Church & Dwight's CEO Presents at 2013 Barclays Back-To-School Consumer Conference (Transcript)

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

2013 Barclays Back-To-School Consumer Conference

September 03, 2013 02:15 pm ET


James R. Craigie - Chairman and Chief Executive Officer

Matthew T. Farrell - Executive Vice President and Chief Financial Officer


Lauren Lieberman - Barclays Capital

Lauren Lieberman - Barclays Capital

So with consistent double-digit EPS delivery year-in and year-out over the past decade, Church & Dwight has done a better job than most, as its value-oriented portfolio, cost discipline and target acquisition strategy have been really well suited for volatile and challenging macroeconomic environment. It's for this reason that we believe Church & Dwight should be considered best-in-class, not just among its peers but within broader staple. We are delighted to have CEO, Jim Craigie, and CFO, Matt Farrell, with us again this year's Back-To-School. Jim and Matt, the stage is yours.

James R. Craigie

Tough crowd. Well, it's always a pleasure to be here at Barclays Back-To-School Conference. Lauren, a little correction, it's been 12 years in a row and nobody is better than us, okay, just to start off right. I may make some statements today about the forward-looking view of the Company. If I do and you buy the stock, it's your problem.

A few opening remarks to say the New York Minute, I know this is Boston but I'm sorry I'm from New York, a New York Minute we're going to hear today, then we're going to get into the top 10 reasons that drive our total shareholder return which has been incredible, then Matt is going to come on and talk about the first half of 2013 results and look at the outlook for the rest of the year, then we'll take Q&A from you.

In a nutshell, the five things we're going to hear today is, we had very strong first half results in 2013, we expect continued challenging environment in the second half of this year, we believe we have aggressive but achievable double-digit EPS target, we are going for 14% EPS growth this year, the Avid integration, that's the vitamin, the gummy vitamin business we bought, is ahead of schedule, doing great, and we have a great cash machine, we're hungry – and right now we've gotten through the Avid acquisition, it's been fully integrated and we've very hungry for additional acquisitions.

Alright. So we talk about total shareholder return of our Company. Let me start and just show you the facts here. In my 10 years as the head of this Company, if you invested back in 2004 when I came here, you made 351% on the Company, the blue part of the chart is the stock price appreciation, the yellow is the dividend payout, and you can see there, it's significantly better than any other company you will hear at this conference on that chart. And as always, our investors love us and our non-investors keep missing the boat on Church & Dwight.

So I constantly get the question great history, great results in the past nine plus years, what about the future? So let me tell you the 10 reasons why Church & Dwight can continue to deliver superior total shareholder return results. First of all, we have the most unique portfolio I believe in the CPG industry. We call it a recession resistant product portfolio. But let me step back for a second and talk about what's going on out there right now. You're hearing a lot about consumer confidence growing but it's not translating into stronger retail results.

We looked at six of the top retailers in the marketplace and their same-store sales trends over the past six quarters, and I don't see this economy getting out of first gear right now. It is still stuck, it's stagnant, and I don't see it getting better right now. I don't see it getting worse, I don't see it getting better, and I think the business results of the top retailers show that. Here's a quote, talking something about the third quarter here by a major retailer, in the second half of the quote he says, 'In surveys regarding expected spending on back to school and back to college items, consumers indicate that they tend to spend less than a year ago by focusing on sales discount and reusing items they already own'. That's not a very rosy outlook by a major retailer.

Now, most companies here should be bothered by that, we are a little bothered too, but also we get excited because we have the product portfolio that fits the tough economy. 55% of our brands are premium, like other companies here, but 45% of our business is on the value side. When I talk value, I'm not talking about $0.05 or $0.10 lower, we offer significant price advantages versus the premium brands in various categories. And here's our most value-oriented businesses, in laundry detergent, we are 50% to 65% below the price leader in that category. You can see in toothpaste, we are half the price in our brand. So, you can see we offer meaningful dollar benefits versus some key competitors.

And the recession has pushed the consumer towards the more value end of the business. This is the official laundry category, and you can see since 2008 the recession period hit, people have shifted down into the value and extreme value segments, away from the premium and mid price segments. The value price laundry tier is increasing its share. We have now passed the mid priced tier in total sales dollars out there in the first half of this year. It might surprise you, more U.S. households now buy a value detergent than a premium or mid-tier detergent. All that has helped to grow our business very steadily and gain about a share point a year on average, we were less than 10% share back in 2007, we are now at 15.5% share, and we passed the number two player to become the number two player in the industry.

