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Church & Dwight Company, Inc. (NYSE:CHD)

Q2 2007 Earnings Call

August 7, 2007, 10:00 AM ET

Executives

James R. Craigie - Chairman and CEO

Matthew T. Farrell - EVP, Finance and CFO

Analysts

William Schmitz - Deutsche Bank

William Chappell - SunTrust Robinson Humphrey

Joe Altobello - CIBC World Markets

Alice Longely - Buckingham Research

Jason Gere - A.G. Edwards

Connie Maneaty - BMO Capital Market

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Church & Dwight Second Quarter 2007 Earnings Conference Call. Before we begin, I have been asked to remind you that on today's conference call the Company's management may make forward-looking statements regarding, among other things, the Company's financial objective and forecast. These statements are subject to risks and uncertainties and other factors that are described in detail in the Company's SEC filings.

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

James R. Craigie - Chairman and Chief Executive Officer

Thank you, Eric, and good morning to everyone. It is always a pleasure to talk to you, particularly when we have good results to report. I'll start off today by giving you a brief summary of the second quarter results. I'll then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with the financial details of the second quarter. When Matt is finished, I'll provide some further information on the factors driving our key business units. Finally, I'll provide earnings guidance before we open the call to field questions from you.

Overall, we are very pleased with our second quarter results, which were right in line with our expectations. Reported net sales were up 19% versus a year ago. Organic net sales which exclude the effect of acquisitions and foreign exchange were up a strong 5% versus a year ago. The organic net sales growth reflects solid gains in all three of our reported business units.

Gross margins were down 50 basis points versus the high year-ago base that was heavily impacted by lower than normal trade spending following significant price increases in April of 2006 on several household products. More importantly, gross margins were up 80 basis points versus the first quarter of this year in line with our plan, for gross margins to steadily improve every quarter of 2007.

Marketing spending was up 30 basis points versus a year ago, and up 320 basis points versus the first quarter to support the launch of new products. The combination of launching these new products, and increased marketing support led to record shares across many of our key brands. And finally, our earnings per share increased 9% to $0.59 per share, which was at the high end of our earnings guidance.

These solid results are right in line with our expectations and has set us up for what we expect will be another year of record sales, record profits and record earnings per share in 2007. I'll provide more detail in our business unit results in our outlook for the year in a few minutes.

I'd now like to turn the call over to Matt, which will provide with greater details on the financial results for the second quarter.

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

Okay, thanks, Jim. Good morning, everybody. I'll start with the headlines. Our second quarter EPS was $0.59 per share as compared with $0.54 last year, a 9% increase. Our revenues are up 19% in which 5% was organic. Our gross margins improved 80 basis points, sequentially from the first quarter. In the first quarter you may remember we cited our expectations that we should have sequential improvement in gross margins throughout the year. And we'll say more about the year-over-year quarterly margin fluctuations in a moment.

Our marketing spend came in at 12.1% of revenues, up 30 basis points as a percent of sales compared to the prior year quarter. And then with respect to taxes, our effective tax rate was higher than expected at 38% and I will also say more about that in a minute.

Now let’s review the income statement, beginning with sales. Second quarter sales were $547 million. The organic sales of 5% year-over-year growth was a result of broad based growth across all of our businesses. The domestic business had a strong quarter led by Arm & Hammer and Xtra Liquid Laundry Detergent and cat litter. Trojan, SpinBrush and Arm & Hammer Dental Care were also up year-over-year. However, offsetting the quarterly growth were declines in other toothpaste and antiperspirant.

The international business had a strong quarter led by Canada, Brazil and Australia. It's a combination of a couple of things. We've big new product introductions, specifically Arm & Hammer Enamel Care in the U.K., Nair new products in many markets, Lineance in France. And secondly, we had higher levels of marketing expenditures in international. We achieved some notable improvements in markets share. We have First Response now, the number one pregnancy kit in Canada, Nair share improvement in Canada, France, U.K. and Australia, and also Arm & Hammer Dental Care in the U.K.

Our other business, specialty products. The specialty products business also had a good quarter due to strong demand for our dairy products and higher volumes and pricing in the specialty chemicals business.

