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Church & Dwight Co., Inc. (CHD)

Q3 2007 Earnings Call

November 6, 2007, 10:00 AM ET

Executives

James R. Craigie - Chairman and CEO

Matthew T. Farrell - EVP, Finance and CFO

Analysts

Alice Longley - Buckingham Research

Jason Gere - Wachovia Capital Markets, LCC

William Schmitz - Deutsche Bank Securities

William Chappell - SunTrust Robinson Humphrey

Joseph Altobello - CIBC World Markets

Connie Maneaty - BMO Capital Markets Corp

Presentation

Operator

Good day ladies and gentlemen and welcome to the Church & Dwight Third 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 amongst 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 fillings. I would now like to introduce your host for today's call Mr. Jam Craigie, Chairman and Chief Executive Officer of Church & Dwight. Please go ahead sir.

James R. Craigie - Chairman and Chief Executive Officer

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

Overall we were very please with our third quarter business results. Reported net sales were up 12% versus year ago. Organic net sales, which exclude the effects of acquisitions and foreign exchange, were up a strong 6% versus year ago. The organic net sales growth reflects solid gains in all three of our reported business units, including record quarterly sales for our international and specialty products businesses. These gains were driven by the improved pipeline of new products, increased marketing spending and excellent sales execution, which led to record shares across many of our key brands. We are also beginning to reduce the drag on organic growth caused by some of our smaller brands through a stepped up efforts to slow the rate of decline.

Gross margins were up 40 basis points from year ago to 39.5% of net sales for the quarter. The improved gross margins in the face of significant commodity headwinds reflect our continuing focus on managing costs, implementing price increases, and leveraging scale.

And finally, our earnings per share increased 32% over the year ago quarter to $0.75 per share. These excellent results have put us in a position for another year of record sales, profits and earnings per share in 2007.

I will provide more detail on our business unit results and my outlook for the year in a few minutes. I will now turn the call over to Matt who will provide you with greater details on the financial results for the third quarter.

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

Thank you Jim and good morning everybody. I will start with the headlines. Third quarter EPS was $0.75 per share compared to $0.57 in 2006. The exceptionally strong sales performance is really the biggest driver of our third quarter earnings results. It's also noteworthy that results include approximately $0.04 of earnings from a property sale in Canada and $0.02 of tax benefits, which lowered our effective tax rate below 36%.

I will start with revenues. Revenues up 12%, of which 1% was due to foreign currency changes, 5% due to the OGI acquisition, if you will recall, we acquired it in August of 2006, and a 6% organic growth. Now about 1% of our organic growth may be attributed to the initial shipments of concentrated liquid laundry detergent in September, but all things considered, this was a very healthy quarter for organic growth.

Now I am going to say a few words about each of the segments. The domestic business had a strong quarter led by Arm & Hammer liquid laundry, cat litter and SpinBrush. Trojan, Arm & Hammer, carpet deodorizer, and Arm & Hammer dental care were also up year-over-year. However, offsetting the quarterly growth were declines in other toothpastes and antiperspirants.

International performed well, led by Canada, France, and Brazil. And finally specialty products business had a solid quarter due to strong demand coupled with the price increase for our dairy nutrition product and also higher volumes and pricing in the specialty chemical business.

And now gross margin, our third quarter gross margin was 39.5%. That's a 40 basis point expansion versus last year. Cost reduction programs and pricing contributed to margin expansion despite higher costs for material inputs such as resin, corrugated paper, and diesel, just to name a few.

Looking ahead to Q4, we again expect year-over-year gross margin to expand as we realize the OGI manufacturing benefits. I am sure we will spend more time on that during Q&A.

And now marketing, marketing spend was 12% of revenues, that's comparable to the prior year spend rate of 12.1%. The marketing expense was up about $7 million over the year ago, partially driven by the OGI acquisition. Now a portion of our planned marketing spend has shifted from Q3 to Q4. This is in part to match our advertising with the expanding distribution of our new products. Our third quarter spend was about $70 million and we expect to easily exceed that level of spend in the fourth quarter.

Now SG&A, SG&A was down year-over-year due to a $3.3 million gain on the sale of property in Canada. So if you exclude that gain, our SG&A as a percentage of sales decline 100 basis point to 12.8% and this reflects continued cross control and leverage from the OGI acquisition. Our SG&A for the past two quarters has been about $74 million to $75 million per quarter. That excludes the Canadian gain from Q3. The fourth quarter, however, will be much higher due to the charge related to a reorganization of our Canadian business, which is mentioned in the press release, and also several R&D projects that require heavier spending in the fourth quarter.

Moving now to operating profit, the operating margin for the quarter expanded 140 basis point to 14.7%, excluding the gain on the property sale. And the operating margin expansion is driven by higher gross margins and SG&A leverage.

