Can you hear me in the back? Okay.

But let me tell you what I do know. Despite these challenges Church & Dwight delivered outstanding Q4 in total 2008 results in terms of organic revenue growth. Gross margin expansion, increased earnings per share, and record cash flow. Second, consumers love our brands. We grew share on all eight of power brands in 2008 that represent over 80% of our revenues and profits.

Third, we have strong partnerships with our retailers that will help us to manage through these difficult times. Fourth, the Church & Dwight management team is totally, total shareholder return oriented. We’ve averaged 18% TSR growth over the past 10 years, including 4% last year, a year in which only 24 stocks in the S&P 500 had a positive TSR.

And finally, we will now let this recession deter us for making investments to drive our future EPS growth. We will maintain our advertising share of voice and our power brand, and we will continue to invest in delivering future cost savings, as exemplified with the startup of new state-of-the-art laundry plant that scheduled to start in Q4 of this year.

If you have listened to me for the past four years, you know that I’m realistic and pragmatic. Church & Dwight have never missed an annual EPS target in my four-year reign as Chairman and CEO. We’ve had significant gains to the tune of 35%, 13%, 19% and 16% this past year.

Our 2009 plan reflects a realistic and pragmatic outlook. It assumes lower organic growth in the last few years due to the recession and retailer actions. It delivers very strong gross margin expansion; it provides a strong marketing support behind an impressive pipeline of new products, there is continued aggressive management overhead cost, and we’re targeting very strong EPS growth.

I’ve always told you that this consumer packages industry is the safest place to invest in during rough economic times. And Church & Dwight is the best bet within the CPG industry, because we have the best value orientation of any CPG company. I believe in our ability to meet our 2009 plan, and I have great confidence that we continue to deliver strong TSR to our investors.

Now, let me turn the podium over to Math, who will provide details on our Q4 and total 2008 results and I’ll return to talk to you about 2009.

Matthew T. Farrell

Okay. Thanks everybody. We’re going to start with the slide, I’m sure many of you are familiar with which is our total shareholder return model. This is an evergreen model, we refer to it that way, it’s an explicit model and I think it’s important for everybody to remember how we use it. It guides our annual operating plan. So, we pull this out and say are we delivering in accordance with this plan.

The second thing is it guides us with respect to evaluating acquisitions. So we want to make sure acquisitions can also support us achieving this particular model. And the third thing is our incentive comp is tied to it. So this matters to us. Three key goals you should be familiar with is the top line 3% to 4% organic growth to 100 basis points of gross margin, which is second, and you run your eyes down to operating margin 60 to 70 basis points annually. So what we’re after every year is 12% to 14% EPS growth, 12% to 15% TSR that would include the dividend.

We’re going to go through the quarter and then the year. So here is the fourth quarter results, you can run your eyes down to page. We had exceptional performance on all key metrics. So we surpassed our evergreen model, EPS of 44%, 11% organic growth, gross margin up 180 basis points, very wide expansion of our operating margin, 310 basis points. And finally free cash flow $92 million in the quarter.

Here is some other numbers we should pay attention to. The 11% organic growth breaks out about eight volume and three being price mix. We had slightly less marketing in the quarter as a percentage of sales, which is 12.7 versus 13% last year. We got some SG&A leverage you may recall that we acquired the Orajel business. So, we got 100 basis points of leverage. [Huge] margin expansion as I pointed out before. Tax rate was a little bit higher. You probably read in the release that we had a higher mix of earnings in the United States. We also had some true up with respect to state taxes.

Here is the full year, full year again exceeding all of those metrics that we looked at on the very first slide exceeding our evergreen model. So, EPS up 17, organic growth 7%, gross margin a 140 basis points, 40 basis points by the way of that was Orajel. We have a slide on that little bit later on. We will look at gross margin expansion year-over-year. And you see operating margin of 80 basis points, remember our target is 60 to 70 on an annul basis. And our free cash flow hit a record of $289 million.

You’ll see on a lot of these slides, we say excluding the new plant. So we’re building a new laundry plant in York County, Pennsylvania. It’s going to cost us $170 million. We spent $15 million so far in 2008, another 100 million in 2009, and remaining 20 million in 2010. And the EPS associated with that is also stripped from our numbers. Most of that frankly is just accelerated depreciation on that plant that we’re going to shutting down.

So back to the numbers, you take a look at this slide here, again the 7% is the organic growth rate for the quarter, pardon me for the year. And that splits about evenly for the year between volume and price mix. You see the 140 basis points, 40 of which was Del. Marketing you see is up 30 to 50 basis points and you are going to see a slide later on from Jim. It shows you that over the last three years, every year we’ve increased our investment in marketing 50 basis points up year-after-year. And finally, margin up 80 basis points. So, just a terrific year for the company.

Just a quick look back at the quarters, the quarters were a little more evenly distributed last year with the exception of the first quarter. I’m sure many of the sell side analysts in the room remember the first quarter. And the first quarter, we were helped by a lot of one-timers and some timing, just to remind you, we had a divestiture gain in the first quarter with some mark-to-market accounting favorable on a gain, on a diesel hedge and we also had the timing of slotting very low in the first quarter. So, we expect 2009 will be a much more balanced year. So Q1 is a difficult comp for us. So low 80’s would be a reasonable expectation for the first quarter.

Okay next slide, remember we said up front that our target is 3 to 4% organic growth rate. So I think it’s helpful to go and look back at the prior years versus that particular model. You can see we’ve exceeded the target in four out of the last five years. You’ll see back 2006, yeah, we did have a 2% year, but we did hit our model that year with respect to the EPS growth rate. We’re exiting this year with very strong momentum particularly in the laundry business. And Jim will say a lot more later regarding our current thinking with respect to our call for organic growth for 2009.