Year-over-year we had high slotting in the quarter, coincident with new product launches. Most of the slotting expense is behind us now as we enter the second half of the year. And regarding slotting, Q1, our previous quarter was the heaviest quarter for slotting due to new product launches. In comparing year-over-year organic growth in the quarter, it is important to remember that last year's price increases served to significantly strengthen the first quarter 2006 volumes while reducing Q2 2006 volumes particularly in liquid laundry. So, consequently we had an easier year-over-year comparison in Q2 than in Q1. The end result is that Q2 year-over-year organic sales were strong were 5%.

And now gross margins. 39-er gross margins, our second quarter gross margin was 39.7%, that’s lower by 60 basis points than last year, but 80 basis points higher than the first quarter of a year. The year-over-year gross margin was expected. Now remember when we raised prices last year effective April 1, 2006. At the same time, we reduced our trade spend in last year's second quarter, to help the new list take hold, and as a result, the highest quarterly gross margin in 2006 was the second quarter. The opposite happened this year in Q2, as we have more normalized trade spend now than last year. When compared to the first quarter of this year, we are pleased with the sequential improvement in gross margins. We continue to expect the second half gross margins to exceed first half margins. On a full year basis, although we have an evergreen target as you know of 125 basis points expansion, it will likely be lower due to compaction and the uncertainty of the commodity markets. We'll talk more about that later.

Marketing. Moving down to P&L now to marketing. Our marketing expense was about $12 million higher for the quarter, year-over-year, partially driven by the acquisition. Marketing expense as a percentage of sales was 12.1% in the quarter in contrast to 11.8% as a percentage of sales in the prior year second quarter. The dollar spend was just a couple of hundred thousand dollars just shy of our previous record spend in Q4 of 2006. Again, looking ahead, we expect Q3 marketing spend in both dollars and as a percentage of sales to exceed Q2 levels.

SG&A, the SG&A increased by about 10 million year-over-year which includes the impact of OGI as well as higher intangible asset amortization costs, higher brokerage fees and higher legal costs in this year's second quarter. Year-over-year SG&A as a percentage of sales declined from 13.9% last year to 13.5% this year.

Operating profits of $76.6 million, is up 15% over the prior year second quarter. The operating margin for the quarter is 14% compared to 14.5% in the prior quarter. But remember that the year-over-year comparison of operating margins is also influenced by the high gross margins in Q2 last year as well as the higher marketing expense this year as a percentage of sales.

Our other income expense increased primarily due to higher debt levels as a result of the OGI acquisition. There's really nothing more to say there.

Now income taxes. As you can see in the release, our effective rate for the quarter is 38.7% compared to 37.6% in 2006. This is explained by an additional $2.1 million valuation reserve that was recorded in the quarter for a tax asset at one of our foreign subsidiaries. And while I'm on the topic of tax, we are forecasting an effective rate of 36% for the balance of the year.

Free cash flow. With respect to free cash flow, we generated $32 million of free cash flow compared to $4 million in the year ago quarter. And CapEx in the second quarter this year was $14 million. Dividends were at 4.6.

Now, just looking at the balance sheet. Accounts receivable are up approximately $30 million versus the year ago, primarily due to our recent acquisitions, and also higher sales in the quarter. Inventories increased about $19 million versus a year ago, again due to the OGI acquisition. It's also noteworthy that we are in the process of transitioning the manufacturing of OGI products from co-packers to our plants and it’s going very well.

When you look at our debt levels, our first priority for free cash flow as you know is debt reduction. And our net debt at quarter end was $768 million. Our total debt to EBITDA per our bank agreement was approximately 2.5, putting us comfortably within our long-term target range of two to three times EBITDA.

So in conclusion, the short summary for the second quarter would be 5% organic growth, sequential quarterly gross margin expansion, higher marketing spend, new product activity and strong free cash flow.

Now back to you, Jim.

James R. Craigie - Chairman and Chief Executive Officer

Thanks, Matt. I'd like to provide everyone specific detail on each of our three key business units, our domestic business unit, our international business unit and our specialty products business unit, to give you a better sense of what is driving the company’s results. Please note that when I mention consumption I'm talking about all channel consumption, which includes the traditional food and drug channel as measured by Nielsen, plus our actual retail consumption results or actual sales results in other sales channels not measured by Nielsen, such as Wal-Mart, Dollar Stores and Plus [ph]. These non-measured channels are growing faster than the measured channels and they represent almost 40% of our company's total consumption and even greater than that of some of our brands. Thus what you see as Nielsen's share in consumption results is often a misleading indicator of the actual total consumption that occurs at some of our categories and brands.

