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Executives

Jim Craigie – Chairman and CEO

Matt Farrell – EVP and CFO

Analysts

Dara Mohsenian – Morgan Stanley

William Schmitz – Deutsche Bank

Per Ostlund – Jefferies & Company

Alice Longley – Buckingham Research

Jason Gere – RBC Capital Markets

Joe Lackey (ph) – Wells Fargo

Joe Altobello – Oppenheimer

Connie Maneaty – BMO Capital Markets

Mike Redick (ph) – Williams Capital

Chris Ferrara – Bank of America Merrill Lynch

Bill Chappell – SunTrust

Church & Dwight Company (CHD) Q3 2011 Earnings Call November 4, 2011 10:00 AM ET

Operator

Good morning, ladies and gentlemen and welcome to the Church & Dwight third quarter 2011 earnings conference call.

Before we begin, I have been asked to remind you on this call the company’s management may make forward-looking statements regarding, among other things, the company’s financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the Company’s SEC filings.

I would now like to introduce your host for today’s call, Mr. Jim Craigie, Chairman and Chief Executive Officer of Church & Dwight. Please go ahead, sir.

Jim Craigie

Thank you, and good morning, everyone. It’s always a pleasure to talk to you, particularly when we have excellent results to report. I will start off this call by providing you with my perspective on our third quarter business results which you read about in our press release this morning. I will then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with his perspectives on the financial details for the quarter. When Matt is finished, I’ll return to provide some more detailed information on the performance of our key brands and discuss our earnings guidance for the year. We’ll then open the call to field questions from you.

Let me start off by saying that I am very pleased with our third quarter business results, which were in line with our expectations despite some serious headwinds. Since January, we’ve seen greater than expected increases in commodity costs and weaker than expected consumer demand in most of the categories in which we compete. Despite these significant headwinds, we delivered record quarterly net sales in both our Domestic and International business units and for the total company.

These record net sales results were driven by 4.5% organic growth in the third quarter. This strong organic growth is largely volume driven and reflects positive momentum from the first and second quarter results of 1% and 3.3% respectively. This organic revenue growth momentum has continued into the fourth quarter, which is off to a strong start.

Our third quarter gross margin was slightly above year ago but below our expectations, as the significant increases in commodity costs and product mix favoring our lower margin household business largely offset our hedging and cost cutting programs. As promised, our marketing spending was up in absolute dollars versus year ago to support the launch of new products across almost every one of our Power Brands. However, our marketing spending as a percent of sales was down versus year ago due to the strong growth of our heavily trade-driven household brands.

Most importantly we delivered a 12.5% earnings per share gain for the quarter, which was on top of an 11.6% earnings per share gain in the third quarter last year. Thus, we have been steadily building momentum over the course of 2011, despite an increasingly difficult business environment. All CPG companies are fighting the same headwinds, but I continue to believe that no other CPG company is as well suited as Church & Dwight to deliver exceptional performance in a tough environment.

I’ll explain my rationale for that statement in a few minutes after Matt provides you with greater insights in the financial results for the third quarter. Go ahead Matt.

Matt Farrell

Okay, thanks Jim. Good morning, everybody. I’m going to start with EPS.

Third quarter GAAP EPS was $0.54 per share which compares to $0.48 in 2010 and this is a 13% increase from a year ago.

Reported revenues were up 6.7%; our organic growth was 4.5% for the quarter and the strong organic growth has put us in an excellent position to once again deliver 3% to 4% organic growth for the full year. The 4.5% organic growth is comprised of 3.7% volume and an 80 basis points effect of price in the quarter. The positive price is largely driven by the Specialty division which is passing through raw material increases.

In the U.S. Consumer business, we are yet to see a pullback in aggressive trade spending. However, we are seeing some positive price in our international business. The full-year organic revenue call is for 3% to 4% volume and flat price. By the way, the effect, if any, of our U.S. SAP implementation is not in our 3% to 4% call and it is not in our EPS guidance, and to the extent there is any incremental profit associated with that implementation, we will be reinvesting in marketing in the quarter.

Now I’ll briefly review the segments.

The Domestic business reported organic growth of 4.3% with 4.6% volume partially offset by 30 basis points of negative price. The 30 basis points of negative price in Q3 is actually the same as we experienced in Q2, although we had some help in Q3 from price increases in powdered laundry and condoms. This was our highest volume growth quarter for the U.S. business since Q3 of 2010.

In the International division we had 3.9% organic growth driven by growth in Canada, Mexico, Australia and our export markets. This increase is driven by volume growth of 2.8% and positive price of 1.1%. We successfully implemented SAP in Canada that was the first phase of our project and we did that in October. We excluded 1.4% of sales in arriving at the International division organic sales and the excluded sales were attributed to customer orders which shifted from Q4 to Q3 in anticipation of this implementation. The 140 basis points may seem like a lot but in fact it’s only a $1.5 million.

For our Specialty Products division, organic sales were up 7.8% with volume down 1.8% and price up 9.6%. Remember I said before the price is primarily driven by price increases in the Animal Nutrition business, where we’re recovering increases in raw material costs. We had some volume softness in our International Chemicals business, which accounted for the division’s volume decline.

I am turning to gross margin now, our reported third quarter gross margin was 44.2%, a 20 basis point expansion from a year ago. The increase in gross margin reflects cost reduction efforts somewhat offset by higher commodity costs, and unfavorable product mix. Regarding mix, as you can see on the schedules attached to the release, Household Products were up 7% in the quarter and Personal Care was up around 1%. The product mix created a lower gross margin in the third quarter. We now expect a similar mix effect in the fourth quarter. There will also be a drag of approximately 30 basis points on our Q4 gross margin related to expenses in preparation for our new California facility, which will open in the March, April timeframe.

For full year, we expect commodities and cost reduction programs to largely offset each other. However, the impact of product mix is greater than our earlier expectations, primarily due to the success of our Household Products and as a result, we now expect our full year 2011 gross margin to be in the range of down 25 to 50 basis points.