Here is the gross margin, 140 basis points of gross margin expansion, and every quarter in 2008 was up 100 basis points or better. You may remember at the beginning of the year, like many companies we had raw material input increases put us behind the eight ball. So we had resin, soda ash, surfactants, diesel, packaging materials everything was up tremendously. So we had a 300-basis points hurdle that we had to overcome.

We had a lot of margin improvement programs, we had laundry compaction helping us, we had price increases on over 50% of our products, and also the backbone of our company frankly is our cost reduction program, which we call good to great. Sounds corny, but it delivers a lot of benefit year-after year-after-year. So, our track record gives us confidence that we can continue to deliver margin expansion in the future.

Now, we have three slides I want to take you through to illustrate the emphasis that we put on free cash flow in Church & Dwight. So you can see here this is free cash flow conversion. So it’s free cash flow divided by net income and our definition of free cash flow is cash from operations minus CapEx. And CapEx in this case is our base CapEx, which runs about $50 million a year. So, we don’t have the York members in here.

So, we had a significant improvement in our cash conversion cycle during the past, because we had a major focus on worldwide receivables and inventory. And that working capital effort has just supercharged our free cash flow number of this year. So that’s free cash flow conversion, well over a 100% in each of the last three years.

Next is working capital. So working capital is a percentage of net sales. And you see the definition there, accounts receivable plus inventory minus trade [a pay]. Now, why is this important, it’s because we view the ability to manage working capital as indicative of the strength of the internal processes within the company. It’s very difficult to knock working capital down at this rate, unless you have a lot of different functions working together. And so that 9.3 number was really supercharged by the effort that we had in the company this year.

And here is the last one, here’s free cash flow as a percentage of net sales. Again this is obviously a reflection of our success in 2008 and just another solid trend, this the first time we've been in double figures with this particular metric.

Let’s now move on as far as CapEx goes. CapEx is managed in a very tight band. So if you look back over the last few years, you could see, we’re generally between 2% and 2.4% of sales again excluding the new plant. And if you look at the last three years that was 6, 7 and 8, you see around $50 million a year. That’s what we should expect as well for 2009 absent the plant. So, this is an illustration that our business really is not very capital intensive.

Now, looking at the balance sheet a little bit more. So our total debt-to-EBITDA again that green band is what we say is our target. So two to three times leverage you hear us, talk about many, many times. This is total debt-to-EBITDA. So, our leverage ratio is below two to three as we end the year, despite that we had a $380 million acquisition of Orajel in July, and then four of those five years on the screen we completed an acquisition.

So we do have a conservative target in two to three times levered and it’s helpful to remind everybody that we do stick to it.

As far as our financial capacity today, start at the top of the slide with $200 million in cash, our debt you see where that arrow is. Our total debt is the same as it was at the beginning of the year, which is remarkable considering the fact that we’ve made an acquisition. We have about $200 million that’s undrawn on our lines of credit. Our leverage is low; we’re in a position now to do another acquisition should one meet our criteria. And the other interesting thing too is after we completed the Orajel acquisition, we’ve got an upgrade from S&P to BB+.

I’m going to end on this slide as far as how we use our free cash flow, and this in order of importance right now for us. So, at the top of the page is M&A, and you can see that the most recent acquisitions we have made Orajel on ’08, Oxiclean in ’06.

Next, well you’d say the new product development would be second on the list, Arm & Hammer with Oxiclean was a very important and successful product launch for us in 2008, it drove a lot of our organic growth. CapEx would be number three. So we’re building a new plant. Number four, obviously that lower on the list now because we’re under our target leverage ratio. And finally, the return to cash to shareholders, we are try to increase the dividend at the same rate that we’re increasing EPS.

Okay, I'm going to turn the agenda over to Jim right now?

James R. Craigie

Thanks Matt. In a moment I’m going to talk about our management team, but I just want to say to you Matt came to the company about two years ago. And he’s been an incredible addition to the company. One example of the free cash flow doubling our free cash flow in two years is a phenomenal result to the company. And he’s really led the whole company in an effort to do that and we very much appreciate it.

Your investments in our company and this slide [kind of] says it, why should you invest in Church & Dwight. Two reasons, we’ve had an outstanding track record of delivering superior total shareholder return. And two, we believe we have a sustainable growth model in place to continue that strong track record.

Two charts, kind of interesting. This is a chart that compares Church & Dwight total shareholder return starting from your right, 10 year, five year, three year and the past year and against what we consider some major CPG competitors out there. And you can see we have a phenomenal record. We've had an average 10-year TSR of 17.9%, number one versus all those other competitors you've looked across the page. The only guy who outperformed us in recent times is [Chatem] a great little company about one-third of our size that's got a phenomenal record. But still, look at what Church & Dwight has done even in the last year we're the only guy in the positive zone on that.

Now, compare that with stock market indices and this was a stunning one to me. If you invested in the S&P 500 10 years ago you have lost an average of 3% a year. You'd have been better off putting your money in a 2% money market. But certainly versus those averages which are all negative except for the Russell 2000 which barely cracks a 10 year plus. We have just blown those away. So obviously we had a great long-term track record of returning gains to our shareholder. I was talking to one of our shareholders here. And they are very happy to be an investor with Church & Dwight for a long time.

So we have a good record. We're not overnight wonders. Our company is very well balanced, we have about 47% household, 41% personal care, and we have this unique business Specialty Products division, that's animal nutrition, number one, kidney dialysis solution, all of the uses of the baking soda in commercial ways. It's kind of funny.

Last two years I was getting beat up all the time, why aren't you bigger internationally, and now everybody is like thank God you aren't bigger internationally. The 21% international so what's going on with foreign exchange right now, it's flipped about 20, 25% in the last three, four months. So, it's a hit for us next year, but it’s manageable, compared to the companies who have monstrous numbers to deal with there.