Okay, let’s turn to talk about our domestic business unit. Total net sales in this business unit, grew 20% in the second quarter over the prior year period, driven largely by the impact of the Orange Glo acquisition. However organic net sales were also very strong driven by sales gains in the liquid laundry detergent, cat litter, baking soda, condoms, Arm & Hammer Toothpaste, SpinBrish and pregnancy kits. These sales gains were partially offset by declines in powdered laundry detergent, antiperspirant, value toothpaste and depilatories.

Overall we are very pleased with the organic growth of our domestic business unit driven by innovative new products, improved marketing programs, expanded distribution and improved merchandizing.

On the new product front, we are also beginning to see the benefit of a corporate new product team that was created in 2006 to deliver more innovative consumer products with strong consumer appeal. Last year, this group produced two great new products, the new Arm & Hammer FridgeFresh refrigerator deodorizer and the Arm & Hammer high performance cat littler, made from natural ingredients. These two great new products are continuing to experience strong sales gains in 2007. This year the new product team efforts have resulted in a record number of new product launches, 50 in total, including the following.

Arm & Hammer Essentials liquid laundry detergent which is formulated from plant-based surfactants and baking soda to deliver the same powerful cleaning capability as regular Arm & Hammer detergent. This new product has shown strong appeal among environmentally conscious consumers. We actually did a limited launch of this new product in 2006, and the consumer demand for this environmentally conscious product was so strong, that we’re now offering it nationally to all customers.

We've also expanded this time in the fabric softeners with the launch of Arm & Hammer Essentials Fabric Softener Sheet which is also off to a strong start. In fact, our new Arm & Hammer Essentials line of laundry products has done so well that we understand that Procter and Gamble will shortly launch a new version of Tide called Pure Essentials. We welcome the competition from industry leaders which will help to make even more consumers aware of the availability of these environmentally conscious products.

We've also just launched a highly, innovative Arm & Hammer cat litter called Odor Alert. This clumping cat litter contains crystals that change color when activated by the cat's urine, so the consumer can see and remove the soiled cat litter before they smell it. As our new commercial for this product states, "If your litter can’t change colors, change litters."

These new Arm & Hammer products have been supported by increase levels of marketing spending behind the new Arm & Hammer mega brand advertising campaign that we started in 2006. The net effect of these great new products, improved marketing programs and increased marketing spending is record sales and market shares in the second quarter on our Arm & Hammer laundry detergent, baking soda and cat litter businesses.

We’ve also launched innovative new products in our other core categories including Trojan condoms called Intense Ribbed, that has a deep ribs for intense pleasure. A new sub light of near depilatory product called Pretty which is specially formulated for the more sensitive skin of young girls in their teens and 20s. And three new SpinBrush toothbrushes, including a unique tooth clean version to enable both gum massage and brushing and our first rechargeable SpinBrush.

These new products have been supported by newer improved marketing campaigns that has driven record shares for our Trojan condom business and First Response pregnancy kit business.

The new SpinBrush products and marketing programs have also enabled us to achieve category leadership in battery powered toothbrushes. Our new product team has also significantly applied its skills to our latest acquisition by developing and launching a new OxiClean portable stain remover that instantly dissolves most stains. The portable instant stain remover segments is for consumers on the go and is a new and fast growing segment, and we expect the launch of this new product, under the popular OxiClean brand name will have strong consumer appeal. In fact the OxiClean brand achieved record shares in the first half of 2007 as a results of this new product, improved merchandizing and free distribution and continuous strong marketing support.

As mentioned earlier, the solid growth that we achieved in laundry detergent, cat litter, baking soda, condoms, Arm & Hammer toothbrush, toothpaste, SpinBrush, and pregnancy kits was partially offset by decline, particularly in our antiperspirant and value toothpaste businesses. These are sub categories once we faced exceptionally strong competitors with significant scale advantages. However, about six months ago, we created a new team of guerrilla marketers and a supporting cross-functional team to stem the decline in these categories. This team is too new to have any effect in the first half of 2007, since that timeframe was driven by customer decision made before the team was formed. We do expect to see improved results in these sub categories starting in the second half of 2007, as a result of the efforts of this new team.