Now, marketing. Marketing spend was $92 million or 13.1% of revenues. This is an increase of approximately 2% from the prior year. It is also a 10-basis-point increase above the second quarter rate, but down 60 basis points from the prior year spending. Remember, we grew dollar share on seven of our eight Power Brands, thanks to the great execution of our sales and marketing teams. I might also add that we had very strong organic growth in Q3, especially in the back half of the quarter which somewhat outran our marketing spend.

Value Laundry Detergent is clearly winning on shelf for Church & Dwight. If we back out our two Value detergents from our calculation of marketing as a percentage of sales, marketing as a percentage of sales is actually equal to Q3 2010.

Looking ahead, we expect to increase spending again in the fourth quarter to over 14% of sales. The total marketing spending will be up approximately 3% versus year ago in Q4. As a percentage of sales, we expect to be flat to down for the year. I might add that total trade and marketing, which is another measure that is worthy of investors, is expected to be up $40 million in the fourth quarter and up $65 million for the full year.

SG&A year-over-year was up $6 million in the quarter. SG&A as a percentage of sales was 13.1% and flat with year ago. The higher SG&A costs in the quarter reflect higher year-over-year legal costs, information systems cost in support of our SAP implementation as well as higher R&D spending. The reported operating margin for the quarter was 18% compared to 17.2% last year.

Now, income from affiliates. Income from affiliates increased $2.1 million due to higher income from a joint venture. With respect to other expense, other expense was $4.7 million lower than year ago reflecting lower interest expense as a result of our refinancing and debt repayment activities.

Now I come to income taxes. Our effective rate for the quarter is 36.8% which is significantly higher than last year’s 34.4%. The prior-year quarter included $3 million in benefits from tax settlements. We are forecasting an effective rate of approximately 35% for the full year 2011 and that compares to 35.2% for the full year 2010.

Now I’m going to talk about cash. We generated $278 million of free cash flow so far this year. Netted in our free cash flow is $41 million of capital expenditures. Net cash from operations is above last year by $31 million. Our operating working capital as a percentage of sales was 9.8% at quarter end and by the way, operating working capital for us is defined as trade receivables, trade payables and inventories.

We have over $275 million of cash on hand right now and $250 million of outstanding debt. For the first time in many years Church & Dwight is now net cash positive and we have about $650 million of available credit through our revolver and asset securitization facility. We expect to generate over $350 million of free cash flow in 2011 and remember that figure if after approximately $80 million of CapEx in 2011. The $80 million includes an $11 million investment for our West Coast facility on California, which is on track and $22 million for SAP and data warehouse upgrades.

We did not repurchase any shares in Q3. We do plan on purchasing shares totaling approximately 80 million in the fourth quarter and this is in the interest of covering share creep from options exercises in 2011. This will only have a very slight effect to EPS in the quarter due to the late timing of purchases in the year.

You may have seen that we announced an air pollution control joint venture with FMC and Tata Chemicals, called Natronx Technologies. This JV will manufacture and market sodium-based dry sorbents for air pollution control and electric utility boiler operations. Natronx intends to invest approximately $60 million to construct the facility in Wyoming in 2012 to produce these sorbents. The investment will be shared equally by the three partners. The joint venture will have no impact on EPS in 2011 but will be slightly dilutive to EPS in 2012.

In conclusion, the third quarter highlights includes 4.5% organic sales growth driven primarily by volume. We delivered 20 basis points increase in gross margin driven largely by our cost savings programs that more than offset higher commodity costs that the whole industry is experiencing as well as product mix.

We increased our market share in seven of eight Power Brands and EPS is up over 13% over a year ago. We are maintaining our annual earnings per share goal of $2.17 to $2.20 for the year, which is an increase of 10% to 11% over last year.

Back to you, Jim.

Jim Craigie

All right, thanks, Matt. I’ll finish off the call today by adding a little color to the solid third quarter business results that Matt just took you through and I’ll provide my outlook on the year.

Our solid third quarter results are directly linked to the seven factors that support my earlier statement that no other CPG company is as well suited as Church & Dwight to deliver exceptional performance in a tough business environment.

First, we have the most unique product portfolio in the CPG industry; it consists of both premium and value brands, which puts us in a position to thrive in any type of economy, as exemplified by our consistently strong EPS growth over the past 10 years. In particular, our value brands representing about 40% of our revenue base have experienced strong growth in this recessionary economy, as consumers are making smart choices by trading down and staying with the more value oriented brands.

The business results for our value-based laundry business, which is our biggest business provide living proof of what is happening in the marketplace. In the third quarter, our ARM & HAMMER Liquid Laundry Detergent achieved record share and net sales results, up over 10% versus year ago. The ARM & HAMMER brand now accounts for one in eight liquid laundry detergent bottles sold in America.

On top of these great ARM & HAMMER results are XTRA brand, which is our extreme value based liquid laundry detergent brand, also achieved its highest ever quarterly sales, up about 10% versus year ago, and it’s now the number two brand in liquid laundry detergent on a wash-load basis, accounting for about one out of seven loads of laundry in America. As a result, our two value-based liquid laundry detergent brands ARM & HAMMER and XTRA grew share in the first three quarters of 2011 totaling over one share point. Only one other competitor gained share in the first three quarters of 2011, and that was around 0.5 point in total.

Our ARM & HAMMER Powder Laundry business is also on fire, with 10 consecutive months of dollar share growth. ARM & HAMMER Powder has gained more share growth (inaudible) about one point and year-to-date, a little over a point than any other power laundry detergent.

The second factor which is the key driver of Church & Dwight’s success is that we have a proven record of building our Power Brands. We have over 80 brands, but eight of these brands of our Power Brands, which generate 80% of our sales and profit. From 2007 to 2010, we grew share on these eight Power Brands in over 80% of the quarters. In the third quarter this year as Matt said, we grew share on seven of our eight Power Brands.

Two key factors drove these excellent share results. First, we have smartly reinvested some of our increased profits from a strong growth of our value brands to increased market share, marketing support on our eight Power Brands, by a total of 290 basis points or $140 million over the last three years.