What are the reasons why we have strong TSR growth? There’s five. The strong revenue growth, steady margin expansion, aggressive overhead cost management, accretive bolt-on acquisitions and we have a very experienced motivated management team. We have over 40 brands in Church & Dwight, but there are eight brands that make up the bulk of the profits and revenue.

And these are the eight brands. ARM & HAMMER about 35% of our company, this brand is more out of the grocery store than any other brand in America and it’s an 86% in US households. Trojan number one condom brand Oxiclean number one laundry additive brand, SpinBrush number one battery powered toothbrush brand, First Response number one pregnancy kit brand, Nair number one depilatory brand, Orajel number one oral healthcare pain relief brand and Xtra which is a pretty major value brand there.

Again over 80% of our revenues and profits come from these eight brands. And I can probably say in 2008, all eight of these brands grew share last year, and you can see the numbers there. I also want to point out, the two small numbers on that page, you might say Arm & Hammer look to 13.6% and Xtra [about] only 4% we make up 10% of the dollar share in the laundry category. But we make up over 20% of the unit share in the category. One out of every five-laundry bottles sold in America comes from our company. That’s second only the P&G. And you can see the share growth, we had across all those categories last year.

One of the big reasons, why we’ve been accelerating new product development, since I came on Board, we created a separate new product development team. They’ve launched a record number of new products last year. We’re not into numbers anymore. We’re trying for fewer new launches of bigger and better new launches. And it shows in the chart, we got 7% organic growth last year, terrific number.

Here is the bunch of new products we’ve launched Arm & Hammer with Oxiclean was the most successful in the laundry product they’ve been launched Arm & Hammer [Inaudible] Trojan is doing very well. Odor Alert with the cat litter, where it turns blue where the cat soils the cat litter, which is great because you want to get all the sold product out to keep smell down. Other products there, the SpinBrush, Swirl was the lowest price battery-powered toothbrushes did very well, digital pregnancy kits, Shower Power.

The first time a women to take depilatory in the Shower, where most women remove their hair on their legs, couldn’t do before would wash off too quickly now you can do it in the Shower and get the benefits of the depilatory products, which is smoother legs and longer lasting hair removals. At the same time behind all this new products, we’ve been increasing market investments. As you can you can see we’ve gone up a 150 basis points in the last three years. So more new products better marketing support for them.

Here is one of the best example, Arm & Hammer are biggest brand. When I came to this company 2004 it was growing at 1% pretty pathetic, four years later 11.3% growth last year, phenomenal. Let’s talk about steady margin expansion we’ve grown gross margins over 400 basis points in the past four years do the math, that’s the 100 basis points a year.

We’ve proven we can do this, we believe we continue to do this. Our goal is to keep doing that, we want to reach a 45% gross margin by 2012. That’s averaging again 100 basis points a year. A half of that will come from internal efforts, organic efforts, half of that through buying margin accretive acquisitions.

Let’s start with overhead cost management. This is my favorite slide in the whole deck. In the past four years, four year ago we’re 1.5 billion in sales. We had 3,741 employees that works out to $391,000 per employee. Four years later we’ve grown sales 60% to 2.4 billion, yet, we cut employees by 5% to 3,530, that’s works out to $6,000 per employee up 75% growth in that number. That beats anybody in the CPG industry including big guys out in Cincinnati who are 40 times our size. That’s a phenomenal result.

So, it’s pretty terrific when you can grow the top line, grow the margin and not spent back some of that on the SG&A line actually have it lower, so terrific thing of our company. How do we do that, a lot of ways, but I want to tell you the truth, it’s not over, we’re continuing to restructure the organization, we’re continuing to consolidate our worldwide supply chain.

Last year we sold out of Spain, we closed the plant in England that’s all going to benefit this year. And we have very tight control over healthcare cost. So that trend is going to continue. That’s all about acquisitions. We love them, but we have a very defined criteria for them. We will only buy number one or number two brands, we want higher growth, higher margin brands, we prefer asset light brands.

We want to take those businesses, we want their brands, we don’t want their people, we don’t want their plans, we don’t their headquarters, we throw it all in the back of our existing organizations. And we believe that the strength of our company in sales and marketing we can drive share growth in those businesses.

I showed you before there is eight brands that drive 80% of our revenues and profit. We didn’t own seven of those brands in the year 2000. We have acquired them since then and built them. That’s the model, all those brands of the criteria except for one the 2003 acquisition Unilever did not fit our model criteria, they weren’t number one, number two brands and honestly we look back and we had a second choice, we wouldn’t have done it. And those brands have not done that well. But everything else has been terrific you can see we have tripled our revenues since 2000, driven by those acquisitions and organic growth. And here is the case in the last three acquisitions. The Spinbrush Oxiclean and Orajel.

You see in all cases we paid between 100 to $400 million, we picked up 100 million to $200 million in sales. They all had higher margins they were in categories we knew about, so we didn't have to hire new people to run them, they were in oral care and laundry, two are biggest business. They were number one in the marketplace, and they all very asset light.

I mean Oxiclean is one of the best thing, OxiClean was a family owned business of Denver, Colorado with about $200 million of sales. As an independent company, they were making $15 million and had to pay for headquarters and sales forces, they were co-packed, we bought that business. We got rid of their headquarters. Out of the 150 people we hired 10 people. We brought their products out of their co-packages to our plant at cheaper costs. In one year, we tripled the profits on that business. And since then we’ve grown the market share in that business from the mid 20s up to actually 40 shares in the latest Nielsen report.

Finally, I've said before and I'll say it again, the experienced motivated management team, my management team comes from was trained at all the great companies. I came from 15 years of Kraft, Matt came from years of Allied Signal, my Head of Marketing has 25 years of J&J, my Head of HR came from Bethlehem Steel. Let me tell you something. You want to get an HR manager, get it out of the steel industry. They know how to deal with tough situation, my Head of R&D, Reckitt Benckiser. We are very proactive, we are highly committed, we are very passionate and we are very action oriented.