Now, other income expense decreased primarily due to translation gains caused by the decline in the dollar during the quarter. So the weakening US dollar also contributed to earnings in Q3.

Next is income taxes. As you can see in the release, our effective rate for the quarter is 34.7%, which is lower than the expected 36% rate. This is due to the reduction of tax liabilities at one of our foreign subsidiaries. And while I am on the topic of effective tax rate, we are forecasting an effective rate of approximately 36% for the fourth quarter.

Not free cash flow. We generated $123 million of free cash flow so far in the first nine months of the year. Our total debt to LTM adjusted EBITDA for our bank agreement was approximately 2.3 at quarter-end. So we are comfortably within our long-term target range of two to three times EBITDA.

If you look at the balance sheet, you can see that we built our cash position in the third quarter rather than reduce our term bank debt. We ended the quarter with $179 million of cash on the balance sheet and this affords us more flexibility in making bolt-on acquisitions without needing to access the credit markets.

Turning now to other elements of the balance sheet, accounts receivable are up approximately $23 million versus a year ago. That's primarily due to higher sales in the quarter and the effective foreign currency changes. Same is true for inventories. Inventories increased about $13 million versus a year ago, a biggest reason for that again would be currency. It's also noteworthy that we have now transitioned the manufacturing of OGI products from co-packers to our plants.

So, in conclusion, a short summary for the third quarter would be a 6% organic sales growth, 40 basis points of gross margin expansion, good SG&A leverage, successful new product performance and strong free cash flow.

Now, back to you Jim.

James R. Craigie - Chairman and Chief Executive Officer

Thanks Matt. I would now like to provide you with details 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's driving the company's results.

Please note that when I mention consumption, I am talking about all channel consumption, which includes the traditional food and drug channels as measured by Nielsen. plus our actual retail consumption results or actual sales results in other sales channel not mentioned by Nielsen such as Wal-Mart, Dollar Stores and Club. 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 on some of our brands. Thus what you see at Nielsen share and consumption results is often a misleading indicator of the actual total consumption occurring for some of our categories and brands.

Okay, let's first talk about our domestic business unit. Total net sales of this business unit grew 10% in the third quarter over the prior year period, of which about 6% was driven by the impact of the Orange Glo acquisition and 4% was organic.

Organic net sales were driven by sales gains in liquid laundry detergent, cat litter, condoms, Arm & Hammer toothpaste, SpinBrush, carpet deodorizers, and depilatories. These sales gains were partially offset by declines in powdered laundry detergents, antiperspirant, and value toothpaste.

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

On the new product front, we are beginning to see the benefits of our corporate new product team that was created in 2006 to deliver more innovative consumer products with strong consumer appeal. Last year, this group produced great new products like the new Arm & Hammer fridge fresh refrigerator deodorizer and the Arm & Hammer high performance cat litter made from the actual ingredients. These new products are continuing to experience strong sales gains in 2007.

This year the new product team's effort has resulted in a record number of new product launches, 50 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 very strong appeal among environmentally conscious consumers. We've expanded this concept in a fabric softeners with the launch of Arm & Hammer Essentials fabric softener sheet, which is also off to a strong start.

We have also 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 cat litter doesn't change color, then it's time to change your cat litter.

These new Arm & Hammer products are being supported by increased levels of marketing spending behind the new Arm & Hammer mega brand marketing campaign that we started in 2006. This marketing campaign in combination with the innovative new product has driven net sales growth for all Arm & Hammer brands from 1% in 2004 to over 5% in 2007. This improved sales growth reflects record market shares in 2007 on our Arm & Hammer laundry detergent, baking soda, and cat litter businesses.

We have also launched innovative new products in our other core categories including a new Trojan Intense Ribbed condom, a new subline of Nair depilatory products called Pretty, which is especially formulated for the more sensitive skin of young girls in their teens and 20s. And also three new SpinBrush toothbrushes, including a unique two-speed version to enable both gum massage and brushing, and our first rechargeable SpinBrush.

The new products and marketing programs have enabled us to maintain category leadership in battery-powered toothbrushes, regain leadership in depilatory category, and expand our category leadership in condoms. Our new products team has also quickly applied its skills to our latest acquisition by developing and launching two new OxiClean products.

First, a new OxiClean portable stain remover that instantly dissolves most stains. The portable instant stain remover segment is a new and fast growing segment and we expect that the launch of this new product under the popular OxiClean brand name will have strong consumer appeal. Second, we are in the process of launching an Arm & Hammer laundry detergent that includes the stain fighting benefits of the OxiClean brand. This new co-branded and premium-priced product builds on the category trend towards 2-in-1 products. It will be available in liquid and powder form and delivers premium laundry detergent cleaning performance at a value price. Trade acceptance to-date has been very strong and we plan to support the launch with significant levels of dedicated TV and print advertising starting in this fourth quarter.