Overall, we are very pleased with the sale, of the organic sales growth of our domestic business unit. Our efforts to launch innovative new products supported by more tactile marketing campaigns and increased spending is working. However, we are not satisfied and we expect to launch bigger new products at a faster rate in the future to meet up the demands of our consumers and to stay a step ahead of our competitors.

We also pushing our marketing team to develop more proactive and appealing marketing campaign. This is personified for the new Trojan campaign called Evolve, which was launched on June 18th on TV, print and our website. And we have seen a widespread news coverage and public relations support driven largely by the fact that the CBS and the Fox Networks have refused to run the commercial. Today this coverage has generated significant public dialogue on the importance of responsible sexual health. This supports our efforts to drive increased condom usage in the U.S., which has the worst sexual disease specific to any developed nation in the world. If you have not seen our new Trojan Evolve commercial, and wish to do so, you can see it on our website www.trojanevolve.com.

Finally, I want to mention that Church & Dwight will fully support the industry wide initiative to reduce the water content of liquid laundry detergent by moving to concentrated offering. We will begin rolling out concentrated line of sensible Arm & Hammer and Xtra to resellers this September and complete the national launch to all resellers in mid 2008. This initiative will help to recover the unfavorable cost impact of higher oil prices by reducing the cost of the detergent, the packaging and its shipping costs. While the launch impact of this action is expected to help recover the gross margin hit in our liquid laundry brand from the significant commodity increases that occurred in 2005 and 2006, we expect to improve short terms conversions costs of this effort in 2007 and the first half of 2008.

Now let me talk for a minute about other two business unit, our international business unit and our specialty product division. Our international business unit which represents about 16% of our total sales had an excellent second quarter with a 20% increase in total sales over the prior year. This increase was driven by strong results in Canada, Australia, Mexico and Brazil. Notably, we achieved market share leadership on First Response for the first time in Canada. We’ve also launched the Trojan brand in China through a wholly owned subsidiary and distribution is growing in key accounts and pharmacy. The improved organic growth and market expansions in international business unit reflects improved coordination between all functions in our domestic international unit to leverage new product innovation, improved marketing campaigns and supply chain best practices.

In our specialty product business unit which represents about 11% of total company sales, net sales drew a healthier 11% over last year’s second quarter. This excellent growth was driven largely by strong demand by dairy farmers for animal nutrition product despite recent price increases. Our specialty chemicals business also benefited from the increased sales despite price increases that were necessary to recover higher raw material energy costs. Sales of our products particularly increased in Brazil driven by the strong Brazilian economy.

Let me switch gears now and talk about the future. Well we are pleased for the solid second quarter results, we are never satisfied. First, in terms of dealing with issues, we have enabled to absorb unprecedented level of cost increases for raw materials, packaging and transportation since 2004 and still delivered solid growth margin improvement and earnings growth. We have a well organized pipeline cost saving initiatives in the areas of manufacturing, purchasing and distribution that are being executed and along with the price increases taken in 2005, 2006 and 2007 have enabled us to more than offset the higher commodity costs.

The improvement in our gross margin has enabled us to increase marketing spending. This increased marketing spending has been focused behind a strong pipeline and new product innovation in every one of our core categories supported by improved marketing campaign. As I stated earlier these new products, improved marketing campaigns and increased spending have resulted in record sales and shares for the second quarter in many of our key category such as liquid laundry detergent, cat litter, baking soda, condoms and pregnancy kits. We are very pleased with these results, but we know that we must continue to improve in our core categories and stem the declines in categories where we are weak.

We will also continue to drive growth in our international market by leveraging our new market and the marketing programs into all applicable worldwide markets, while at the same time, improving the efficiency of our worldwide supply chain through implementation of best practices. Now let me translate this into a specific guidance for the rest of this year.

In view of our solid organic results in the second quarter, our confidence in new product launches and improvement in gross margins we remain enthusiastic about 2007. However since commodity cost remain unstable this time, we are going to reaffirm our earnings per share forecast for the year of $2.34 and $2.36 which is equivalent to 13% to 14% increase over 2006 results. This will include the expected negative impact of conversion cost related to the transition to concentrated liquid laundry detergent starting in late 2007.