While our marketing spending was relatively flat versus year ago in the first three quarters of this year, we have increased our trade spending to defend our brands against competitively driven price wars. Thus our total advertising promotional spending against our brands is up 7% versus year ago in the first three quarters. We had planned and would have preferred to increase our advertising spending instead of our trade spending, but we had to deal with aggressive trade spending by one of our key competitors. The end result was the optimum mix of our advertising and trade spending that’s proven by our strong organic revenue growth results.

Put another way, we don’t sit on a paddle saw at Church & Dwight and stick to our plans to increase advertising spending when faced with lower prices by our competitors. We responded quickly to the increased trade spending by one of our competitors and as I said, executed the optimal mix of advertising promotions to drive strong organic revenue growth.

The other factor driving the growth of our Power Brands is our robust pipeline of new products. Over the past four years, new product delivered about 50% of the company’s organic revenue growth. We have shipped innovative new products in almost every key category this year to support delivery of organic growth target of 3% to 4%. We expect these new products to be as successful as our new products over the past four years. A sample of these new products in our household business include XTRA with Oxi Clean Laundry Detergent. This combination of two of our Power Brands has driven distribution gains for the XTRA brand this year, which has helped to deliver a high single-digit jump in sales.

We launched the ARM & HAMMER brand with Oxi Clean co-branded detergent two years ago and that new product now represents over $100 million in annual sales and has a higher market share than the Aera (ph) and Cheer brands.

The XTRA with Oxi Clean new product will enhance the cleaning power appeal of our XTRA brand, which as I told you a few minutes ago, is the number two brand in liquid laundry detergents on a wash-load basis accounting for one and seven loads of laundry in America.

We also launched the new sensitive skin product for our Liquid Laundry Detergent business on the ARM & HAMMER brand to enhance the brand’s appeal for the 50% of consumer households who have sensitive skin issues. This helped to drive over 10% sales growth of the ARM & HAMMER Liquid Laundry Detergent business in the third quarter and bolstered this brand’s position as the number one value brand in liquid laundry detergents in America.

Another new great household product being launched in the fourth quarter this year is ARM & HAMMER ULTRA LAST Cat Litter. Our new ULTRA LAST Cat Litter is the only cat litter where every granule is coated with baking soda to deliver all day freshness even if you forget to scoop out the soiled litter. We expect our new ULTRA LAST Cat Litter to build upon the huge success achieved by our ARM & HAMMER Double Duty Cat Litter line launched in 2010. That unique product eliminates both urine and feces odors.

This steady stream of great new cat litter products has resulted in 31 consecutive quarters of net sales growth and ARM & HAMMER Cat Litter is now the number 1 and number 2 clumping cat litter brand in most of the retailers in America. That’s pretty impressive for a category which we entered only 13 years ago. It also shows the strong consumer appeal of the ARM & HAMMER brand, which in total passed $1 billion in sales in 2010.

Now, on the Personal Care side of the business, we had several exciting products in 2011. First, on our ARM & HAMMER Spinbrush business, we launched the new kids’ Spinbrush for Boys called My Way, which allows boys to personally decorate their toothbrush with popular peel and stick decals which come with product. This new Spinbrush follows on the heels of the My Way Spinbrush for Girls, which was a huge success in 2010.

Our total My Way kids business is the number one kids’ battery brand for the latest 52 weeks more than doubling its share during that time. These successful new kids Spinbrushes have enabled our total Spinbrush brand to continue with dollar share leadership on the battery powered segment which it has held for the past 24 consecutive quarters.

Another new personal care product is our new First Response Digital Ovulation Test, which enables a woman to better determine her optimal time to conceive and provides an unmistakable yes or no result. This new product and continued strong marketing support of our total pregnancy kit business resulted in our two brands, First Response and Answer, achieving a record quarterly share and the only two brands that grew share in the third quarter in this high margin category.

Finally, our Trojan brand achieved solid share gains in both the condom and vibrations category. The share gain in Trojan condoms was driven by increased marketing support and the launch of our newest condom called BARESKIN, that’s bare as in B A R E, and you can figure out what that implies without my help.

On the vibrations side, our net sales were up over 60% in the third quarter, behind the launch of a line of full-sized vibrators under the Trojan brand name. This product line is now available in all classes of trade as well through our website and the 800 number on our commercials. This is a category of new white space for the Trojan brand to answer. It represents a major long-term growth opportunity because we estimate that the total vibrations category currently has up to $700 million in retail sale with no clear branded leader.

One side benefit of these great new products and the recent strong growth of our brands is that we have achieved significant distribution gains on almost every one on our powered brands in 2011. The share and sales impact of the distribution gains will play a major role in continued sales growth in the fourth quarter of 2011 and into 2012.

Now there are many other new products that we have launched in 2011, but in the interest time I’ll move out of my review of the other factors driving Church & Dwight’s continued success and discuss our updated earnings guidance on the year.

Let me quickly run though the five other key factors. Factor number three is that we have a proven history of ferociously defending our brands. We proved that in 2010 in our defense of the Oxi Clean franchise when it faced the entry of a mega brand extending into this non-chlorine laundry additives category where Oxi Clean is the number one brand. The powerful new competitor gained some share behind significant marketing spending that came largely at the expense of other competitors. Oxi Clean’s all outlet share in the latest quarter was actually up over 0.5 share point versus year ago and the brand’s share is also up over the first nine months of this year.

The fourth factor behind our continued success is the strong growth of international business. While our international business represents only 20% of our total revenues, it has delivered high single-digit sales growth and double-digit operating profit growth over the past five years. This strong growth continued in the third quarter as Matt mentioned earlier when international sales delivered record quarterly sales and strong organic growth of about 4%.

Factor number five is our long history of success in expanding gross margin through cost optimization programs, supply chain restructuring, acquisition synergies, and launching higher margin new products. We expanded gross margin by 1,560 basis points in the past 10 years. While we did not improve our gross margin in 2010, we were successful in holding the 430 basis point gain achieved in 2009 despite major headwinds from higher commodity costs.

As Matt told you earlier, our gross margin increased 20 basis points versus year ago in the third quarter of this year. While we had planned for a larger gain in our gross margin, we consider these results a major success because it’s already heard, most of our CPG competitors incurred significant gross margin declines of several hundred basis points in the third quarter, which reveals how well we have aggressively attacked cost savings and hedged key commodities.