By the way, all of us after having 10, 15, 20 years in those major CPG companies. We probably spent 3 to 5 years in the private equity world, a very different world, very aggressive, more action oriented, basic goal of double the size of the company in three to five years and sell it. We will guess what in the past four years; we doubled the size of Church & Dwight. It took 150 years to get to one place and four years we double that.

And we walk the walk in overhead controls. Nobody in my company has a company car including me. We don't have golf club memberships and we don't corporate jets. I think we're a little ahead of the world in this trend. And the management team, we are 100% in the game. Our bonuses are tied to the four factors that drive total shareholder return. 25% of our bonus is based on our revenue targets, 25% gross margin expansion, 25% operating margin, 25% free cash flow.

Our equity compensation is 100% stock options. If stock doesn’t go up they are worthless, we don’t have restricted stock that's worth something no matter what happens. We don’t have performance-based units based on some crazy formula. It's pure stock, just you when you buy our stock. And we're required to have skin in the game. We have to invest in the company stock.

All right. That's great, Jim, about the past. We want to know about the future. We believe we can sustain that kind of growth in the future, again it starts with the eight key power brands, it's focused behind four trends I'll talk to you about. We have a strong pipeline of innovative products and it supported by increased marketing spending. These will drive our strong revenue growth.

Here again are the eight power brands, the four trends that those are largely focused on are value, pets, green, and sex. How is that for four trends? Hey, I don't even talk about the world. The world is going to value right now. The rising unemployment out there, the rapid contraction of housing prices, declining consumer spending, tight credit markets.

I said earlier on, I think it's going to get a heck of a lot worse before it gets better out there based on my belief, and its very sad but it’s a tough world. This is why we are different than other CPG companies. Over 30% of our portfolio is value based, but here is very specific facts. And that 30% basis makes us recession resistant than any of the CPG companies.

Our laundry brands, Arm & Hammer and Xtra are 50 to 55% cheaper than Tide, the category leader. Our fabric sheet business also Arm & Hammer get 50% lower than Bounce, number one fabric sheet business. We have toothpaste brands like Aim, which are 50% lower than Crest and Colgate.

We have pregnancy kit, we have two we are the leader at premium price First Response. We also have a value brand, Answer, growing at double-digit that 30% lower than other brands in a category, and in cleaner category, a small but we have brands like Scrub Free that are 45% lower than Scrubbing Bubbles, a category leader there. Private label, lot of talk about private label, it is a threat, we believe it’s a manageable threat.

You see in most of our categories, today private label is a fairly small share. It's only big in three parts, cat litter, baking soda and pregnancy kits, but we listed here in 2008 how much private label share gains where. As you can see for the most part they are not big. As Nielsen just finished a study recently and said the biggest drop in private label will come in categories, where private label already big, hey it make sense people have already tried it. So when they are hurting for money, they've already tried it before and they will try it again. In categories they have never tried it, they will be resistant to try something they've never tried before.

But you can see there, and I can show you a baking soda yes, where 80% share, private label 20% share. There is nobody else. We lost two points from last year. We took price increase and the category had profit growth to it. Pregnancy kit is a big factor, but we actually gained share in pregnancy kits last year with the great work we did in our First Response brand and the gain on the Answer brand.

Talk about pets for a second, it is an interesting fact I love. Almost two-thirds of the households today have a pet. Only one-third have a kid. America is becoming a pet world. That's why all the people in CPG want to feed them, and we take care of the other end.

So you can see we're in the cat liter business. We entered this business in 1998 and in 10 years we're the number two brand in this category. So we love this category, because it has terrific growth behind it. Green, all about environmentalism. The population all of a sudden in the past 12, 24 months has become very environmentally oriented, 54% of population [Inaudible] mainstream green, and 58% U.S. adults believe chemicals and pollutants are more of a threat than they were 10 years ago.

People are throwing away tons of plastic bottles filling our landfills, and only 7% recycle. Big opportunities there, about 2.5, 3 years ago, we launched a sub brand of Arm & Hammer essentials, we first launch in the laundry detergent, that in the fabric softeners, then underarm deodorant, then cat litter and just most recently in cleaners. Nice little business, growing double we have over $35 million in net sales so far and this is a nice steady safe business going forward with the consumer trends.

Talk about sex. We folks are not a sexually healthy nation 19 million people in this country every year are infected with sexually transmitted disease. 1/14 girls have an STI. AIDS, which was on a decline, is now back on a rise again. Nearly 3 million unintended pregnancies in this country and there are 2 billion unprotected sex acts a year. One out of four sex acts in this country between two people who don't know each others sexual health, only one out of four use a condom, three out of four times people take a risk of getting sexually transmitted disease, that's why we have those horrible statistics there.

Hey, we win either way. Either use our condom where we have a 75 shares, or don’t use our condom, you’ll use our pregnancy kits. So and we have record with a record shares in both businesses. However, I'm being kind of funny, our condom business again is only used one out of the four times it should be used. We would like to drive that number north and we’ve been trying desperately through new product that marketing campaigns to do that. And I’d like to show you, you’re the first to see this, this will be a commercial running on Valentine’s Day this year, which happens to be one of the five highest points in the year for sexual acts. So take a look at our new TROJAN commercial.

[Commercial Advertisement]

You guys aren’t laughing? Come on, we’re trying to get people wake-up; this is what’s going on America. The spread of diseases is out of control and we’re trying to get people to wake up above, use a condom every time. So, on pipeline innovative new products, here is a smattering of them, a new in the fabric softener world. We are combining both the liquid and the sheet into one. A two in one product, a hot trend in a lot of category, You are going to throw this into the dryer and you get the benefits of both liquid and sheet fabric softeners. A new form of OxiClean spot treater, doing tremendous, off to a great start.