Organic sales growth is expected to stay strong in the back half of 2007 behind a significant increase in marketing spending to support our new product launches and several new advertising campaigns. There will also be one major new product launch in the fourth quarter. For competitive reasons, I'll not divulge the details behind this launch at this time.

The continued solid organic revenue growth in the back half of 2007 will support our targeted organic revenue goal range of 3% to 4% for the total year. This excludes the impact of foreign exchange and the acquisition of the Orange Glo business. We also expect gross margins to be higher in the back half of the year and the first half. In addition we expect second half earnings to be more evenly distributed in the third and fourth quarters than in prior years.

In summary, we are very pleased with our second quarter and first half present results and we feel confident we can deliver our earnings per share forecast for the year barring any significant changes and commodity cost for competitive action.

That ends our presentation. I’ll now open the call for any questions you may have which Matt and I will do our best to answer. I do want to mention though that due to travel commitments Matt and I are in different locations today, so we may have to cause some audibles in the phone as we decide who'll take the lead in answering your questions. Operator, please go ahead.

Question and Answer

Operator

[Operator Instructions].

Your first question comes from the line of Bill Schmitz with Deutsche Bank, please proceed.

William Schmitz - Deutsche Bank

Okay.

James R. Craigie - Chairman and Chief Executive Officer

Hi Bill.

William Schmitz - Deutsche Bank

Hey, how was pricing holding up, I know, a lot of the compaction stuff is already out there, I mean, a lot of people are afraid that a lot of it may get dealt back and I was wondering what your initial thoughts on that were?

James R. Craigie - Chairman and Chief Executive Officer

Bill, pricing is holding up exceptionally well. No issues there.

William Schmitz - Deutsche Bank

Okay. And why is Wal-Mart launching private label again in the face of the compaction theme? It seems like it’s a pretty disingenuous strategy by them?

James R. Craigie - Chairman and Chief Executive Officer

I don’t know what you are talking about.

William Schmitz - Deutsche Bank

Yes you do.

James R. Craigie - Chairman and Chief Executive Officer

Well, private label what, Bill?

William Schmitz - Deutsche Bank

Its private label detergent, was it Simply Elegant or something that’s a some Huish variant that’s going to be under Sun that’s kind of like a knock off of the Tide variant?

James R. Craigie - Chairman and Chief Executive Officer

Well I mean it's under the Sun brand, so that’s going on a long time, so it's probably just a new variant like everybody else tries.

William Schmitz - Deutsche Bank

Okay, got you. And then how is the OxiClean migration going from their factories to yours, I know you started, talked about starting last quarter. I'm just curious, how that’s progressing?

James R. Craigie - Chairman and Chief Executive Officer

It's been excellent. We will complete the transition from the co-packers into our factories in the second half of this year.

William Schmitz - Deutsche Bank

Okay, great. And then just on gross margin at the back half of the year. Have you thought about taking another price increase or is there anybody in the industry thought about another price increase given the big spike up in resin and surfactants that seem to follow apparently?

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

Hey, Bill, this is Matt.

William Schmitz - Deutsche Bank

Yes.

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

We haven’t signaled any changes with respect to pricing in the second half. What we are counting on in the second half with respect to margins is that a few things, slotting is going to be behind us now, because it's pretty much concentrated in the first couple of quarters. Second thing is OGI plant integration, we get some synergies from that in the back half. We are obviously going to get some better distribution on some of the new products that we just launched. So that will keep expanding and then I guess finally we have our ongoing cost reduction programs in the company, reformulation, improving yields et cetera. So we feel pretty good about gross margins expanding in the second half without a price increase.

William Schmitz - Deutsche Bank

Okay, great, thank you very much.

James R. Craigie - Chairman and Chief Executive Officer

Thanks, Bill.

Operator

Your next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed.

William Chappell - SunTrust Robinson and Humphrey

Good morning.

James R. Craigie - Chairman and Chief Executive Officer

Hey Bill.

William Chappell - SunTrust Robinson and Humphrey

I guess, just talk a little bit more about compaction. I mean, it sounds like you now are seeing a little greater cost in the back half in the next year than you originally anticipated. Can you give us a little more color around that? Are you now also looking at more marketing and advertising? I know P&G is doing a lot to educate the market, are you being pulled in to do that as well?