Nevertheless in light of our Q3 and year-to-date gross margin results and continued retail price wars, we are lowering our previously stated 2011 goal of annual gross margin improvement from 0 to 50 basis points to a decline of 25 to 50 basis points. We’re not happy with that forecast and are in the process of taking aggressive actions to drive gross margin growth in future years.

This includes the early 2012 startup of our new manufacturing, distribution facility in Southern California. This move is part of our long-term commitment to expand gross margin by reducing complexity in our supply chain and reducing manufacturing and distribution costs. This plant will provide us with easier access to major populations in the West. The plant will also allow us to continue to grow both our liquid laundry and cat litter businesses, and position our businesses to be among the industry leaders in low-cost production and distribution.

We are also working diligently on projects to reduce the manufacturing complexity of all of our product lines and lower the cost of purchase ingredients by combining our purchasing powers with other non-competitive CPG companies.

Factor number six is our ability to tightly manage our overhead costs. Church & Dwight currently has the highest revenue per employee of any major CPG company. While our overhead costs were only equal to year ago in Q3, we are continuing to aggressively manage all overhead costs to stay best-in-class in our industry.

Finally, factor number seven is our strong record on free cash flow conversion. We have almost quadrupled our free cash flow over the past 10 years. Over the past five years, our free cash flow conversion as a percent of net income was 128%, which was best-in-class in the CPG industry. As Matt told you a few minutes ago, we continue to improve in this area as our free cash flow for the first three quarters of 2011 was $278 million or 11% above year ago. This cash flow and our strong balance sheet have enabled us to smartly invest in our future through both investments in our supply chain such as building more efficient new plants and the acquisition of higher margin and faster growing leading brands.

All these factors give me great confidence of our ability to deliver our aggressive 2011 business target despite the very tough business environment facing all companies these days. In my biased opinion, no other CPG company is as well as suited as Church & Dwight to thrive in any type of business environment. We were delivering exceptional EPS growth before the recession; we are delivering exceptional EPS growth during the recession and we are taking actions to ensure that we can continue to deliver exceptional EPS growth going forward regardless of the future economic environment.

Let me switch gears now and simply talk about our outlook for the rest of 2011. As stated in the press release, as a result of the fact that our third quarter results were principally in line with our expectations, we remain confident that we can deliver our previously announced earnings per share estimate of $2.17 to $2.20, which is an increase of 10% to 11% over 2010, excluding a pension charge of $0.10 per share in 2010. We strongly believe that we can deliver this aggressive EPS target despite greater than expected headwinds from higher commodity costs and weaker consumer demands.

Our confidence in delivering this aggressive EPS target is based on two key factors. First, we strongly believe that we can deliver the share gains in our power brands required to deliver our target of 3% to 4% organic growth. These share gains are expected to result from our innovative new products, significant distribution gains we get from a majority of power brands and increased marketing support. All three of these factors should enable us to continue to deliver solid organic growth as reflected in our Q3 results and we currently project even stronger organic growth than our current quarter, the fourth quarter of this year. Second, we believe we can still minimize our corporate gross margin decline to just 25 to 50 basis points despite significantly higher commodity costs and higher trade spending. While this is less than we previously projected, it is still a better outlook than most of our CPG competitors.

Three other points I would like to make before I open the call to questions. First, achieving our 2011 EPS target is not dependent upon making an acquisition. We continue to very aggressively pursue good acquisitions. We actually have recently completed another small acquisition of the BATISTE Dry Shampoo brand on June 28. This unique hair care brand meets all of our acquisition criteria. It’s the number one brand in its category of dry shampoos. It is gross margin accretive to our company with a gross margin of over 50%. It is growth accretive as demonstrated by its 90% compound average growth in net sales over the past four years. It is asset light as it currently produced by co-packers.

Importantly, over 85% of BATISTE’s annual sales were in the U.K. which will increase our sales base in the U.K. by approximately 25%. Overall, a terrific small acquisition which will deliver EPS accretion starting in 2012.

While we would love to make a larger acquisition, there are none available which meet our criteria and if there are no acquisitions recently by one of our competitors which we regret not buying. Second, I want to assure you that we are fully aware of the threat posed by new products being launched by our competitors. As I told you earlier, one of Church & Dwight greatest strength is its ability to ferociously defend our brands. We will prepare to do just that against the future competitive threat.

Third, given our strong balance sheet and high cash flow yield, we will continue to smartly manage our capital. This includes the doubling of our dividend that we announced in February 2011 and the share buyback program of up to $300 million of the company’s common stock that we announced in September 2011. I want to emphasize that this share repurchase program will not inhibit us in any way in our continued pursuit of major acquisitions and it reflects of our confidence in future free cash flow performance.

In conclusion, 2011 is shaping up to be a very challenging year due to the weaker than expected consumer demand, higher than expected commodity prices and continued price wars. But when things get ugly, you should place your bet on the company that has the product portfolio that thrives in such an environment and the management team that has a track record of knowing how to successfully leverage that portfolio to deliver strong EPS growth.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Dara Mohsenian, Morgan Stanley.

Dara Mohsenian – Morgan Stanley

Good morning.

Jim Craigie

Good morning.

Matt Farrell

Good morning.

Dara Mohsenian – Morgan Stanley

So, appreciate your comments on ad spend versus promotion, but given you are going to end the year with marketing as a percent of sales nearly 100 basis points below the original level you expected, do you anticipate reboosting marketing spending next year as a percent of sales or are you comfortable with your share performance despite coming in with lower than expected advertising this year?

Jim Craigie

Look, Dara, we’re not going to give an outlook on next year yet. It is always our goal to increase ad spending. We always told you that we’ll get it up in the range of 13% to 14%. We’re just about 13% right now. So, we are getting to the point of where we think there is maximum results. But it’s always our goal initially to be looking to get it up every year. But again, I’m not going to give any details about next year. We will reveal that to you in our February earnings call.