Condoms, two things. We have what we call the condom card. One of the biggest issue with condom usage as people say I didn’t have a condom on me, when the act occurred. We now have a new condom card it comes with a very heavy plastic case that actually I think snaps in two, you can put one into your wallet or purse, it’s very discrete doesn’t scream condom on it. And you can have it in your purse and won’t get crushed in your wallet over time. We expect to do a lot of business on this one, especially at C-stores and people can run into and get something out quickly and then I will be preserved in your pocketbook or wallet in that.

A new condom that’s had a new shape, that's actually more sensitive called Ecstasy coming out. New things on Nair, for different forms of the Shower Power very successful, and a Nair version of exfoliator for skin. That's a new Orajel product and a new SpinBrush. Sonic has a much higher speed SpinBrush, a more powerful cleaner. These kind of brushes usually cost anywhere from 50 to $150. We're launching this one for $15, should be interesting.

And again we’ve increased marketing support, I've told you we've been increasing steadily over the years. I'll tell you in a few minutes we'll hold flat on dollars next year, but the spot market on marketing spending right now is down between 10 to 20%. So we'll get a lot more impressions for the same amount of money. So in a sense our spending is going up, but we don’t have to go up to get impressions.

All right, let me talk about 2009. Once again the model, start with the models as Matt said, this is our evergreen annual model we target to, but every year has little pluses or minuses on each one of those with one exception. We want to get the 12% to 15% total shareholder return. Look at our model. Look at what we're telling you. We only believed in this world right now with what’s going on with consumer trends, what's going on with retailers that 2% are realistic guidance right now.

Honestly, I believe the worst is yet to come. I will be honest with you in the 11 out of the 12 categories we compete in category, not our business, but total category. Consumer buying was down exiting last year, and I don't view the end of last year, as a rough time, rough time; it's going to be a lot worse. So when I look at this next year, it’s going to continue to decline across the year. And I think calling 2% is very realistic.

Other CPG companies are mostly calling between 2 to 5 I think 2% is very realistic going forward. And I can get 12 to 14% earnings growth with only 2% organic revenue growth. Margin, we’ll do better than or equal to a 400 basis points next year, good year on margin. Market is [little] technical, we are going to hold dollars flat in that case. SG&A overhead, lower next year. Lower dollar spending in SG&A, I’ll tell you why in a minute. Tax rate is about 36% that leads when operating margin of over 100 basis points and that leads to 12 to 14% EPS growth.

Hey, beginning of the year, we usually come out and say at this point in time with all of the uncertainty going on in this marketplace, we think it’s an appropriate start, 12% to 14% to my knowledge is the best EPS call in the CPG industry of any CPG competitor out there. So we’re at the high end of the range.

Let me tell about the reasons, 2% organic growth. What’s the good news? Pricing last year, we priced 30% of our portfolio that will lap into this year. We got a strong pipeline of new products, almost all of which are margin accretive. And we exited last year with very strong share trends, very strong share trends, good news. But big but lower category volumes due to consumer spending.

I just see a continued decline in consumer spending across the year. Private label, every retailer in this country will talk about growing private label. They see this is the right time to do it, they see the time when consumers are looking for value. The majority of private label brands are value, and retailers are pushing hard to grow their private label brands why, they make more margin.

So they believe this is the time if ever the time to grow private label. We think that will cause pain. I told you before private label is not big, but with almost every retailer out there pushing, it’s going to be a year with some pain to share. I don't think it will last long personally. I think a year from now they will all back off somewhat and go back to brands, but I think 2009 is going to be a year of pain from private label.

The other thing, retailers are in a big effort to reduce SKUs now. They want to get their inventory down and they’re reducing the inventories and pay SKU harder than ever before. You add that up in my mind, and I think a realistic and prudent call on organic revenue growth is 2% at this point in time. I hope I’m wrong, but I think it is prudent at this point in time.

Gross margin this is great news, we have five factors driving gross margin. Three are common industry. We’ve had pricing and mix action again we put pricing over 50% of our portfolio last year. That's lapping into this year we are not going to lead any price decline. Lower commodity costs, you‘ve seen what’s happening there’s a big drop off in a lot of commodity costs a few that are up, but the bulk of them are down that’s a cost saving benefit, as Matt said this corny program called Good To Great but it works. It’s reformulation, reducing packaging, reducing SKUs, hedging on commodities.

We've had tremendous costs benefits on that, a very strong program in our company. But every company has those three basic factors. Two that are very unique to us that help us deliver better gross margin expansion like anybody else. The acquisition we bought Orajel middle late last year, the bulk of the benefit will come through that year that’s a 60 plus gross margin business $100 million you do the math.

Laundry compaction was completed about the middle of last year. It was a nice benefited gross margin on laundry business. So we will get benefit in the first half of this year in which it wasn't totally compacted last year.

Hey folks we are not stopping, we are looking beyond 2009 to 2010 whereas we speak we're building a fantastic new laundry plan in York County, Pennsylvania. It’s going to be about 25% more efficient than our plant in New Jersey and everything is going very smoothly on speed and again we will get benefits from this starting Q4, but mostly 2010 to help our gross margin again get to our goal the 100 basis points a year. Marketing wise, again, dollars are flat, we have increased as I said before marketing spending over 150 basis points last three years, but advertising cost less right now. I have seen the spot marketing were 10 to 20% lower than was a year ago. So, the same amount of dollars we can buy by more impressions and that allows us to maintain or grow we hope our share of voice for all of our categories.

SG&A, we are just mongers about this. We had continued tight control, we consolidated our worldwide supply chain to take cost out and we benefited from divesting businesses last year in Spain and selling a plant in U.K. So SG&A dollars lower in 2009. So it all adds up to a very steady record that we've had in this growing EPS. Again 12 to 14% is actually the low end of what we’ve kind of done the last in the four years. But I think, it’s an economy right now going on there, it’s a very aggressive call again. I don’t know, if CPG company who is over 10% right now.