James R. Craigie - Chairman and Chief Executive Officer

No, Bill, what's going on is we are clearly following the lead of the industry leader here on compaction. It's just as we get closer and closer to the start date it's getting a little clearer as to what the transition costs are being on both our plants and with retailers. So it's just that real vision. We are not participating in any industry efforts to advertise this issue. We will do our own stuff, everybody else to our knowledge are doing their own stuff. So everything seems on track so far for this effort.

William Chappell - SunTrust Robinson and Humphrey

And I guess I am just trying to understand kind of the additional cost that maybe you hadn’t seen before is that just sharing more the cost with the retailers as you do the roll out or is it just cost of transitioning the plants is maybe greater than you originally expected?

James R. Craigie - Chairman and Chief Executive Officer

It's just pretty much… it's just pretty much what we thought and expected, we hadn't talked much about before but it is transitioning our plants to manufacturing those smaller bottles. Any impact it might have on logistics and also potentially working with retailers to reset all the shelves.

William Chappell - SunTrust Robinson and Humphrey

I guess you had said in the past I mean, you sought to see some benefits from this program by the fourth quarter. Is that probably early, is it maybe more mid next year?

James R. Craigie - Chairman and Chief Executive Officer

It's more mid next year.

William Chappell - SunTrust Robinson and Humphrey

And then I guess… finally do you see in other areas beyond detergent, do you see other needs for price increases?

James R. Craigie - Chairman and Chief Executive Officer

Not at this time, Bill. We have taken some pretty aggressive price increases in our specialty product division this year to keep up with raw material and energy costs. Right now given where commodity prices are, we don’t see the need for anything. Probably because we are being so aggressive and good in our own cost structure of cutting back on cost, we don’t have anything planned at this point in time.

William Chappell - SunTrust Robinson and Humphrey

Okay. And then just one last one. Can you just remind us fixed versus floating kind of what the capital structure looks like and if there are any changes planned?

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

No we haven't signaled any changes in our capital structure. Just in round numbers, we have $100 million convert that’s out there, we have another couple of $100 million of high yield and then we have $400 million roughly of bank debt. And then we have another $100 million in securitized receivables. So by the way we are going to file our Q today, so you will get all the details this afternoon.

William Chappell - SunTrust Robinson and Humphrey

Perfect, thanks.

James R. Craigie - Chairman and Chief Executive Officer

Thanks Bill.

Operator

Your next question comes from the line of Joe Altobello with CIBC World Markets. Please proceed.

Joe Altobello - CIBC World Markets

Hey guys good morning.

James R. Craigie - Chairman and Chief Executive Officer

Good morning, Joe.

Joe Altobello - CIBC World Markets

Just want to go back on the gross margin issue for a second. Was compaction cost or the higher compaction cost the lion's share of the change from the 125 bips or is it more the commodity cost inflation we have seen over in the last couple of months?

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

Yes, but we have got uncertainty with respect to both of those items right. So compaction, it's an obvious one that was already covered by Jim. With respect to commodities I am sure you know we are exposed to a number of different commodities, resin would be one, corrugated liner board, diesel, even vegetable oils that affects… alcohol is the first surfactant that go into our detergent. So you know that still there is a lot of volatility right there, so consequently we would say that it's probably unlikely we are going to hit a 125 basis points this year.

But you also know we don’t call line items on the P&L. The only thing we give guidance on specifically is EPS which is at $2.34 to $2.36. And we have our evergreen target of the company of 3%-4% top line, 125 basis points of gross margin expansion. But given compaction of where commodities are, it's unlikely we are going to get to that this year, because you also know that as we improve our gross profits, we file it back in to the marketing line. So you can see marketing go up year after year here.

Joe Altobello - CIBC World Markets

Okay. And then in terms of the quarterly impacts and the higher compaction costs, is there one quarter which stands out in the next say three or four that would be hit the most?

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

It's kind of hard to say because you have three waves that are coming.

Joe Altobello - CIBC World Markets

Right.

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

You have got September, April 1 January and April 1. So I think each one could bring its own factors that we are going to have to deal with. So no, it would be hard to predict that right now, Joe.