The OxiClean brand has achieved record shares in the first nine months of 2007 as a result of improved merchandising, increased distribution, and continued strong marketing support on the base OxiClean business. These two new products are expected to continue to drive record sales and share results on OxiClean going forward.

As mentioned earlier, the solid growth that we achieved in the first quarter on laundry detergent, cat litter, condom, Arm & Hammer toothpaste, SpinBrush, carpet deodorizer and depilatories was partially offset by declines, particularly in antiperspirants and value toothpaste. These are tough categories in which we face exceptionally strong competitors with significant scale advantages. However, about six months ago, we created a new team of gorilla marketers and a supporting cross-functional team to stem the decline in these categories. This team was too new to have an effect in the first half of 2007 since that timeframe was driven by customer decisions made before the team was formed. However, this team was able to begin to reduce our sales declines in these tough categories starting in the third quarter and is expected to continue to be reduce the decline of these brands in the fourth quarter and in 2008.

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

Finally I want to mention that Church & Dwight is fully supporting the industry-wide initiative to reduce the water content in liquid laundry detergents by moving to concentrated offerings. The rollout of concentrated line extension began this September in the southern half of the United States. So far, this rollout has gone very smoothly and the results are in line with expectation in terms of reactions by our customers, our competitors and most importantly, our consumers. If everything continues to go well, this initiative will be a winner for our customers, our consumers, and for manufacturers. We will complete the national launch to all retailers by mid-2008.

Now let me talk for a minute about our two other business units. Our International business units and our Specialty Product division. Our International business unit, which represents over 18% of our total sales had an excellent third quarter and broke through the $100 million level in net sales fourth quarter for the first time. This represents a 13% increase in total sales over the prior year. When acquisitions and foreign exchange are included, this translates into 3% organic growth. This increase was driven by strong sales result in Canada, Australia, France and Brazil.

On international front, I also want to note two important initiatives. First, we recently launched the Trojan brand in China and distribution is growing in key accounts and pharmacies. Second, we are reorganizing our Canadian subsidiary to streamline our total company within North America. The Canadian organizational restructuring will incur a fourth quarter charge of approximately $0.04 per share, but will generate cost savings in 2008. The improved organic growth, market expansions, and organizational restructuring in our international business unit reflects improved coordination between all functions in our domestic international units to leverage new product innovations, improved marketing campaigns, and supply chain best practices.

Now on our Specialty Products business unit, which represents about 11% of total company sales, net sales grew 22% over the last year's third quarter on a reported and organic basis. This significant growth was driven larger by strong demand by dairy farmers for our animal nutrition products despite recent price increases. Specialty Products also benefited from increased sales of our product in Brazil driven by the strengthening Brazilian economy.

Now let me switch gears to talk about the future. While we are pleased with the solid third quarter results, we are never satisfied. First, in terms of dealing with the issues, we have been able to absorb on unprecedented level of cost increases for raw materials, packaging and transportation since 2004 and still deliver solid gross margin improvement and earnings growth.

We have a well organized pipeline of cost savings initiatives in the areas of manufacturing, purchasing, and distribution that are being executed, and along with price increases taken in 2005, 2006, and 2007, have enabled us to more than offset the commodity cost increases. As we look forward, these cost saving initiatives will be bolstered by manufacturing synergies from the recently completed Orange Glo integration, liquid laundry and detergent compaction, volume scale leverage, and planned price increases on selected products in 2008. The net affect of all these initiatives will lead to further steady improvements in our gross margin in the fourth quarter of 2007 and will enable us to achieve our annual gross margin goal of 125 basis points of growth in 2008.

The improvement in our gross margin will also enable us to increase market spending in the fourth quarter of 2007 and in 2008. We will focus this increased marketing spending behind the strong pipeline of new product innovations at every one of our core category.

As I stated earlier, these new products increased spending have resulted in record sales and shares in 2007 in many of our key categories. We are very pleased with the results, but we know that we must continue to improve on all fronts and continue to stem the decline in categories where we are weak.

We will also continue to drive growth in our international markets by leveraging our new products and marketing program 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 specific guidance for the rest of the year. In view of our solid organic revenue growth, gross margin improvement and overhead expense control action in the third quarter, we are confident that these trends will continue in to the fourth quarter. As a result, we are raising our previously announced 2007 earnings per share forecast from $2.34 to $2.36 to$2.42 to $2.44. This goal includes the $0.04 per share gain in the sale of property in Canada. The $2.42 to $2.44 earnings per share forecast is equivalent to a 70% to 80% increase over 2006 results.