So I think calling 12 to 14% is aggressive where it is right now. Be nice to beat that, but I think it’s a very prudent call right now in the business world. As I said earlier, if you believe [in the future] buyer beware.

With that Matt and I will take questions that you may have.

Question-and-Answer Session

Operator

[Inaudible]

Unidentified Analyst

Just on the Orajel side, if I'm doing the math correctly, this 40 basis points that’s the gross margin now, has been able to keeping moving from 30–40 basis points in there and in fact that and then 70, all I need is another 60 basis points for proposed to do it?

James R. Craigie

Yeah, the way to think about 100 basis points, because what we say, we are expecting to meet or exceed 100 basis points. Netted in that 100 basis points, as we are actually overcoming a big drag from Fx transaction. So what that means is that in Canada, Mexico and some European countries to the extent we source in U.S. dollars, cost of goods sold for those countries it is going to be significantly higher to see about 10 to $12 million. It’s actually totaling about $.0.11 in EPS. But that is a drag that we are overcoming as well in our 100 basis points. So that alone will be about 50 basis points that were covering. So but you are right. The impact from Orajel next year would probably about 50 basis points.

Unidentified Analyst

Jim, can you maybe help us understand your, I mean the prudent caution. Are you seeing in January first part of February de-stock retailers focusing on private label versus your brand, slow down in sales or something or is that just caution on what could happen remainder of the year?

James R. Craigie

I expect the year to get worse, we are seeing a little bit of it right now, we expect the situation deteriorate over the course of the year, based on what we are hearing from retailers and based on the consumer trends we are seeing. So it is a projection, the year is actually also a pretty decent start, but we are seeing signs of what’s going on out there that make us nervous, make us very nervous. And if I had said at this point in time, we can’t get the 12 to 14% earnings growth with only calling 2% organic growth and I think in the end, I wont call it a worse case, but I think at the end we are prudent realistic case in the year. And again I mean the other guys are – other major companies were only calling from the most part 2 to 5. We are not like minus 5, we are in the plus 5, and they are doing what the hell are you doing. We are very much closed to arrange – into the range we’re just calling in our eyes are low end of the range based on what we see out there. But again early, it’s largely our forecast what's happening.

Unidentified Analyst

Just I have a follow up on the first quarter you’ve called for this 2% organic growth for next year and you just reported 11% organic growth. So one might I think that maybe your shipments were ahead of consumer concession in the fourth quarter and ticking and that’s coming out of the first quarter. So could you just comment whether your organic growth in the first quarter is above or below that 2%?

Unidentified Company Representative

That would be above. And as Jim points out, we expect a deterioration and category spending throughout the year. And there was no inventory loading in the fourth quarter.

Unidentified Analyst

And may be a reason for that 2% organic growth was just the tough comp in the fourth quarter for next year?

Unidentified Company Representative

That’s part…

Unidentified Company Representative

That is an issue…

Unidentified Company Representative

Yeah, that’s going to be a difficult comp for us once we get to the end of the year and kind of the countries is in worse shape.

Unidentified Analyst

Okay and then the fourth quarter could you take apart that 17% increase a little bit more. How much were your detergents up and did that match your sell-through at retail in your view?

Unidentified Company Representative

You’re referring to the 17% in your eyes is the retail growth number, organically 11% for us. But in general yes, our laundry business is doing exceptionally well right now, it’s all of the value oriented businesses we have are doing very well right now, but I will also tell with you again we grew all eight of our power brand last year. Every one of our brands had a very good fourth quarter last year, but laundry was exceptionally good in the fourth quarter. There was no meaningful inventory low.

Unidentified Analyst

So, detergents were up something like 25%?

Unidentified Company Representative

We don't comment by category.

Unidentified Analyst

Could you comment on how much your market shares in detergents were up at retail including all of the retailers like Wal-Marts?

Unidentified Company Representative

Most probably I don’t have a numbers in front of me.

Unidentified Company Representative

Arm & Hammer Liquid Laundry up year-over-year. Is strong – it is strong.

Unidentified Analyst

Did you gain 3 points of share?

Unidentified Company Representative

No, no, not that much at all, no…

Unidentified Analyst

Thanks, I was if you could talk a little more about the pricing environment I guess the commodities coming down retailers pushing back harder if you have a very weak demand environment, maybe some of the competitors get more promotional what gives you the confidence that you're going to see the pricing environment hold about as well as you are?

Unidentified Company Representative

I would just say so far so good in all of our businesses I've not heard of one price decline actions. I said we're certainly not going to lead any actions we only have lead the world and categories where we are large Trojan, banking soda business are the ones we lead and the rest we follow and the category leaders in all of those other categories have not show any kind of taking place to drive. So I'll be honest with you, I think on the other categories, the leaders in those categories had much more significant foreign exchange problems than we do they got to make up for those in some race and I think – I think the big guy in Cincinnati have been very clear. They do not intend to lead any price declines. But then again if there is continued significant decline in commodities and those pressures from retailers who knows, I'll just say the same thing they said. I don’t intend to lead price declines but again I only believe in a couple of category, rest of the – both of the categories we follow. But everything I'm seeing the competition is nobody else there is saying they are going to be taking place decline they only have – heard about out there is pro-acting in the coverage bags and we don’t compete in that category.

Unidentified Analyst

And then just a quick one on the self space comment, you elude that private label picking up space did you go through and you have private label shares that are less than 5% in the book of the categories. Is there any one category in particular were you seeing, have your increases and private label self space and I get what if they are coming from such a small base and the gains are coming from categories where prior label and higher share positions…

Unidentified Company Representative

I would say every category, but in a lot of the categories we are in, we are hearing what the retailers are talking about pushing private label harder, they are going to do that, they are going to increase their shelf space for the brands, that means other guys lose, that’s how we see. We see that happening, it is pretty much across the board, it is the talk of the talk in the retail industry right now, every retailer out there is talking about my share of private label is this, I want to take it to this, and they’re looking for every opportunity they can do it, and to do that they’ve got to take more shelf space up to their brands, more merchandising space, more merchandising effort up to their brands and it is an early call, but we are nervous about it. Even though in the end, they’re not going to become category leaders, but there is going to pain by everybody in those categories, if the retailers who control distribution, who control merchandise, they can control pricing, are going to have the ball in their hands to what to do and all they are talking about right now is going private label. So, we are nervous.