Dara Mohsenian – Morgan Stanley

Okay. You didn’t repurchase any shares in Q3, but obviously plan to be more aggressive in Q4. Can you just explain the timing decision there and give us an update on how robust the acquisition pipeline looks at this point?

Matt Farrell

We did announce that in August, Dara, and October is when we essentially got it moving. So, there’s no story behind when we decided to do it. We just wanted to get it done before year-end, and through mid-year we had about a 2 million share run rate for option exercises. That’s slowed down a bit. So the $80 million is going to be enough to cover the option exercises in 2011. What was the second part of it?

Dara Mohsenian – Morgan Stanley

That answers it.

Matt Farrell

Okay.

Operator

The next question comes from Bill Schmitz of Deutsche Bank.

William Schmitz – Deutsche Bank

Good morning.

Jim Craigie

Good morning, Bill.

William Schmitz – Deutsche Bank

Hey, is there any sign that this promotional activity in laundry is slowing at all? Because if you look at some of the feedstocks and they’re going in the exact opposite way of the average price per unit in that category. Of course, I only have scanned data and I imagine it’s probably even worse in the un-scanned channels.

Jim Craigie

Yes, Bill, we are starting to see it slow a little bit. Overall pricing in liquid laundry in the third quarter was relatively flat versus the second quarter. There was little bit more aggressive pricing in the value side when we competed and driven by one of our competitors, and we had to take some actions to maintain our price gaps in that segment. But we are optimistic that pricing will begin to improve going forward, but again we don’t control the world there. If our competition doesn’t want to do that, then we have to maintain our price gaps to stay competitive.

William Schmitz – Deutsche Bank

What are the retailers saying about that because it seems like the category profit pool is shrinking because they (inaudible) some of the two.

Jim Craigie

I can’t speak for the retailers. I can just speak for me, and we’re doing fine.

William Schmitz – Deutsche Bank

Okay. All right, thanks very much.

Operator

Your next question comes from Per Ostlund of Jefferies & Company.

Per Ostlund – Jefferies & Company

Thanks, good morning guys. Maybe just following on to the Bill’s question quickly, your pricing actions were a little bit, I would say, more targeted and maybe more modest than some of the competitors, but did the third quarter volumes benefit at all from any pre-buying ahead of the actions in powder, detergent or condoms at all?

Matt Farrell

No.

Jim Craigie

No, not at all.

Per Ostlund – Jefferies & Company

Okay, okay, I wouldn’t have thought so. Are you satisfied with your pricing now or do you see the need for additional pricing given maybe a little bit of the shift in the commodity picture? Or maybe even a different way, do you see potentially an opportunity to take more pricing if price gaps have opened up a bit here?

Jim Craigie

Well, two points. First of all, I mean, we don’t lead pricing in the laundry detergent category. We’re about a 10, 11 a share. The big dog in the category has about a 60 share. Secondly, on the powder side, we did take a double-digit price increase in the powder laundry business, and that is making its way into the marketplace as we speak. So, I think that you’ll see some higher pricing on powder going forward if that price increase gets fully reflected by the retailers.

Per Ostlund – Jefferies & Company

Okay, good, thank you.

Operator

Your next question comes from Alex Longley of Buckingham Research.

Alice Longley – Buckingham Research

Hi, Alice, not Alex.

Jim Craigie

We know you Alice.

Alice Longley – Buckingham Research

Detergents again. Did you say ARM & HAMMER was up 10% year-over-year and XTRA up 10% year-over-year?

Jim Craigie

Yes, at least that.

Alice Longley – Buckingham Research

Okay, was that volume or value terms?

Matt Farrell

Dollars.

Alice Longley – Buckingham Research

How much was each one up in volume terms?

Jim Craigie

Alice, don’t play this game with us. We’re not going to get into volumes and dollars, it’s dollars. Dollars are where we get paid on, dollars are what you get paid on.

Alice Longley – Buckingham Research

But what I am trying to figure out is how much the pricing was negative year-over-year?

Jim Craigie

Little, very little is pricing.

Alice Longley – Buckingham Research

Very little?

Jim Craigie

Yeah. Customers are bound with their fee, they want value laundry detergents.

Alice Longley – Buckingham Research

But I thought you just said that – where was your negative pricing for the U.S. in the quarter? I thought it was heavily weighted to detergents.

Matt Farrell

Let me help you with that, Alice. If you think about 2010, we weren’t as heavily discounting in 2010 as we are in 2011. So, year-over-year, if that’s what you are trying to get at to Q3, so it is true that year-over-year we would have had more trade spending in Q3 2011 versus ‘10 for laundry.

Alice Longley – Buckingham Research

So, again, what was the negative pricing for those two detergents year-over-year?

Matt Farrell

I couldn’t give you the specifics about brand pricing.

Jim Craigie

Call Maureen afterwards. She will still get the details for you.

Alice Longley – Buckingham Research

I mean like 2% to 3% or something like that?

Jim Craigie

Alice, move on. Call Maureen afterwards.

Alice Longley – Buckingham Research

And then the big question – well, the another one is, your operating margins have been going up for a number of years and I know you are not giving us guidance today for 2012 but what would – where can we get operating margin expansion going ahead? It seems like you have kind of reached to the end of the line for operating margin expansion.

Matt Farrell

There are a lot of things to drive gross margin expansion, Alice. One of them is obviously is our plant footprint. So as you know the York plant helped us overcome all the commodity price increases that the whole industry is struggling with for the last two years. That was a big factor for us and as you know we have the California plant that’s going be opening next year. So that’s going to pay dividends for us for years to come because it’s going to remove millions of miles of diesel fuel cost from our system.

We also get gross margin expansion from our new product offerings, as you know our policy is to only introduce new products that have margins that are accretive to the brands. And acquisitions have also been an element historically of our gross margin expansion. It is typical when we buy something that we are so good at it. There is tremendous amount of cost synergies, so we can actually expand the gross margins for the acquired business over a period of years. Yes, we haven’t brought something big since 2008, which is when we brought Orajel, yet we have been hitting our numbers in 2009, 2010 and 2011 for EPS. So I think that should be very encouraging to investors.