You can [indiscernible] this chart here, we've grown from 11.5% share in 2009 to over 15% share in the category growing 4 points, and the only liquid laundry detergent to manifest a growth share in that time period. If you look at the value segment of the category, we have grown 10 share points since 2009, we are bigger than number two, number three and number four players combined.

You might also – I showed you dollars on those past few charts, if you look at washloads what people are actually using in their house, we are second to only Procter & Gamble and way closer to them than being able to get total dollar share. So people love our detergents, they are using them very heavily out there in their businesses.

We expect continued strong growth in our business in the second half of this year driven by significant distribution gains we have achieved this year at key retailers, I'll show you some charts on that in a few seconds, new product launches this year which I'll again show you in a second, and increased marketing spending on the business.

Now some people say, okay Jim, Church & Dwight is all about value, you're value, value, value. That's not true. We know how to build our power brand shares. Our past success has been driven by the eight power brands you see in this chart, we now have two new power brands with the Avid acquisition, we picked up the number one kid gummy vitamin and number one adult vitamin business. So put them together with the eight, we now have 10 brands that drive over 80% of our power brands. We have another 60, 70 brands, the smaller brands, but those 10 power brands drive 80% of our sales and profit.

You can see across the board, they are all market leaders out there in their categories, and you say, well, how do you grow share? There's no secret to this, this is an age-old formula. We just execute it extremely well. It's all about innovative new products, we support those with increased marketing spending, you increase the distribution, and you get share growth.

Now the new product, we have a great range of new products launching this year, here's a picture of some of them, new fragrances on XTRA, a new compacted form of ARM & HAMMER I'll talk about in a second, new forms of toothpaste, condoms, cat litter, pregnancy kits, and we have all great new products out there. Let me talk about a few of those.

On the laundry detergent side, ARM & HAMMER, we took the lead in this category. We are number two but we got tired of waiting. We took the lead in going out with the next round of compaction. It's a product called ARM & HAMMER ULTRA POWER. Everybody wins with this. For the consumer, they get improved value. This time versus the last compaction, we actually passed some of the savings back to consumers offering 20% more load in the bottle than the last compacted size. It's a smaller bottle, easier for consumers to handle, environmentally friendly, less waste out there in the landfills, and the consumer can control the dosage in this product but they can't control the dosage on products like [indiscernible].

Retailers love this. Lower transportation costs for them, higher shelf turn, more bottles in the shelf, fewer out of stocks and it drives category growth. The last time this happened, the category was growing 5% to 6%. The laundry category right now is declining 3%. The bleach category in this business, the category is growing 7% to 8%. So right now the situation where the laundry category is actually declining, this would be a great move. We took the lead, we launched this incrementally out there, we didn't replace our current product, we launched it incrementally, it's doing very well, we've got over 0.5 share point to our business this year, the retailers love it and the consumers have accepted it.

A lot of other new products out there, a lot of them are on the White Space. White Space as you know is a [indiscernible] category out there, we have launched into four White Space opportunities this year. Why we did it? These categories we're going into are big in size. You can see they range from $140 million in dishwashing additives to $800 million in manual toothbrushes. The products [indiscernible]. We bought this technology two years ago. Musical toothbrushes, we thought it was a neat idea especially for kids to go out there and get them to brush their teeth and we added to that the hottest boy's band in the world with One Direction out there. It's doing exceptionally well and we are the number one toothbrush in the kids category.

Secondly, ORAJEL, this is patented core sore technology. Treatment starts healing with one dose. It's a great new product. It achieved top 10 SKU status in this category already. The dishwashing booster with OXICLEAN name, it's the number one new product in the dishwashing additive category. We launched it in the second half of 2012. It restores the cleaning power of dishwashing liquids. You may not know, about two years ago the government banned phosphates in dishwashing liquids. Phosphates were bad for the water supply. The key players in that category didn't change their base products. They launched some premium products as solid but 80% of their business is still losing its cleaning power because they lost the phosphates. We saw the opportunity, launched OXICLEAN in this category. OXICLEAN has been in laundry additive. We thought, hey, let's make it dishwashing additive. It's driven about 50% growth in the dishwashing additive category, we have achieved a 10 share already, it's doing fantastic.