Now before I close I would like to comment on Unilever's announcement that it intends to sell its North American laundry business. Generally we do not comment on specific acquisition opportunity. However, in this case I want to remind you and inform the following. We will adhere to our practice of making business decisions that we believe are in the best long-term interest of our company. We have a great record with the acquisitions that we've made. We've being very successful in growing our laundry detergent business, both organically and through acquisitions such as the recent purchase of OxiClean.

And finally, we are extremely confident that we will able to continue to properly grow our laundry business, regardless of the future ownership of Unilever's North American laundry business.

In summary, we are very pleased with our third quarter and first nine months results for 2007, and we feel confident that we can deliver our new EPS forecast of the year.

Now that ends our presentation. I'll now open the call to any questions that you may have with Matt and I will do our best to answer. I do want to mention that due to travel commitments, Matt and I are in different locations. So, we may have to call a few audibles on the phone as to who takes the lead in answering your questions. Operator, please go ahead.

Question And Answer

Operator

Thank you. [Operator Instructions]. Your first question comes from the line of Alice Longley with Buckingham Research. Please proceed.

Alice Longley - Buckingham Research

Hi. Good morning.

James R. Craigie - Chairman and Chief Executive Officer

Hi Alice.

Alice Longley - Buckingham Research

Hi. First of all, the quarter was clearly an upside surprise and you had warned us about the cost of shipping to compaction. Can you tell us what in the quarter, if anything, was ahead of your expectations?

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

Yes, Alice, this is Matt. I think that anybody who is looking at our performance in this quarter is going to see that we had outsized earnings, but I think that we had pretty high expectations for sales in the second half because remember we said we thought that we would be able to head our 3% to 4% full year earnings target. There may have been some skepticism with respect to that externally, but from our point of view we expected to get there and right now we are on track to be there for the full year.

Alice Longley - Buckingham Research

Okay. Can you tell us how much pricing was in the organic number?

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

Yes.

Alice Longley - Buckingham Research

Just a percent?

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

Yes, it's mostly volume because we do have some price increases and the decreases that net, but I'd say in general that 6% is largely driven by volume year-over-year.

Alice Longley - Buckingham Research

Okay. So maybe 1% to 2% pricing in there?

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

No, it wouldn't even be as high as 2%.

Alice Longley - Buckingham Research

Okay. And are you planning any further... what are your pricing plans for next year?

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

Yes, well, we estimate there will be pricing about 20% of our total revenue base in 2008, and this could go higher based on where commodity prices settle out and what competitors' actions are.

Alice Longley - Buckingham Research

But for the time being, we should assume 1% to 2% pricing for next year too?

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

No, I wouldn't call it that way. I would just say that... it's 20% of our revenue base that we are looking at. You can translate that anyway you want, the percentage of the price increase will vary from one category to the next.

Alice Longley - Buckingham Research

Okay. And is... are OxiClean sales coming in on or ahead of your expectations or below, I guess?

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

Alright. The OGI acquisition is performing extremely well, it's... many measures, it's at or above our expectations.

Alice Longley - Buckingham Research

Okay. And I guess my last question and then I'll give up will be in compaction, are you seeing price per load holding up or coming through as you had expected in the shift to compaction?

James R. Craigie - Chairman and Chief Executive Officer

Alice, This is Jim. We pretty much have seen it come in as we expected and it's holding up very well. I think sometimes people get fooled by looking at which is the normal merchandising taking place out there, but as far as we see on averages it's holding up with expectations and where it was.

Alice Longley - Buckingham Research

Okay, thanks a lot.

James R. Craigie - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Jason Gere with Wachovia Capital Markets. Please Proceed.

Jason Gere - Wachovia Capital Markets, LCC

Good morning.

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

Hi Jason.

Jason Gere - Wachovia Capital Markets, LCC

Just in general, I mean, going back on compaction, can you just talk about... I mean, how you feel in general with the first wave? I know the costs initially ran a little bit higher maybe two quarters ago than what you were anticipating. So as you go to the second wave, can you just give a little bit more color on the whole process?

James R. Craigie - Chairman and Chief Executive Officer

Jason, it's Jim. It's going very smoothly, the retailer reaction has been excellent. They are in the process of resetting shelves, which vary from retailer to retailer. The manufacturers are all supporting it. Pricing is holding as we see it and the move's going very well. Secondly wave starts in mid-January of next year, third wave, the final wave starts in mid-April. Consumer reaction so far has been pretty much in line with what we expected and based on test markets. And everything seems to go well. As we've said, this is one of those moves which everybody can win on, both the consumers, the customers, and the manufacturer, and everything so far is very much in line with what we' expected.