Alice Longley – Buckingham Research

Okay, my last one is with your balance sheet and all that cash flow, when do you get to the point where you are not being responsible to shareholders and not doing anything with all that cash flow?

Jim Craigie

Excuse me, our shareholders are up over 30% this year. I think we are being very responsible to our shareholders.

Matt Farrell

Let me take a swing at that, Alice. So, speaking about the cash, you go back sequentially. So in February of this year we doubled our dividend and we were trying to target a 2% yield and the stocks moved pretty well since then. Now our yield is 1.6%, so we’re going to revisit that again in February and when we give guidance that will be the right timing to think about the dividend again. You are correct; we generate more and more free cash flow every year and so obviously we have to be good stewards of the cash. As far as the buyback, you know we had announced a very modest buyback the $300 million just to cover share creep. Obviously, that could be expanded but that’s only a decision we would make with the Board and we looked at that probably at the same time that we did make the decision on the dividend.

Alice Longley – Buckingham Research

Thank you.

Matt Farrell

Thanks.

Operator

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

Jason Gere – RBC Capital Markets

Hey, good morning guys.

Jim Craigie

Hey, Jason.

Jason Gere – RBC Capital Markets

So, I guess I’ll kind go on Alice’s question, but a little differently though. As we think about the evergreen targets, it feels like next year, 3% to 4% organic should be fine. So, I guess, we are expecting a bit more on the margin side. Can you talk maybe about the opportunities still on the SG&A side versus maybe on the gross margin, because I guess to kind of get back to that 10% EPS growth, that you guys have consistently delivered over the last decade, it does imply that there is more margin coming through and marketing spending is kind of at the low end of your 13%, 14% range. So I was just kind of wondering if can parcel that out that a little bit, and then I have a follow-up.

Jim Craigie

Well, on the SG&A side we already have best-in-class performance there, but we always (inaudible) do things, we’re implementing a new companywide healthcare program next year, which we think will help to keep healthcare costs in check, and beyond that we have other programs too to keep it very tight. We have a very tight overhead, and we’re going to keep it that way and even look for ways to improve upon it.

Matt Farrell

Yes, I would add to that, Jason, that our SG&A as a percentage of sales during 2010 was 13.5%, and we are tracking to be around that number, 13.5%, 13.6% for full-year 2011. As you know, we have had flat headcount at Church & Dwight for many years now. In order for us to continue to do that for another five years, that’s one of the reasons why we put in this SAP system, so we can make our folks even more productive going forward. So, we do expect to get some leverage out of SG&A going forward as a result.

Jason Gere – RBC Capital Markets

Okay. So should we be anticipating and I guess I know you guys haven’t really talked too much about the plan and maybe relative to the York Pennsylvania. I mean can you kind of benchmark what type of cost savings you think could be there, could it be half the magnitude? I guess I’m just trying to get a framework of – it seems like gross margin would – after two years of not seeing gross margins go up because of the macro environment. Should we be anticipating that with pricing, with cost savings, the mix that this will be the driver and are you endorsing I mean the kind of 10% earnings growth for next year?

Jim Craigie

Yes, but Jason, it’s only November. You know our policy is we are not going to talk about next year until February; we are always pretty consistent with that.

Jason Gere – RBC Capital Markets

But do you feel pretty good going into it? I guess that’s the kind of – I mean just conceptually?

Jim Craigie

Jason, we have delivered three years of 10% EPS growth, so that speaks for itself.

Jason Gere – RBC Capital Markets

Okay. I will drop off and just get back in the queue if there are – if questions are unanswered. Thanks.

Operator

The next question comes from Joe Lackey (ph) of Wells Fargo.

Joe Lackey – Wells Fargo

All right, thanks. Can you give us the degree of expected sales from the pullforward in Q4?

Matt Farrell

Actually we can’t. We really don’t know how that’s going to go in Q4. Like I said it was small dollars in Canada and I think the fact that there was no disruption to our customers in Canada it went very smooth and that’s a tribute to the folks that worked on that and the company’s ability to execute. I think we and our customers will be pretty confident about the January 1 implementation as well.

Jim Craigie

Like I said before, to the extent it gets pull forward we will try to quantify it and call it out and to the extent it generates any incremental profit, we have an opportunity to invest it in marketing.

Joe Lackey – Wells Fargo

Yes, that’s appropriate. And Matt, I know you guys were at least looking laying out some new hedges in October. Can you elaborate on that at all?

Matt Farrell

Yes, that’s true. We typically do start making hedging decisions this time of the year and we have made some (inaudible) past but what I normally do is I wait until February and kind of tell everybody how much of 2012 we have hedged and in what areas, but that is our policy.

Joe Lackey – Wells Fargo

Okay. I know again waiting until February, I know lot of the stuff but if you can maybe kind of give us a general idea of what you are planning as for as CapEx, I know you got the $20 million JV investment there but any sort of parameters we should think about?

Matt Farrell

Remember the JV investment, that would be outside of – if you think about statement of cash flow, that would be investment in JV. As far as CapEx goes, we’ll probably be around $70 million next year if you ask me today simply because the investment in the California plant is going to be about $20 million. And as you probably know, we average absent these things that we have done in the last few years at the York plant, the SAP implementation in the California plant, absent those we run about $50 million to $55 million in CapEx, so $70 million to $75 million next year is a safe bet.

Joe Lackey – Wells Fargo

Great, thanks.

Operator

Your next question comes from Joe Altobello of Oppenheimer.

Joe Altobello – Oppenheimer

Hey guys, good morning. Just a couple of quick questions here. First, in terms of the question Jason asked regarding the efficiencies from Victorville, I am not sure we got an answer but how should we think about the savings there vis-a-vis York? Is it half the size of York in terms of cost savings or is it about equal to what you got in Pennsylvania?

Matt Farrell

Joe, just to be fair we never quantified what the impact of York was. What I can tell you is that the plant in York is 1.1 million square feet and one out in California is 450,000 square feet. So it’s not only big, but the other element is the fact that we are going to benefit from lower distribution costs, which we didn’t get from the York plant. Remember York is only 150 miles away from Princeton. So, it’s still on the East Coast and now we’re actually moving the manufacturing West. So the composition of the save is going to be a little bit different. But, we haven’t quantified that stuff in the past, we just built it into our gross margin costs for the future.