Unidentified Analyst

So, no sense that you think you can hit disproportionally versus other brands?

Unidentified Company Representative

Not at this point in time.

Unidentified Analyst

I mean, just last one, on the marketing spending side, do you guys tend to buy a lot more spot or upfront?

Unidentified Company Representative

We are about 50-50.

Unidentified Analyst

Okay.

Unidentified Company Representative

But which is honestly even more than I think most people are, it is about half of our budgets in the spot side, and that’s right, the upfront has held amazingly, the networks are refusing to renegotiate the upfront from what we’ve seen, spot market is always is a daily thing and the spot market right now is generally down between 10 to 20% versus year ago.

Unidentified Analyst

So we should we think of your ad spending rates being down 5 to 10 versus flat in [collars] than your weights are up 5 to 10, is that a reason we can think about it?

Unidentified Company Representative

That’s reasonable.

Unidentified Analyst

Okay. Thank you.

Unidentified Analyst

Jim can you just talk about, you talk about destocking, I mean is there any fair dilution, because that the destocking is so far, looks like it’s been more at the distribution center side, but have any of your brands or anybody else has actually just been thrown out point blank?

Unidentified Company Representative

I’m not going to comment by category, but that is a risk, Bill, that retailers are again, it’s just sort of like private label, they talk about it for years, but now they are really doing stuff on both private label, Inventory, SKU reductions, destocking like never before. And so yes, there could be, in particular accounts we lose some businesses, but also I’ll tell you truth in a lot of our top brands we’re gaining distribution, but we see overall, I would say it's a net negative this year, because the retailers are more than ever doing and we can't control it. We can go and argue with them, but if they decide to reduce the SKUs or knock an item out or two in that and their account, I mean they control the decision. And like I said we just never seen it at this level before going on. So, it will be a, that's why we’re, without that I would certainly call higher organic growth. But I just think over the course of the year, there is going to be pain to pay for it, and again I think 12 to 18 months from now, the retailers in large part will realize their business grew less than it would have if they kept the brand assortments, they've had or kept the SKUs they had. But they are convinced right now is the time to go private label and they're pushing it harder than ever and they’re delisting SKUs harder than ever and they’re pushing inventories lower harder than ever. They are cash strapped. You've seen the same-store comp sales. They are not good and these guys are cash flow junkies as we are and they’re looking for ways to preserve their cash, grow their margins, and they again decided private label is the best time ever to push it.

Unidentified Analyst

March is sort of planogram season for most of your categories, right? So wouldn't you know what's staying and what’s going?

Unidentified Company Representative

It’s something in discussion right now, that's where there is early signs with some of the retailers on a large number of the businesses. What we're seeing is we haven't seen final plans, but we've seen enough to make us worry. We've seen enough to make us worry what's going on.

Unidentified Analyst

Okay.

Unidentified Company Representative

And that’s why I say it’s realistic and prudent in our eyes to take a lower position, a low-end of the zone of CPG, in the 2% zone right now to see what happens. God forbid, I hope I'm wrong. I hope I’m wrong. And I am hoping some of the retailers may reverse any decisions they make before the year is over and put stuff back in. But at this point in time it's a prudent position to take I think of calling, because again we can get the 12 to 14% earnings growth, which is the 2% organic growth call.

Unidentified Analyst

Okay and hypothetically, which one of the products might be at risk to?

James R. Craigie

I’m not going to go category-by-category in that. Almost anything is at risk for competitive reasons and retailer reasons, I just don’t want to get into what we know from each. Retailers get upset if we even told what they were doing. We’ve been warned even competitors don't know what’s happening by certain cases on that. So, we've been warned too many times. We can’t talk what retailers are doing because they do it as, we don't want to even know we are doing stuffing like that. So, we have enough insight at this point in time to make us nervous.

Unidentified Analyst

Okay, great. And then what was the input cost headwind and basis points this year and what you are expecting for ’09?

James R. Craigie

For ’08 it was 300.

Unidentified Analyst

Okay.

James R. Craigie

So 300 basis points a hurt in ‘07 going away.

Unidentified Analyst

Okay. And do you have an outlook for '09?

James R. Craigie

Yeah. We have done the slide for ’09 with the gross margin bridge from ’08 to ’09. No, in another words am I going to call what, how many basis points improvement we are going to get from commodities, but it’s going to be substantial.

Unidentified Analyst

Okay. Are there any adverse hedges like a layover from July when you probably locked up some stuff?

James R. Craigie

Yeah. We had to hedge for a couple million gallons of diesel oil for '09, by about a $11 million annually. So, a $2 million of the $11 million and because of mark-to-market accounting that’s been marked down to the low price as of 12/31. So, that’s not going to really hurt us next year other than on cash side.

Unidentified Analyst

Okay.

James R. Craigie

But not from a P&L standpoint.

Unidentified Analyst

Okay. But the gross margin would have been even better if you didn’t have these hedges in place this quarter than the 108 basis points, yeah.

James R. Craigie

No, that hedge is not going to hurt us in this quarter. It's only going to hurt us to the extent that oil goes down to $20.

Unidentified Analyst

Right.

James R. Craigie

If that happens.

Unidentified Analyst

Okay, and then lastly just on the specialty chemicals business, I mean that's a more economically sensitive business. I mean its still about 50% of sales, right, I mean what's the outlook for that that piece?