TROJAN, we saw a huge opportunity here. We are the number one leader in condoms with over 75 share. The sexual lubricant category, this may surprise you, it's a $250 million category, condom is only $350 million. We saw a huge opportunity in this category. We launched into it with a great line of products, trying to expand the appeal to all age groups, especially the younger generation, we have three great SKUs we launched here and we put very heavy sampling, we have over 4 million samples of this in boxes of our TROJAN condoms. It is doing very well. Now for a little bit of video entertainment here, we have one of the commercials we're running this year, and if you don't feel a little buzz in your body after watching this, then you need some coffee. Show the video.

I think it is actually quite interesting, [indiscernible] Nutritional is next doors, so there will be a lot of babies born after this meeting if you're going to use all their products next door, you'll be just fine. So that's product is off to a great start. We have already achieved about a 6 share nationally, it's up to 10 share in certain accounts out there and it's doing fantastic.

So if you take those crazy innovative new products, then if we add increased marketing spending out there to drive them, you can see here we have certainly increased the marketing spending on our brands over the past four years, increased it very significantly this year to support all these new products we have launched, you add those two things together, you get increased distribution and go the retailers to launch these great new products, we supported them heavily, you get increased distribution.

Here's a new chart we haven't shown before just comparing where we stand today compared to other competitors who are sitting here for many [indiscernible] technical use against those retailers. Here is a chart that shows 2009 with the index and all these key power brands of ours, how much have we grown distribution in its first half of 2013 versus 2009. You can see as much as 50% of some of our brands we have increased over the past four years, I'm sharing with you the particularly good drivers of distribution. So all of our new products and all of our increased marketing support over the last several years has resulted in significant distribution gains.

When you put that together, the new product, the marketing spend, the increased distribution, and what you get is share growth, and we are very proud to say, over the past five years, we have grown our share, not held and grown, which other some companies talk about, we have grown our share 75% of the time on our eight power brands over the past five years. I don't think any other company in this conference has that kind of a hit rate of success of growing their share across their power brands.

Just a few examples to show you the kind of growth rate over time. Here is ARM & HAMMER laundry detergent, it has grown to 16% CAGR since 2003. The cat litter business has grown over 14% CAGR since 1998 when we launched them into the business. OXICLEAN, we bought them in 2006, has grown over 21% CAGR since that time. FIRST RESPONSE, this one we are showing the share base, it's just an astounding number. Back in 2001, this was a 12% share of the business, the [EPT] (ph) was around 30 plus share owned by J&J. Today we are 31% share and [EPT] (ph) is a 12% share. So we have done a great job through new products, stronger marketing support, and innovation in this category to drive the number one leadership position in pregnancy kits.

Now some people say that, Jim, that's great, okay, you are value and you can build your brand but you are little Church & Dwight, you are only $3 billion in sales and some of your competitors are as big as $80 billion, if they ever get pissed at you, they can squash you like a bull. We have a little story here of how we ferociously defend our brands. Actually we bought OXICLEAN in 2006, the brand at the time was 27% share, it's number one brand in the laundry additives category. In the next three years, we grew it over 40% share of the category. How did we do that? We lunched great new products in different forms and sprays and liquids on that, we increased the marketing spending by 400%, and we really got tremendous growth as I showed you.

Then in 2009, the big dog in the category decided they wanted a piece of the action. They had its number one laundry detergent brand but was not in the laundry additive category in a big way. So they attacked us with a whole bunch of new products. We didn't sit there, we didn't sit there and take it on the chin, we launched a whole bunch of brand new products on the OXICLEAN brand. We also co-branded, we took the OXICLEAN name, combined with ARM & HAMMER for our laundry detergent, with our carpet deodorizer, with our XTRA brand, our KABOOM brand, and launched [indiscernible] we are present in the marketplace for OXICLEAN, and we also spent heavily on the brand. It was already the number two brand and the most advertised brand of fabric care. And in result I'm very proud to say we not only didn't lose anything, we gained 2% share points in the process. So being attacked by the biggest guy in the industry, not only did we fight them off, we gained share and deflected all the share loss of other pretty big competitors in that category.

International, sometimes people say, Jim, you're not big internationally. Well, the truth is we're only about 18%. It's a big difference from the 2% we were back in 2001 and we have grown that largely through acquisitions and organic growth, but the international has been wonderful for us. We have over $0.5 billion business internationally, it is concentrated in six countries. Those six countries, [five of them] (ph) have tremendous growth records out there, doing very well, and the first half of 2013 has been fantastic. We have got over 5% organic growth in those businesses which I'll take any day of the week. So international is actually a great strength for us right now.