Joe Altobello – Oppenheimer

Yes, I was just curious how we’ll compare it to York, but it sounds like you kind of gave us some thesis there, so that’s helpful. In terms of gross margin it looks like fourth quarter you are looking for gross margin to be down year-over-year. You had a modest increase in 3Q and obviously part of that is the California plant. But could you quantify for us what the input costs impact was on gross margin this quarter and I’d imagine that gets better rather than worse going forward?

Matt Farrell

Yes, why are you thinking that?

Joe Altobello – Oppenheimer

It seems to be the referring we’ve have heard throughout this earnings season, mother of staples names?

Jim Craigie

Yes, they are full of optimistic bullshit.

Joe Altobello – Oppenheimer

Could you tell us how you really feel?

Jim Craigie

Yes. So now what your view is that the world is getting a lot better for commodities?

Joe Altobello – Oppenheimer

No, it just seems like the year-over-year impact should be getting better.

Matt Farrell

Well, I think you are right from a year-over-year standpoint just because the comparisons get a little bit easier. I think that’s fair, but full year it’s a large drag year-over-year.

Jim Craigie

That’s just math that they get a little bit more favorable because they started to ramp up in second half of 2010.

Joe Altobello – Oppenheimer

Okay. Just one last one. The Natronx JV, what’s the strategic benefit for you guys, particularly given that’s going to be dilutive to next year?

Jim Craigie

In other words, why get involved?

Joe Altobello – Oppenheimer

Yes because you’re going to lose money on it next year.

Jim Craigie

Joe, it’s a great new platform from our Specialty Products division. I mean, air pollution is going to be a majorly growing business in this country going forward with the new EPA regulations. This joint venture will deal with old coal-fired plants, which need a fairly efficient way to meet the new air pollution requirements, and so it’s a great opportunity for us to drive some good organic growth in our Specialty Products division. It’s worth the investment.

Operator

Your next question comes from Connie Maneaty of BMO Capital Markets.

Connie Maneaty – BMO Capital Markets

I also have a follow-up on the joint venture. How are the sales and profits going to be split and where will it be recorded in your P&L? And then, long-term what do you think the potential of the joint venture really is?

Matt Farrell

Hey, Connie, this is Matt. So, the JV – it’s a three way JV, so third, third, third. The results of operations will be split in that fashion, though, we reported on the other income and expense line, which is where we report JV income. The market is expected to be about $200 million to $400 million in sales, and this is in, I think, in 2015 is the projection. So, as Jim said, that’s going to build over time, and that’s about as far as we’ll go right now, as we haven’t even built the plant.

Connie Maneaty – BMO Capital Markets

Okay. Then also, I was intrigued by a comment you made about combining purchasing power with other non-competitive CPG companies. What do you mean by that?

Matt Farrell

We’ve actually made some progress on that, but I’m not going to name any names. What we mean by that, Connie, is that, let’s say, for example, we buy cartons, and lots of people buy cartons. So, we might go to a company who is a non-CPG company, who buys the same size of cartons as you, combine your volume and then, get a joint bid, and so you get more leverage that way.

Connie Maneaty – BMO Capital Markets

So, it must have some real efficiency implications, because even everything you buy to look for non-competitive partners might offset the efficiency. So, how does the math work on that?

Matt Farrell

No. It doesn’t offset (inaudible) purely purchase price –

Jim Craigie

Purchasing power. This has taken our purchasing size as Matt said, somebody else’s purchasing size, putting that together and getting a better price out of the supplier, and the supplier will benefit now from a steadier long-term contract from both companies. The larger size will keep their plants humming. So, the bottom line is saving on our purchase price, which helps us drive the gross margin improvement.

Connie Maneaty – BMO Capital Markets

Yes, that’s interesting, thanks. Then what’s the outlook for pension expense and contribution either at the end of this year or next year?

Matt Farrell

I think, you got me stumped there, Connie. As far as the defined benefit plan, we put that one to sleep a year ago in the fourth quarter. You may remember we had a big charge associated with that. So, DB benefit plans you’re talking about now are just simply the international one. I know in the Q we disclosed what the contributions are year-to-date. So, we’ll be filing that probably today.

Operator

Your next question comes from Mike Redick (ph), Williams Capital.

Mike Redick – Williams Capital

Church & Dwight was sort of in the middle of a tug of war, if you will, between the States of New Jersey and Pennsylvania and with the new headquarters being announced last month, I was wondering if you could spend a couple of moments sort of taking us through that process and so some of the benefits that you may be able to see going forward from that announcement? Thanks.

Jim Craigie

Thanks. The answer is no. We made a lot of judgments; we decided to build our new headquarters about 10 miles south of our current headquarters here. The key building we are in here in Princeton in which we own – there is four buildings in Princeton, we own one. We are turning that into our world headquarters for R&D and our FPD divisions and the rest of the company is moving 10 miles South Dakota, Ewing into industrial park and I will just say that the State of New Jersey came for with incentives to make that a good deal for us. But I am not going to give any details as far what Pennsylvania offered and New Jersey offered. I would just say we are very happy to keep our headquarters in New Jersey.

Mike Redick – Williams Capital

Is there a timeframe as to when that transfer may take place, are we looking at next year?

Matt Farrell

Yes, we are thinking fourth quarter 2012 is what we are targeting right now.

Operator

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

Chris Ferrara – Bank of America Merrill Lynch

I wanted to ask about maybe some of the differences in laundry between the track and non-track channels you are seeing right because if you just look at the scanner data and given obviously this is not perfect data, right, but it looks like in liquid laundry you guys have actually been the most aggressive on the negative pricing and it has been going on for quite a while, right given Henkel is doing something similar, but it looks like the lower end of the category is pricing pretty aggressively and you are the most aggressive. So I guess what’s different outside of the track channel that we might not be seeing?

Jim Craigie

No, what we seeing is somewhat true. Our friends at Henkel got very aggressive on pricing in the first part of this year and open up their price gaps for us. They are our key competitor in the value segment and we had to respond to protect our business. So that is exactly what’s going on. Again, I wanted to tell you, one of our greatest strength in this company is defending our businesses and we had to step in and defend our businesses.