Matthew T. Farrell

Yes. There is two prices to the specialty products business, half of it is dairy, and half it is chemicals. On the chemical side, the big part is of it is chemicals. On the chemicals side the big part is bulk sodium bicarbonate, and if you think about bulk sodium bicarbonate, where does it go, it goes into food. So, craft the food companies would bulk sodium bicarbonate would also be used in industrial, but water filtrations et cetera. So, there are things on that side that actually, kidney dialysis as well. So, there are a number of things that keep that business pretty steady, and who we went to look back at previous recessions and saw that side of the business is pretty strong. On the other side of the business, the dairy business, the dairy farmers are struggling because price of milk has come down, inventory levels are also rising a bit, that's because that exports are down as well for milk. So, what has to happen on that side is that the number of cows have to be taken out of the system and that's happening right now. So, to the extent that happens over the next 6 to 12 months, price of milk would start going back up, they can get healthier. So, there is going to be some softness on that side of the business, animal nutrition.

Unidentified Analyst

Okay. Thanks very much.

James R. Craigie

Okay. Question is by Connie?

Connie Maneaty – BMO Capital Markets

Hi. What do you estimate the days or weeks of inventory of your products to be at retail is it growing or declining?

Matthew T. Farrell

Specifically four to six weeks with the supply.

James R. Craigie

And it's been relatively flat, maybe a little down. We've not seen a huge de-stocking issue across our brands.

Connie Maneaty – BMO Capital Markets

Okay. Do you also think some of your customers will file for bankruptcy of this year and if they do with that disrupt your sales and shipments as that inventory works its way around?

Unidentified Company Representative

We monitor our retail is very, very closely, not only the retailers, but the other side that is equally as important is our vendors. We do have less co-packers and people that ship as raw materials and some of them aren't that big. So we've got a process in place to study both in very closely but right now, I wouldn't say we have a big exposure to our sales base as a result of the economy.

Connie Maneaty – BMO Capital Markets

And does the tight credit markets affect your supply chain in anyway?

Unidentified Company Representative

It can affect smaller suppliers to the extent that they don't have a credit line and they are dependent upon their weekly monthly cash flows. So that’s why the smaller vendors were more concerned about it. It hasn’t gotten to the point now, people are looking for us to bank them, it hasn’t gotten to this.

James R. Craigie

Yeah, we had a wake up call last year, the largest trigger spray manufacturer in this country went bankrupt suddenly caught everybody by surprise, everybody in industry the cleaner industry using trigger sprayers was caught short, we had a source around the world and it cost us an extra money. It woke us up to the fact that how on the edge some of these suppliers are, it led to a major effort [inaudible] group to study everyone of our suppliers out there very careful, because there was risk, we had gotten dual sources and things like that. So that won’t happen again. And luckily, we managed it okay. It didn’t affect supply, but it got very close at certain points in time.

Unidentified Analyst

Right and just a follow up question what were Orajel sales in the fourth quarter?

James R. Craigie

Well, we typically don’t call the sales of an acquisition but the thing you should remember that the annual sales for Orajel were about 100 million, and it’s a pretty linear business, so you can do the math.

Unidentified Analyst

Jim, excuse me, can you talk a little bit about the M&A environment. What do you think the odds are you will be able to execute another acquisition in this year?

James R. Craigie

Good question, but M&A, there is a lot of opportunities out there. As usual, a lot of it is junk, a lot of strategics are doing some strategic portfolio looking right now or looking to shed business, which is good news a concern is though that there is not a lot bidders of the doors as usual because of the credit market so tough, private equity is not at the door it's slowed some of the auctions. But even some of the strategic players are not been able to source cash right now. So, it leading to some of the sellers, we thinking whether they want to sit back and wait, because in most cases these are big companies they don’t need to sell and they are deciding whether or not maybe [I’ll wait 6 to 12] months for the credit market opened up then have a bigger line of the door have a more competitive auction. So in some sense because of that it may result a little bit of slowdown, but I would say we are actively on the trials, the couple of opportunities right now but again we don’t know in the end of the seller, we will go through with the deal. But I still hope so, we are in a great shape, we’ve got Matt showed you, how much, $700 million, if we push what we have availability on?

Matthew T. Farrell

Yeah, as far $200 million of cash and $200 million of undrawn lines and we have given our rating and on the level of cash flow we will be able to access our credit line, we have an accordion feature where we can borrow another $250 million.

James R. Craigie

So plenty of, our usual range is 1 to $400 million for an acquisition, so we have the money we can make deals right now. It's just the case will sellers be willing to sell without thinking they could wait a little long and get a little better price.

Unidentified Analyst

Are those strategic sellers mostly the big pharma companies.

James R. Craigie

They are the key players. That isn't all of them though.

Unidentified Analyst

Would it be a preference to stay in the OTC pharmaceutical area?

James R. Craigie

No, we like that area, we are in that area, but no, we again, we’re always I would say agnostic between household and personal care. Orajel was one of our best acquisitions every in the household side, I’m sorry OxiClean was. Orajel was great, I mean we will go anywhere at the number one or two brand, margin accretive, asset light and growth opportunity.

Unidentified Analyst

Okay.

James R. Craigie

That’s where we don’t care. Any other questions?

James R. Craigie

Well, all right. Hey I think I said to you my mantra going forward is in these rough economic times and again I’m probably more draconian than most, I think it’s going to be a very, very rough year for us not that only the U.S., but the world. The consumer package industry is the safest bet you can place out there. Within the industry we are probably the safest bet in there, we’ve got a long track record of delivering the numbers. I think our strategies are on track and our great momentum, and I think we’re realistic and prudent at this point in time, 12 to 14% EPS growth, I think is the top on anybody is calling right now and I’ve a pretty good assurance in my mind we can deliver those numbers, so I want to thank you all for coming today and if you have any other further follow up questions we are always available down in Princeton, New Jersey or by phone. And have a good day. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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