Jason Gere - Wachovia Capital Markets, LCC

Can you quantify what, I guess, the transition costs were in the quarter? Are you able to break that out?

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

Yes, Jason, this is Matt. I wouldn't say that we're... our systems are so fine that we can quantify that, but there is a fair amount of expense internally as you shift from one process to another within our detergent plan.

Jason Gere - Wachovia Capital Markets, LCC

Okay.

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

I wouldn't hang a number on it.

Jason Gere - Wachovia Capital Markets, LCC

Okay. And then just in terms of commodity costs, can you break out what the actual impact on gross margins were in the quarter owing to material costs?

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

I think a better way to do it might be if you think about what we... our evergreen target has been 125 basis points of expansion on an annual basis and that is something that's not going to change in the future. I think next year our goal is going to be 100 to 125 basis points. But within this year, a logical question would be why were we unable to get or did we say we can get as high as 125 basis points. And the number one reason would be compaction, the second thing would be that the... actually number one reason is commodities; number two is compaction, it comes later than we originally expected. But I'd say it's easy to see that the lion share of the miss between our evergreen target and where we think we're going to come out will be driven by commodities.

Jason Gere - Wachovia Capital Markets, LCC

Okay. And then last question, certainly intrigued by Trojan in China and can you talk about the marketing there and I guess what you think is going to be more difficult getting on primetime in the US or reaching out to consumers out in China?

James R. Craigie - Chairman and Chief Executive Officer

Definitely latter will be, Jason. I mean, actually there is no TV advertising allowed in China on condoms by the government. So it's much more point-of-sales like type marketing going on over there. So right now we're in the basis of through a distributor building our distribution base in key markets over there. And marketing in the best way we can within the rules and limitations of the government there.

Jason Gere - Wachovia Capital Markets, LCC

Okay, great. Thanks a lot guys.

Operator

Your next question comes from the line of Bill Schmitz with Deutsche Bank. Please proceed.

William Schmitz - Deutsche Bank Securities

Hi. Good morning, guys.

James R. Craigie - Chairman and Chief Executive Officer

Hi Bill.

William Schmitz - Deutsche Bank Securities

Hi. If you look at your peer group, everyone has a pretty tepid growth in North America, then you guys came out and had some pretty strong numbers. On the laundry side, is there a trade down going on, are people trading down for more of the premium stuff to some of your brands?

James R. Craigie - Chairman and Chief Executive Officer

It's a good question, though we can't quantify that. Certainly when you're in the value side of any business, you're hoping when the economy is getting pretty rough out there you might benefit from it. But we can't put a finger on that, so we would hope that might happen.

William Schmitz - Deutsche Bank Securities

Okay. Are there any plans in place to kind of encourage that?

James R. Craigie - Chairman and Chief Executive Officer

Yes, stick right where we are.

William Schmitz - Deutsche Bank Securities

That was helpful. And then you said 20% of portfolio is taking pricing. Can you tell us what brands are going to take pricing?

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

Yes, Bill, this is Matt. We wouldn't call that just yes, simply because we'd have to notify the trade in advance. So we wouldn't talk about that on an earnings call.

William Schmitz - Deutsche Bank Securities

Okay. Because it seems the most impacted is liquid laundry obviously and can you take laundry pricing in light of all this compaction change going on with the consumer?

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

Well, we are not specifically focused on laundry, but certainly that would be high on our list because as you point out, the commodities are affecting laundry more than any other category. I mean, the two biggest of swingers for us are resin and diesel, and they are the two that are most unpredictable, but obviously we would be reacting to what our competitors do as well in pricing in laundry.

William Schmitz - Deutsche Bank Securities

Okay, great. And then just on Unilever thing, the Unilever laundry business, it was sort of cryptic what your prepared comments. I think from a synergy perspective, obviously makes great sense. And I think you have to get tons of cost out, I mean, is there something you would look at, it wasn't very clear in your comments?

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

Yes, we would not comment on M&A activity. I think that was just a general comment and they were meant to be general by Jim.

William Schmitz - Deutsche Bank Securities

Okay. And the point again is that you are okay with it, you are okay without it, kind of is that because I didn't understand what your comment was in there?

James R. Craigie - Chairman and Chief Executive Officer

Bill, I just wanted the world... we have done very well on our acquisitions in the past. And I want to make sure everybody understood that we will be doing well with or without the Unilever acquisition.

William Schmitz - Deutsche Bank Securities

Okay. Great. Thanks so much. Sorry, tax rate for next year is 36%, probably the right rate to use in the models?

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

Yes, I mean, for now. We would... we will update that in February when we come out with 2008.