I would also keep you in mind that Henkel’s actions were an outcome of last year where another competitor started a price war in the whole category and Henkel got hurt pretty badly. So Henkel’s reactions this year were somewhat understandably, but unfortunately they responded and got very aggressive on price and we had to respond to them.

So I’ve always said to everybody it’s very easy to start a price war and one of our competitors started that last year and it’s very hard to end a price war because those will get hurt and lose in past tend to keep aggressive in the future. We would love to see the price war end, but we didn’t start it and we can’t end it unless everybody else stops it. So that’s what’s going on.

Chris Ferrara – Bank of America Merrill Lynch

I guess one last one. You guys said that Q4 is going to be your strongest organic sales growth quarter of the year, you know that’s great and it makes sense. I guess but unless you blow through the full year plus 3% to 4% rate, Q4 is actually going to be the weakest quarter of the year on a two-year stack basis, right? Just trying to think about underlying momentum and eliminate just a one-year ago comp, right. So are you actually seeing incrementally worsening environment in a lot of your categories because even on a three-year basis it’s the slowest quarter that you are seeing kind of a steady deceleration through the year?

Jim Craigie

You better talk to Maureen. That math doesn’t dry with our math.

Matt Farrell

I want to say it in a different way, Chris, so if we get 4.5% organic growth in Q3, and we’re expecting something similar or better in Q4. Tell me how you get into your week numbers?

Chris Ferrara – Bank of America Merrill Lynch

So, just simplistically, right, the comp in a year ago was plus 2.8 in Q3, minus 1.4 in Q4, right? So, the comp is essentially getting foreign change points easier.

Matt Farrell

You’re forgetting you know we had that whole crazy day thing last year. We had fewer days in the fourth quarter, and we had more days in the first quarter. Remember that?

Chris Ferrara – Bank of America Merrill Lynch

I do, and I get that’s why the comp is much easier in the fourth quarter, right, but it doesn’t change the fact that your growth doesn’t accelerate very much despite the comp getting much easier. That’s what I’m kind of – I guess, it’s also another way of understanding what the Q4 growth rate is going to look like too, right? Because that comp gets much easier because of that change in days dynamic.

Matt Farrell

See, last year year-over-year in Q4 2010 versus Q4 2009, we had fewer days year-over-year. In 2010 and 2011 Q4, we had the same number of days. So, we don’t have a day issue year-over-year. It is apples-to-apples. Last year looks like a low growth quarter on a reported basis, because of these days.

Operator

Your last question comes from Bill Chappell, SunTrust.

Bill Chappell – SunTrust

Good morning and thanks for taking the call. Just wanted to dig a little bit into the Tide Pods that are expected to come up in February, and P&G has kind of talked about it, pods being as much as 30% of the category. And I guess in some extent, this is a way of compaction or a next round of compaction. I think you’ve said you have something similar out there or planned. You talk about, I mean how much of a driver it could be for your margins going into next year and how you see that market?

Jim Craigie

It’s a hard one to call, Bill. I mean I first applaud Procter for driving the category through innovation, this is an innovation, and as far as what percent of the category it will take, that’s to be seen. I mean consumers haven’t voted at all yet, but I do applaud the push innovation, we will have our version of pods out there. It will be out there in the first quarter of next year. It will be margin accretive. We don’t get into margins by product and things like that but it is definitely a move in the right direction to drive gross margin improvement in the Laundry category, and we fully applaud it.

Bill Chappell – SunTrust

Looking at the past benefits from compaction, can it have a similar type benefit on freight logistics if it plays out?

Jim Craigie

It could. I mean I would tell you, Bill, there is one concern we have. There’s been a long term trend of people overdosing on liquid, and this product, you cannot overdose with. So, while there’s a gross margin improvement on a wash-load basis, and if you did exactly one wash load quantity for liquid, the pods, it could be a little dilutive on it as it cannibalizes liquid as far as taking away from the overdosing effect on liquid. So, that’s why we’re a little hedging our best.

Apples-to-apples, pod versus liquid, when liquid is properly used is gross margin accretive, but liquid is not properly used in many cases. So, that could dilute some of the gross margin improvement, and that’s just something we got to see what plays out in the marketplace as the pods go out there, how many people buy, what effect that has on the liquids side of the business. So, there’s a little bit of give and take, and that’s why until the consumer starts voting, we won’t know the final answer.

Bill Chappell – SunTrust

Okay. Then just one quick one. I think for the first half of the year six out of eight Power Brands had been growing share, now seven. Did you tell you me what the new winner is?

Jim Craigie

The one that didn’t grow in the third quarter?

Bill Chappell – SunTrust

The one that is now growing that wasn’t growing in the first half.

Jim Craigie

I think it was Trojan. Trojan, I said earlier in my speech, we increased marketing spending in our BARESKIN product is doing exceptionally well. So Trojan has reignited share growth starting in the third quarter.

Bill Chappell – SunTrust

And is still kind of Orajel is the one that’s not?

Jim Craigie

That’s correct. That’s just like there was some little bit of private label activity in that category and we are dealing with that.

Bill Chappell – SunTrust

Great, thanks so much.

Jim Craigie

Thank you. All right. Let me wrap up this call today. Let me just say, I think some of you are looking for some very pretty results in a very ugly business environment. We are delivering outstanding results versus competition. We have strong organic growth. We have positive gross margin improvement where almost every competitor had negative and quite negative results and we are delivering double-digit EPS growth.

As I said in my call, we have momentum on organic growth. We expect the fourth quarter to be our strongest organic growth quarter of the year on a percentage basis. Our Q4 EPS will be the highest EPS gain in the year and we have some competitors, I mean, in this current quarter actually calling negative EPS growth versus a year ago. So, if you want something pretty I would say to go buy a dog. If you want to buy the best performing stock in the CPG industry, buy Church & Dwight. Thank you.

Operator

This concludes today’s Church & Dwight third quarter 2011 earnings conference call. You may now disconnect.

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