Gross margin, gross margin is the fifth factor. Gross margin is god to us. Gross margin is the gas or the gas tank I call it here. If you're growing your gross margin, it's a great day. You can afford more marketing spend, you can make more profit. If the gross margin is not growing, it's an awfully tough environment. We've got a fantastic record here. We have grown gross margin by over 1,500 points between 2001 and 2012. In the past six plus years when we had some [indiscernible] years and commodities in that, we still grew our gross margin over 500 basis points. Nobody did even half of that in the category out there.

And how do we do it? Again it is sort of like the marketing formula for growing share. It's a very basic thing. We have great cost cutting programs. We [indiscernible] the famous James Collins book. That's reformulation, reducing packaging, reducing SKUs, allowing compaction and hedges, we do supply-chain restructuring, we built some brand new plants that are much more efficient, acquisitions, we always look for acquisitions with rather margins in their businesses, and price mix, anything we launch as new products, we want to have a higher gross margin of the products they are replacing. In the past four quarters alone, we are back on track, we are up 100 basis points on that, and [indiscernible] line are better than most of our key competitors. So, gross margin again has been very good for us in the last four quarters and certainly the first half of this year.

Acquisitions, now it's number six on my list. I sometimes think honestly acquisition is one of the greatest strength for my company. We just have a fantastic track record. The key behind that is we have very, very clear and very tight criteria. We will only buy a number one or two share brand. We want brands that are higher growth, higher margins, as I told you a moment ago, we go for asset light which means I don't want to pick up 650 stores, next presentation, I don't want to leverage our capital base or manufacturing logistics on purchasing, I want to deliver sustainable competitive growth there. Our track record has been fantastic, we don't drive ourselves, we find them, we wait for them. We waited 2.5 years for our Avid acquisition since our last big acquisition which was ORAJEL. Every one of those brands we've acquired now have been almost all of our power brands. Nine of the ten power brands today came through acquisitions. When we buy them, we grow the share through the formula I told you a minute ago.

Let me talk about Avid for a second, the vitamin acquisition. This was a fast-growing business out there with a unique gummy form to it. We closed the deal last October 1, we're about to lap after one year. We paid $650 million. We told you we expected to realize at least $15 million in cost synergies, and I'll just tell you simply, the integration is ahead of schedule and doing extremely well. You might say why we get into this category. We saw a couple of things. Honestly 15 months ago, I never had any idea about the vitamin category, and all of a sudden it came across our desk. We thought it was a fragmented category that provided an opening for a very strong actual competitor which Church & Dwight is, we saw a track record of building market share and new categories for us, we have great field sales resources to kind of expand the distribution base, I'll tell you about what we have done there in a second, internal manufacturing know-how, just the vitamin but it is batch processing, our guys are experts of batch processing and packaging. We saw economies of scale in packaging and logistics and we understand the regulatory environment. This is FDA regulated, we deal with that in many of the categories we are in.

So we really thought we had great strength to play to this business. And here is a great growth potential, here is a $7 billion category with consistent strong growth and 57% of adults that are using nutritional supplements and with the aging trends and the healthcare trends this will continue to grow very strong, high single digits steady grower, and here's the case we bought the number one brand in kids vitamins, and [indiscernible] difference to catch on, in the kids vitamins world, already 64% of vitamins are gummies and we have the number one brand in L’IL CRITTERS. Adult vitamin are very different, much bigger category but only 5% is gummies and again we have a brand in VITAFUSION.

So as you can see, we had good steady growth in the history of this brand on the kid side dramatically – the brand was launched in 2008 on the adult side and dramatic growth on the adult side of the business. So then you see what the opportunity we really see. The kids business is wonderful but the adult business, the category is 20 times the size of the kids business. In the adult side, it's only 5% of the world that's gummies today whereas 64% of the kids side is gummies, and the adult side is growing at 57% in the recent time period.

So you see for us, the kids is great, it's a nice little steady grower but the adult side is explosive. So going forward, we see that, we see category growth, while vitamins is growing 7% in total, the gummy via the kids and the adult together grew 34% in the past year on the Avid distribution side here's the number. This is where our multiples comes in and this is what we do with acquisitions. While the kids business we grew at 11%, that's nice, the adult side, we have grown distribution by 42% in the first half of this year and we have got a lot more opportunities to go there.