Joe Altobello - CIBC World Markets

Okay. And then lastly, on the acquisition side it sounds like your balance sheet is pretty much or actually pretty strong here. Are you guys looking for acquisitions actively and would you prefer a personal care or household business?

James R. Craigie - Chairman and Chief Executive Officer

Joe, we are already looking. We are very honestly ambivalent between household and personal care, because we have business on both sides, plants on both sides and everything. And other than that we just don’t comment about any activity in that front.

Joe Altobello - CIBC World Markets

Okay thanks.

Operator

Your next question comes from the line of Alice Longley with Buckingham Research. Please proceed.

Alice Longley - Buckingham Research

Good morning.

James R. Craigie - Chairman and Chief Executive Officer

Morning, Alice.

Alice Longley - Buckingham Research

Hi, how much were your newly acquired brands up, year-over-year, apples to apples comparison of OxiClean and Kaboom, I guess?

James R. Craigie - Chairman and Chief Executive Officer

I didn’t follow the question, Alice.

Alice Longley - Buckingham Research

How much were their sales up at… I guess the way to put it would be at retail, your newly acquired brands, are they growing?

James R. Craigie - Chairman and Chief Executive Officer

Oh the OxiClean business, yes they are growing.

Alice Longley - Buckingham Research

And can you give us some numbers and tell us are they all retailers end or what--?

James R. Craigie - Chairman and Chief Executive Officer

No we don’t give numbers on specific businesses, but they were up nicely.

Alice Longley - Buckingham Research

Were they ahead of your expectations?

James R. Craigie - Chairman and Chief Executive Officer

They were very much in line with our expectations.

Alice Longley - Buckingham Research

All right. And could you give us some sense of how much Trojan might have been up at retail?

James R. Craigie - Chairman and Chief Executive Officer

No, Alice, we never comment on specific product lines.

Alice Longley - Buckingham Research

All right. Another effort would be, we are understanding that Unilever might be getting rid of its US detergents, is that something that you could do or would what to do?

James R. Craigie - Chairman and Chief Executive Officer

We don’t comment on M&A actions.

Alice Longley - Buckingham Research

Would there be any antitrust problems in your buying of brands?

James R. Craigie - Chairman and Chief Executive Officer

We don’t comment on M&A actions.

Alice Longley - Buckingham Research

All right, I'll give up, thanks a lot.

James R. Craigie - Chairman and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Jason Gere with A.G. Edwards. Please proceed.

Jason Gere - A.G. Edwards

Thanks, good morning.

James R. Craigie - Chairman and Chief Executive Officer

Hey.

Jason Gere - A.G. Edwards

Hey, a couple of questions. One can you just give a little more color on some of the positive learning so far with the new structure for the value toothpaste and the deodorants.

James R. Craigie - Chairman and Chief Executive Officer

The special team we put on it?

Jason Gere - A.G. Edwards

Yes, maybe just anecdotally share some of the things that you have learnt over maybe the course of the three months you have announced the team there.

James R. Craigie - Chairman and Chief Executive Officer

A little bit, Jason. We call it guerrilla marketing and it's a fairly common term in the industry. It's just doing much more micro marketing I would call it on an account-by-account basis to do what you need to do in the key accounts that carry the product. We're making sure we have the right pack sizes, the right fragrances on the antiperspirant line. We are doing smart, efficient things in every account to support the business. And with the new team we've put in place, we've brought that much more micro focus I would call it to these businesses and it's really doing a much better job of maintaining distribution and in some cases growing distribution and then also in driving in-store consumption of the brand.

So, we didn’t invent this. This has been used in a lot of the big companies, but we're applying it with great finesse I think to these brands. And I think you will see the benefit of that starting in the second half of this year, as I said earlier.

Jason Gere - A.G. Edwards

Is it too early to ask about maybe shelf space of some of these brands which probably whether or not you are getting any increased space with them? What’s been the reaction I guess of your major retailers with your efforts at this point?

James R. Craigie - Chairman and Chief Executive Officer

Well, first job is to, hold the space in these categories and the team’s doing a very good job of that. In a few cases they have gone in and gotten some incremental distribution. I think the retailers are generally much happier that we are paying this kind of special attention to these brands with a team that’s very focused on issues such as distribution and in-store promotions and in-store advertising and stuff like that.