William Schmitz - Deutsche Bank Securities

Okay. Great. Thanks so much.

James R. Craigie - Chairman and Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Bill Chappell with SunTrust.

William Chappell - SunTrust Robinson Humphrey

Good morning.

James R. Craigie - Chairman and Chief Executive Officer

Hi Bill.

William Chappell - SunTrust Robinson Humphrey

I guess, first on the specialty business, it's a little bit tougher one to track or forecast, but would you expect the trends in terms of top line growth to continue for the next few quarters?

James R. Craigie - Chairman and Chief Executive Officer

It's a tough one to call, Bill. It is highly dependent on the dairy farmers and the situation out there and there has been some significant price increases, but generally I don't know if they will be as high as they were recently, but generally we see some positive momentum there.

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

Hey, Bill, just to add to that, keep in mind that there is some pricing that's driving that as well. But the pricing is simply enabling us to catch up to some significant increases in some of the inputs that would be palm oil based.

William Chappell - SunTrust Robinson Humphrey

Sure. And would that business be part of the potential 20% of the pricing next year?

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

Yes, it could be.

William Chappell - SunTrust Robinson Humphrey

And then am I right in saying that there is no real advertising promotion related to that business, is there? So, you get some good leverage in the quarter from that growth?

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

Yes, that's true. There is very little marketing in SPD.

William Chappell - SunTrust Robinson Humphrey

Okay.

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

But their margins are half what the consumer domestic business is.

William Chappell - SunTrust Robinson Humphrey

So it could... the growth will also bring down kind of the gross margins too.

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

Yes, that's true. Yes, that has a negative effect on the consolidated gross margins as SPD, as the specialty products business grows.

William Chappell - SunTrust Robinson Humphrey

Okay. And then if you look at A&P and kind of your comments of stepping it up in the fourth quarter and into next year, is this something that all along you've planned or you are running ahead of schedule now so you can reinvest more in the business or are you seeing something out there where you feel like you need to put foot on the gas a little bit more?

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

It's a good question. You may recall that earlier in the year, we thought that Q3 and Q4 might be more level, and that's not the case right now. A few reasons for that, but I mean, the number one would be marketing. If you look at the first couple of quarters of this year, you would see that our marketing spend as a percent of sales increased year-over-year. It did not happen in the third quarter and the reasons for that is frankly we are just trying to time our advertising spend with the distribution that we are gaining on a lots of our new products. So it makes a lot more sense for it to have shipped from Q3 to Q4 so that's prudent. But the other things that are happening why Q4 would be far lower than Q3 is as you have the timing of marketing spend, we have some R&D projects and big ones that are concluding in the fourth quarter. And we normally have a fall off in sales from Q3 to Q4. So, if you go back historically, you will see that as well. And that's for the total company. And the last thing would be we have a charge in the fourth quarter for Canada.

James R. Craigie - Chairman and Chief Executive Officer

Bill, this is Jim. I would also add to that. We accelerated the launch of Arm & Hammer laundry detergent with OxiClean because of the test results were so terrific that we wanted to get that out there as fast as possible. So, that was one thing that wasn't quite in our initial plan, but we put that out there early to get a go and we are going to be spending some significant marketing dollars behind that.

William Chappell - SunTrust Robinson Humphrey

Okay. Great. Nice quarter.

James R. Craigie - Chairman and Chief Executive Officer

Thank you.

Operator

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

Joseph Altobello - CIBC World Markets

Thanks. Good morning, guys.

James R. Craigie - Chairman and Chief Executive Officer

Hi Joe.

Joseph Altobello - CIBC World Markets

Just one question actually for Matt. If you go back to sort of where guidance was earlier this year, the $2.34 to $2.36. You guys have talked about 3% to 4% organic growth and you probably will be at the high end of that range assuming a 6% organic number, let's say, in 4Q. So you are in that range. The gross margin looks like it's going to be down versus the 125 bps obviously that you talked about earlier this year. So, it seems like you guys are making a lot of progress on the SG&A front, much lower than what I was looking for. Could you just give a little color as to what's going on in that line to basically drive the earnings growth that we are seeing?

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

Are you talking about specifically SG&A, Joe?

Joseph Altobello - CIBC World Markets

Yes. I mean, beyond marketing obviously.

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

Yes. Frankly it's simply vigilance with respect to holding the line on SG&A, as simple as that. Part of our model is to keep a lid on SG&A and to grow our top line much faster than rise in our SG&A. And we are going to achieve that this year and in the future.

Joseph Altobello - CIBC World Markets

I mean, clearly it seems like you guys are doing much better than at least you anticipated as early as May.

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

Well, we expected to do very well on the SG&A line this year because we have a lot of process in place to monitor that within the company.