Marketing side, we have increased the sampling of this business by 50% and we are increasing the marketing spending from single-digit to double-digit territory. And future growth, so you say, hey, I told you the adult side alone is explosive here as we take it from 5% of the category to much higher, and I will tease you a little bit here. We honesty bought this a year ago we thought only as a vitamin business. What we realize today is why can't we take the gummy form and go to other OTC categories that are out there, aspirin, cough and cold, allergies, all these kinds of things, especially for kids, kids hate to take those medicines in a hard pill or a yucky liquid form, why can't we do a gummy thing there, and that's not easy to do, we have to mask the bad flavors in many situations, we have to keep the active ingredient inside the product, but we see that as a good opportunity which we hopefully can start to leverage three or five years from now.

Free cash flow, coming down the whole stretch here, I'll let Matt up here in a second, we are best-in-class and I mean nobody is better than us in free cash flow conversion, and my partner here Matt is largely responsible for this. We have increased cash flow by 450% since 2002 to over $400 million a year and free cash flow conversion at 118% and there's all the other big players in the category and we do it best.

Number eight, overhead management. A little hidden secret about Church & Dwight, in the past seven, eight years, we have increased revenue both organically and through acquisitions by 93%. We have only increased the number of employees by 15%. I like to say we started small and we are going to stay small. I think it's a lot harder for guys who are big and want to get small. We are going to stay small. We don't like adding employees to our Company. The result of that is we have the highest revenue per employee of any major CPG company. We should not win that game, that game should go to the big guys with the big revenues and that, but we win that game because we keep our overhead count small as we grow our revenue base. And we walk the walk on this one folks, we have very tight overhead controls, nobody in the Company including me has a company car, we don't have golf club memberships, we don't have company planes. We are not flying me from Florida every week. So it's like we are very tight on overhead controls here. That's our little inside joke. And we expect the overheads to continue to decline in the revenue driven by the fact we bring on new acquisitions, we bring in all that revenue and very little overhead and we are doing new things in the health care where it is actually going to help us reduce our overhead in that revenue.

Number nine, the expertise we have in the management team. I don't believe in moving people around every 18 to 24 months to give them a new experience. I believe in keeping my top people on their businesses. I believe expertise pays off. The people running our eight strategic business units have been in their role for over five years. That number actually came down, we just had a retirement and somebody new came in, but I keep people on the businesses. My favorite example is the woman who runs my pregnancy kit business, has been running it for 16 years. Now how do you say I keep her there for 16 years, well how I keep her there is we give her additional businesses, I'll show you in a second, she had several pregnancy kits, now she runs a whole gamut of businesses. So she can run pregnancy businesses [indiscernible] up her sleeve because she has been doing it for 16 years.

It also pays off for us because our people know their businesses core. That's how we get growing our businesses 75% of the time on the share growth, that's how we keep that headcount down, that's how can we execute well, because my people all know that because they have been doing the same job in the management, and the real trick on the acquisition is, when we buy an acquisition, we don't need to bring on their high-powered people into over businesses. We get rid of their high-level people and put it on the backs of our current people because they can handle it because they know their businesses core that they already do and this helps us drive the overhead down.

If you add all those up I probably call total shareholder return junkies, I've told you about most of the factors there but the bottom line there is most important, the market capital of our Company has grown from $2 billion over $8 billion in that timeframe and if you have been an investor in the Company you have benefited from that as I showed you from the first chart earlier on. Bottom line, over the past 10 years, 19.2% total shareholder returns of the company, I think that speaks for it all. There's the team doing it. We are all intact, we are all happy, and [indiscernible] New York Stock Exchange, see that, I get extra points for that.

And then I would tell you too, just a very important chart, we are 100% in the game. We have our bonuses tied to the four factors, 25% tied to our revenue growth goals, 25% to gross margin expansion, I dare you to find any other company at this meeting who has gross margin and their bonuses and that's a big mistake in my thinking because we got to deal with things, gross margin is tough. Oil is up there high, resin is at record high right now, you got to deal with that, you got to grow your gross margins. Everybody else doesn't want to deal with gross margins, they want to skip over it, they want to get down to EPS and cash flow. But I will bet you those four factors are the four most important factors in any of your models in which you pick companies. That is what our bonuses are tied to, that is what we are driven to do.

Our equity, second big thing is 100% stock option. If that stock price doesn't go up, our equity is worth nothing. So we are in the same exact boat that you are in. We're not in restricted stock, we are not into stock factors or anything else like that so we can make a lot of money when you don't, we are in the same boat, very important. And we are required to be heavily invested in the Company. Over 80% of my net worth in this Company, and believe you me I watch that stock price every day and I'm totally in the game as well as the rest of my team.