Jason Gere - A.G. Edwards

Okay. And then just the second question, I guess, going back to gross margins. Is it fair to assume that margins in the back half of the year will be around or maybe even a little bit lower than your… I guess your long-term guidance of 125?

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

Sorry, Jason, yes year-over-year it’s going to be difficult to get to a 125 basis points expansion. What I have said earlier is that the second half gross margins, ’07 will be higher than the first half of ’07.

Jason Gere - A.G. Edwards

Right. But the increase will still be below, I guess, your longer term guidance?

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

Yes, it will be.

Jason Gere - A.G. Edwards

Okay. Thank you. Thanks, Matt.

Operator

Your next question comes from the line of Connie Maneaty with BMO Capital Markets. Please proceed.

Connie Maneaty - BMO Capital Markets

Good morning.

James R. Craigie - Chairman and Chief Executive Officer

Hi Connie.

Connie Maneaty - BMO Capital Markets

I don’t know if… I haven’t seen the press release, so I am sorry if this information is in there. But could you give the organic growth rate for the domestic business?

James R. Craigie - Chairman and Chief Executive Officer

No, we didn’t, we just gave for the overall company, but I would say, domestically it was in the mid-single digits, on the domestic.

Connie Maneaty - BMO Capital Markets

Okay. Also on the value toothpaste, we are hearing from P&G that they believe they are becoming the category leader overall in oral care. And that as such there will be a less and less space for minor brands, some of which are in your portfolio. Is this possible that you would just discontinue some of the smaller brands that have been under pressure for so much time?

James R. Craigie - Chairman and Chief Executive Officer

Never.

Connie Maneaty - BMO Capital Markets

Never?

James R. Craigie - Chairman and Chief Executive Officer

No.

Connie Maneaty - BMO Capital Markets

So is the strategy in the guerrilla marketing just to find places, channels of distribution where the biggest names aren't controlling quite as much shelf space?

James R. Craigie - Chairman and Chief Executive Officer

Our intention is just to educate the retailers that some of our SKUs have a faster retail movement on them than some of the 50,000 versions of Crest and Colgate.

Connie Maneaty - BMO Capital Markets

Do you foresee a time when your share will stabilize or grow?

James R. Craigie - Chairman and Chief Executive Officer

Our share has already stabilized, it is improving on Arm & Hammer toothpaste and it's actually doing well on some of the minor brands. So just like Procter's usual proclamations of greatness, we'll be very… we'll be doing just fine in the toothpaste category.

Connie Maneaty - BMO Capital Markets

Okay. Thanks so much.

James R. Craigie - Chairman and Chief Executive Officer

Thanks.

Operator

Our last question comes from the line of Bill Schmitz with Deutsche Bank. Please proceed.

William Schmitz - Deutsche Bank Securities

Just had a quick follow-up. What was the gross to net sort of this year and what was it year ago? And can just… I know you can't give me exact numbers, but it was up like an order of magnitude and can you just sort of say how much that really impacted to the gross margin line?

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

Yes, Bill, as you know, we don’t call out what the gross percentage or even what the gross dollars are on an annual basis, but I mean suffice to say that we spend $100 million plus on a quarterly basis on trade. So, as you can see just a few million dollars can be a pretty large basis point difference in gross margins.

William Schmitz - Deutsche Bank Securities

Right. I guess and you call it out in the press that there was sort of higher trade funding this quarter and that’s what impacted the gross margin?

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

Exactly. Right, so if you got a $100 million of trade spend and you spend 3% more that’s going to affect your gross margin by 60 basis points.

William Schmitz - Deutsche Bank Securities

Got you. Okay.

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

So that, it’s a big lever.

William Schmitz - Deutsche Bank Securities

Right. Is that mostly slotting or is that other stuff as well?

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

No, it's trade spend.

William Schmitz - Deutsche Bank Securities

Okay. All right. Thanks for taking my follow-up.

James R. Craigie - Chairman and Chief Executive Officer

Thanks, Bill.

James R. Craigie - Chairman and Chief Executive Officer

Any other questions? All right. Again, we are very pleased with our second quarter results, very happy with the first half results. The business is on a roll and we see continued improvement rolling into the second half of the year. I want to thank you all for taking the time today to talk to us and if you have any follow-up questions, please give me or Matt a call. Thank you.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. And have a good day.

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