Joseph Altobello - CIBC World Markets

Okay. And lastly if I could, just probably a small number, but what are Trojan sales in China at this point?

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

As you know, we don't quote sales of any of our brands that specifically.

Joseph Altobello - CIBC World Markets

Okay, great, thanks.

Operator

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

Connie Maneaty - BMO Capital Markets Corp

Good morning.

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

Hi Connie.

Connie Maneaty - BMO Capital Markets Corp

About the Canadian streamlining, is there one charge or will there be charges next year? And what how do you quantify the benefit and what's the date for a completion?

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

Okay. Connie, that's just in the fourth quarter and what it relates to is we are going to be more closely integrating the Canadian business into our US supply chain. So sales and marketing will still be handled locally up there. We are also going to be exiting some distributor agreements up in Canada and so we will have some census reduction and the charge will relate to both census reduction and to the exit of the distribution agreement. And we expect that to have a pretty good payback within 18 months.

Connie Maneaty - BMO Capital Markets Corp

Okay. I am sorry, you are exiting the distribution and what was the other thing, census reduction?

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

Yes, I said we are going to be taking some people out in Canada, so that's pat of this reorganization.

Connie Maneaty - BMO Capital Markets Corp

Okay. On compaction, in the markets where it's been launched, what are you seeing in terms of repeat purchase or have consumers just loaded the pantries with the old stuff?

James R. Craigie - Chairman and Chief Executive Officer

It's pretty early to call that Connie, but so far we're seeing pretty normal repeat purchase, but it is difficult right now. There is still in some cases both non-compacted and compacted product on the shelves. But we're not sensing any stampede to shelves to buy the compacted products.

Connie Maneaty - BMO Capital Markets Corp

Okay. What is the market in China for condoms like at the moment? Are there are a lot of local brands? Is there any one that's dominant and what do peg the market potential of the category to be?

James R. Craigie - Chairman and Chief Executive Officer

It's a hard one Connie. It's mostly a government supplied market. The premium side of business is relatively small, but as that country has rapidly changing as we all know, we see the premium side and the branded side growing rapidly in the future. So, I don't want to give a number, but we all know the potential if that continues to happen, that's everybody is rushing to get over there and we are taking our best brand that has significant opportunity there. But it's way too early. And I think it was Jason's really comments, I would not say this is going to have any kind of significant impact on our earnings certainly for... not for next year.

Connie Maneaty - BMO Capital Markets Corp

Okay. And do you have any early thoughts, I mean, you started to give some thoughts on 2008, but can you give us a sense of your outlook for organic sales growth, commodity pressure, things like that?

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

Yes, hi, Connie, this is Matt. We normally provide all that guidance in February. But it is fair to say that we have been pretty consistent in what our corporate goals are, in that we annually want to have a target of 3% to 4% top line and I think with respect to gross margins of 100 to 125 basis point expansion, I think those are two things that will probably not change and that will be our target for 2008. But we will be far more specific in February.

Connie Maneaty - BMO Capital Markets Corp

And then I guess just one follow-on question. With the rollout of Arm & Hammer with OxiClean. Should we expect that marketing spending would be very heavy, not only in the fourth quarter, but also the first quarter of '08?

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

Yes.

Connie Maneaty - BMO Capital Markets Corp

Thanks.

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

That's accurate. So I think we'll see a lot more marketing spend in the next two quarters, Q4 and Q1.

Connie Maneaty - BMO Capital Markets Corp

Okay. Thank you very much.

James R. Craigie - Chairman and Chief Executive Officer

Thank you.

Operator

You have a follow-up question from the line of Alice Longley with Buckingham Research. Please proceed.

Alice Longley - Buckingham Research

Hi. Could you tell us what your organic growth was in detergents, if put the liquid and powder together? Were the detergents up in line with your 6% organic growth?

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

I don't know that I have it that fine for you, Alice, but that.. both categories are up as well. But I wouldn't peg it at 6%.

Alice Longley - Buckingham Research

So, maybe the two together growing slower than that, but the shift is to liquids with higher margins than the granular?

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

Yes, that's right.

Alice Longley - Buckingham Research

That would be the way to look at it?

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

Yes.

Alice Longley - Buckingham Research

Okay, and then on this OxiClean Portable Stain Remover, is that different from the pen?

James R. Craigie - Chairman and Chief Executive Officer

It's the same kind of performance as the Tide to Go pen. It's different technology, they have a pen type application, ours is a spray type application.

Alice Longley - Buckingham Research

Hasn't that been out awhile?

James R. Craigie - Chairman and Chief Executive Officer

It's been fully building distribution for about the last three to six months.