So there you have it, there are the ten factors which I think have driven the past great success and will continue to drive great success in the future, and I'm going to turn over to my partner here Matt to talk about the first half of 2013 results and the outlook for the year and then we'll take some questions.

Matthew T. Farrell

Okay, let's look at some numbers now. So here are the first half results. We'll start at the top and kind of wind down the pages. You see 13% net sales growth. So remember we acquired the Avid business on October of 2012. So a big chunk of that is the Avid acquisition. Organic sales, if we exclude acquisitions and we exclude divestitures and FX, we grew 1.9%. On the [indiscernible] slide that the consumer business actually grew 2.7% in the first half and we were dragged down because of the Specialty Products business, and I'll explain that when we get to that slide.

Gross margin up 100 basis points, so that's the fourth consecutive quarter that we have been up 100 basis points year-over-year. There are a few reasons for that and I'll take you through. And this is a very familiar trend, the algorithm is to the extent we expand gross margin, we spend back on the marketing line. So if you are new to the story, that's something you'll hear a lot from us. And operating margin expansion of 70 basis points, and that's what we are calling for the full year, 70 basis points operating margin expansion. EPS is up 13% and we're calling for the year as 14%, so it's kind of balanced between first half and second half, and you can see the cash flow from operations on the bottom of 4%. Next slide is more or less what I just said in words, so I'm going to keep rolling here.

So if you see on the far right, that's the 13% we talked about which is the reported number. We often talk about 3% or 4% organic growth but sometimes it is good to remind everybody what the reported number is. So we have had some acquisitions along the way which add to our organic growth, it drives the number up even higher.

So here's the first half, so here's that 2.7% I mentioned with respect to consumer largely driven by volume. But you can see the Specialty Products Division was down almost 6%. The reason for that is that part of that business is a dairy business and those products that we sell to dairy farms are used to replace electrolytes and cows and typically you need a lot of them when it's hot and you don't need a lot of them when it's cold. So that was a weather related phenomena in the second quarter. In contrast, the last year second quarter was super hot in U.S., everybody knows what the second quarter was this year, it was very cool. So, on the first half, we were up 1.9% all in organically, and for the full year, we are calling about 2%, you'll see that on a later slide.

So here's the four consecutive quarters of gross margin expansion, if you go to the bottom of the slide, you'll say okay why did that happened. We have a new plant in California that we started in mid-year last year to make the laundry products and cat litter out there, and secondly a unit that was a new form of laundry detergent, we had made that outhouse third-party, we brought it in-house second half of last year and we also had the cat litter price increase. So we have had four quarters in a row of 100 plus and we're going to start to lap that in the second half.

To the slide Jim pointed out, free cash flow conversion, so that's free cash flow divided by net income, so we have been over 100% for many, many years. We expect to be over 100% again this year. Part of the reason we have been able to generate so much cash is we have done a lot of work on our balance sheet. Our cash conversion cycle is a function of trade payables, trade receivables and inventory. So we are down from 52 days to 26 days over that period of time. So the next trick is can we go from 26 to zero, I think that's going to be a little bit harder but it would be a goal. And this is the CAGR with respect to free cash flow. So you can see in 2012, over $400 million of free cash flow. And one of Jim's favorite slide, the monopoly man, so over the next three years obviously $1.2 billion or better of free cash flow.

So what the balance sheet looks like. So even after the Avid acquisition, we're really 1.1 times EBITDA, so obviously we still have an unlevered balance sheet, we're not a capital-intensive business. This is another measure we typically call out with CapEx as a percentage of sales. We are generally around 2.5% of sales for CapEx. In 2008, 2009, we were building a really big laundry plant in Pennsylvania which drove that number higher.

And this is our credit-rating right now. We were upgraded last week by Moody's. We had a split rating and now we have a rating of BBB+ and Baa1 and you can see we have a lot of capacity to do additional acquisitions.

And destination for free cash flow, so given our unlevered state of 1.1 times total debt-to-EBITDA, obviously acquisitions are something we are still in the market for and we typically do integrate acquisitions very, very quickly. The Avid acquisition is nearing completion, as Jim pointed out. So we are doing the hunt again where we are able to find a business that would meet our criteria, and debt reduction is at the bottom, to the extent the debt actually grew to 2.5x, 3x EBITDA, the destination for cash flow would be to reduce debt.