Alice Longley - Buckingham Research

Okay. And then on this Unilever detergent business, is there any reason you would want to buy them just theoretically given what has happened with your buying their value toothpaste?

James R. Craigie - Chairman and Chief Executive Officer

No correlation at all.

Alice Longley - Buckingham Research

So there would be a potential that could stabilize those business, those brands or turn them around in your opinion?

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

I don't think we can speculate on that.

Alice Longley - Buckingham Research

Okay, thank you.

James R. Craigie - Chairman and Chief Executive Officer

Yes, thank you.

Operator

You have a follow-up question from the line Bill Schmitz with Deutsche Bank. Please proceed.

William Schmitz - Deutsche Bank Securities

Hi guys, sorry to queue back in. Can we have some more color on the OxiClean, Arm & Hammer combination, when it ships, is that going to be compacted, kind of what the outlook is for it? And you said you had some pretty good feedback from the trade, can you just elaborate that a little bit?

James R. Craigie - Chairman and Chief Executive Officer

Yes, Bill, it's started shipping in September. It's a compacted product, it's got outstanding cleaning performance, equal in whitening to the category leader. It will be a value price, but it is premium price per wash load or per ounce to our other Arm & Hammer brands. It will be line priced though to support line merchandising. But we will make premium margins and pricing off of it. So, it is just a really outstanding laundry detergent that leverages the stain fighting benefits of OxiClean, mixed with a great freshening and cleaning benefits of Arm & Hammer, we are really excited about it.

William Schmitz - Deutsche Bank Securities

Okay, great, thanks so much.

Operator

You have a follow-up question from the line of Bill Chappell with SunTrust. Please proceed.

William Chappell - SunTrust Robinson Humphrey

Yes, just a quick follow-up on cash on the balance sheet, I mean, I guess, at what point do you have too much cash on the balance sheet and do you start putting it to use in terms of debt pay down or other things?

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

Yes, good question Bill. We have a almost $180 million of cash on the balance sheet. In my remarks I pointed out that we're 2.3 times levered total debt to EBITDA right now. So, we do on a regular basis evaluate what's the best use of cash. I mean, to-date it has been the pay down of debt. We did decide 90 days ago to stop paying down debt, primarily because of turbulence in the credit market. So we essentially built more of a warchest because as you know that we are focused on bolt-on acquisitions. You can't always predict when they are going to come, but we certainly are in a very good position to do OGI-size acquisition without accessing the credit markets. But that said, you can't predict when those going to happen. So it's a quarterly thing that we do. We evaluate what's the best use of our cash. There's no more I can say on that topic.

William Chappell - SunTrust Robinson Humphrey

And I guess following on that, are you seeing anything different on the acquisition landscape in terms of with the credit markets more things coming off, less things coming up for sale or is it pretty quiet?

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

Well, we have a pretty active M&A program. As Jim pointed out, we are pretty fussy about the types of acquisitions that we will pursue, but as far as the number of properties that might be available, we are still seeing a pretty healthy inventory. But again, because of the criteria we set for ourselves that would narrow it down to a very small number of potential targets.

William Chappell - SunTrust Robinson Humphrey

Okay, great.

Operator

Our final question comes from the line of Connie Maneaty with BMO Capital Markets Corp. Please Proceed.

Connie Maneaty - BMO Capital Markets Corp

Hi, I do have a follow up question on the compensation of the sales in Church & Dwight. I mean, over the last couple of years, you have gone to great pains to let us know that you have been pleased with the shift in the portfolio away from household products into personal care, even mentioning that if we were to look at it your sales split would now look pretty much like what P&G has. So with that as background, are there any reasons why we should think that you would alter that composition of sales within the portfolio with an acquisition in household products?

James R. Craigie - Chairman and Chief Executive Officer

Well, Connie, this is Jim. I mean honestly, we did that when we bought OGI, which we paid $325 million for about $200 million business and it's just been incredibly successful acquisition. So we have always said we are agnostic when it comes to... as far as whether it's household or personal care businesses. When we see a great deal come along that we think would be very accretive for our company, we will make it. And we don't care whether it's an household or personal care. In the same hand, we are not going to make a deal that we think will hurt us, just because we want to enhance one side of the portfolio or the other. So like I said, our last one was household based, it's terrific. We are very happy with it and we will just look at what comes along the landscape and be patient. I do wish... I do think some people out there are making some crazy deals and overpaying. So we are going to be patient and wait for the market to come to us if it has to.

Connie Maneaty - BMO Capital Markets Corp

Okay, thank you.

Operator

This concludes the presentation. You may now disconnect and have a good day.

James R. Craigie - Chairman and Chief Executive Officer

Thank you.

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Source: Church & Dwight Co., Inc. Q3 2007 Earnings Call Transcript
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