Dividend policy, so back in 2009, our dividend payout ratio was 12%. So we have increased that over the past several years to today where it's 40% payout which is where we are comfortable with right now.

And I'm going to talk a little bit about what we said with respect to the outlook, and Jim has mentioned it already, that we have, this would be the 13th consecutive year of double-digit EPS growth, 14% this year. We're getting it in a little bit different way. So in May, our guidance was 3% to 4% top line, 25 to 50 basis points gross margin, you can read the rest. After second quarter and looking at the outlook for the rest of the year in U.S. economy, we lowered that to 2% for organic but we see on a full year basis that our gross margin will be up 50 to 75 basis points, and again still holding to the 14% EPS number consistent with our August guidance.

And now we are ready for some Q&A.

Question-and-Answer Session

Lauren Lieberman - Barclays Capital

Just when you [indiscernible] the slides sort of reiterating a historic criteria for acquisitions given that Avid was a deviation from some other things on that list, so can you talk a little bit about that, I mean how you'll think about it going forward?

James R. Craigie

It was, Avid, we broke the rules in the sense we took a business that was less than the corporate average on gross margin and a business ahead of plant which was unusual, but we saw a business where we have never seen before the revenue growth that we saw in that business. So we felt we can get the gross margin up to corporate average or better over time and we could deal with the plant. The plant was actually competitive advantage out there. No other player in our category has their own gummy plant in the U.S. Even the big players like Pfizer and [indiscernible] go through a co-factor, so in a business that requires quick turnaround and response with the new product, we actually thought having a plant was a competitive advantage. So from those to standpoints, we felt that that we would break the rules on that one.

We are quickly growing the gross margin which is great and I think the plant has been a competitive advantage out there in building the business. And then we benefit hugely from the revenue growth rates in this business. So we will deviate a little bit when we believe we can offset it over time or it's a competitive advantage to go do it. It's been a wonderful business, this is a home run, this is an absolute home run, and if we can do it I talked about the rest of the OTC business, it would be a grand slam.

Unidentified Analyst

The acquisition pipeline?

James R. Craigie

The market is active, it is active as usual, [indiscernible] more or less. I'm honestly been surprised there haven't been more acquisitions out there especially as debt start to creep up a little bit, but it's active, we are watching, we're looking for good opportunities out there, and like Matt said a moment ago, it's a little bit concerned on the first half of the year on pulling the trigger or anything because we are still heavily, heavily working on the Avid integration. That's over, it's totally integrated right now and the organization has just the physical capacity to take on the acquisition and we have got the firepower with over $2 billion of spending power. So we're looking, I can't say anymore at this point in time but we are active and I'd love to find another Avid as soon as I can.

Lauren Lieberman - Barclays Capital

So just actually sticking with Avid, when you did the acquisition even say now you're in, how far out are you assuming the growth to continue to kind of like 30%, 40% rate, do you need the growth to continue at that rate for the numbers to make sense further out?

James R. Craigie

Certainly another 12 months, maybe 24 months of that rate, then it might tail down to just the category growth rates which are high single digit, low double-digit. If we can correct the OTC businesses, we will be back up in the 30%, 40%, 50% rate. So it's certainly a pretty good contributor certainly in 2014 and then it might start to trail down a little bit. It will still be our fastest category we have out there and our growth rate will still be the fastest but maybe not 30%, maybe down more somewhere between 10% and 30% rate, and that's ex OTC, but we just have so much more – even though we have done great distribution gains there is so much more to gain out there.

If you want to see the full breadth of this line, go to Target, Target has probably got the best distribution of this business in the country. You may not know we have CoQ10, we have prenatal vitamins, that's the adult side obviously, we have officially Omega fish oil in there. If you hate tasting fish oil products, taste our gummies. [indiscernible] taste of fish oil, they did a great job of disguising that with good taste. We have [indiscernible] vitamins. It's an amazing line of products that most people don't know we have out there in the adult side and we're trying to get that whole line of products in all the accounts in the country. So it's coming on quite fast through our great sales force and we are supporting with sampling.

And this is the product, I had at least three people today in one-on-one meetings tell me that they tried the product, couldn't believe it, took it home to their spouse and they couldn't believe it and now they have become gummy advocates. So that is the sampling that you use to get the people to try the product. They can't believe that the vitamins they take today can taste so good in this form and they just become compliant as we call to taking vitamins every day and people look forward to taking their vitamins instead of like, oh crap, I got to take the vitamins. So it's a great business side, I love this business. I had seven of them today, I'm a little excited. Every time I make somebody else try them, I eat a few, so it's like I am kind of pepped up and I'm [indiscernible] I'm going to probably blow it, so anyway. What else you got there?

Lauren Lieberman - Barclays Capital

One thing with just international on Avid, I mean is that part of the plan, have you looked into that at all?

James R. Craigie

International right now, Canada is on the play right now and other countries we're beginning to look at. They had a small business internationally when we bought it but it was so small, so fragment, that we shut a lot of it because it was tremendous cost to the plant to ship a few cases to Russia. So we shut that down temporarily but that's a certainly a bigger opportunity. Right now we know the firepower we have in the plant to keep up with distribution gains in the U.S. Then we are going to do a foreign FDA equivalence in that but they already had a business with some other countries and we could bring that back in the future. But our first requirement right now is the U.S. and Canada that are huge opportunities.

Unidentified Analyst

That's one of my question there but just do you have a target for which you want international to be, and then as you think about I would think it's tough to maybe get to that target fully organically, but as you think about an acquisition strategy internationally, would you need to bend those rules again in terms of plans and distribution capabilities and things like that?

James R. Craigie

Good question. I mean, no, we don't, we don't have a target internationally. I refuse to do that. If I were to say I want to be 30% international by 2020, that would force us most likely in a bad acquisition. I could get there through acquisitions but I'll end up on a pile of junk. So we're looking for acquisitions, we just bought a hairspray brand in the U.K., two years ago BATISTE, going double digits, we are expanding it to other countries right now, we are looking at other opportunities, but it's got to fit our criteria, it's most important to fit in that. Preferably, honestly we looked at other countries we are in. Like I said most of the business is in six countries today, six very strong countries, I would go outside that but I got to find a good business to start with. If I went into a new emerging market, I might have a deal that's not accretive in the first year or two, I might be willing to do that, if I felt long-term it would go there.

We are in China today, we are in Brazil today in a very small way. So we have businesses there but I'm not going to buy a piece of junk just to establish myself in those countries but we are actively looking all over the world. I just said we have bought in the U.K. and there are other opportunities we are looking at right now in other countries and just working them through but I refuse to force myself into a number saying, we are going to be x% internationally by a certain year because we'll have a nice steady organic growth, the mid-single digits a year, but the big driver will be acquisitions over time as we have done in the past. Our multi-national business today came from the Carter-Wallace acquisition back in 2006. I'd love to find another one of those right now, maybe I will, but I'm not going to set a target.

Unidentified Analyst

Thanks for taking the question. Can you comment a little bit about personally what are sort of your long-term objectives for the Company, what is Jim's end game as it relates to Church & Dwight, and subsequently to that, maybe just talk about succession?

James R. Craigie

Personally I just want to keep this formula going, double-digit EPS growth every year, we are in our 13th year now, this is my 10th year of that, I want to keep driving that formula, be the best in class in the industry and EPS growth, same basic formula and the ten factors. I just love it. I have a great team, a great company, I'm very proud to be the leader. I'll be 60 years old this year. I'll probably retire by the time I'm 65. So the succession planning is in place whether I get hit by a truck tomorrow or that timeframe comes along. We have a great pipeline of talent in the Company. So I don't worry about that. It's a great Company, the team is a great team.

And we had a situation when your company is growing at this rate, we have been averaging bonus payouts of 140% a year, our stock has been growing 20% a year, I think our loyalty [indiscernible], and we keep that overhead small. My people will tell you, my stock managers will tell you, they make an impact, they make decisions, they don't have to go through 15 years to get stuff done, every day their hands are on the business and I think they love that and the compensation on top of that is just the gravy. So we have had that great loyalty to the team, to the Company, and I don't see that changing.

It's a pleasure to run this Company. It's a tough economy out there, there is tough competition, but we have done it for 13 years now in double-digit EPS growth, 10 of them are my years, and I just want to see that record keep growing, and what I know right now about the future which you'll hear more about in the early part of next year, we don't announce our new products till next year, I think it's going to be the greatest year of new products we have launched in the industry, our cost-saving machine is in high gear, everything that's been driving the formula is going to keep going. So I have no desire to retire any point in time. So too much fun here presenting to you and with no [Larry and Clarry] (ph) behind me, what could be better. One more question. Actually [no Larry and Clarry] are presenting tomorrow, but we'll leave it outside. So whatever their names are.

That's it. Alright, thank you very much.

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