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Church & Dwight Co. (NYSE:CHD)

Q4 FY07 Earnings Call

February 05, 2008, 12:30 PM 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

William Schmitz - Deutsche Bank Securities

Connie Maneaty - BMO Capital Markets

Dara Mohsenian - JP Morgan Securities

Nik Modi - UBS Investment Research

Joseph Altobello - Oppenheimer & Co.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Church & Dwight fourth quarter and full-year 2007 earnings conference call. Before we begin I have been asked to remind you that this is... that this presentation... that in this presentation the company's management may make forward-looking statements regarding among other things the company's financial objectives and forecasts. These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings.

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

James R. Craigie - Chairman and Chief Executive Officer

Good afternoon. Folks, my name is Jim Craigie, I’m the Chairman and CEO of Church & Dwight, and if I can get my Chief Financial Officer stop talking, I’ll start the presentation here. Seriously it’s a pleasure to be with you today in New York City. I knew our business results are great, but I really have to thank you for that ticker-tape parade. Seriously I have to view my company very much like the New York Giants, which I’m a huge fan of, which is why I have the jersey here. We are major underdogs to competitors like Proctor & Gamble and Colgate, but we have a great team, we have a winning strategy, and we have great momentum. And I feel confident about my company's future success as the New York Giants felt when they walked on the field Sunday night and we’ll talk about the today. First I want to tell you this presentation is… they all do contain forward-looking statements. They represent our plans and expectations, but the actual results are subject to risks outside of our control. So, listeners beware.

We have a four-part presentation today. I’m going to kickoff for those of you who may not be familiar with the company, a little history of the Church & Dwight Company. And then I’m going to talk about our future vision, then I’ll turn over to Matt to take you through some details of our 2007 financial results and then I’ll get back up here and talk briefly about our 2008 earnings guidance. For those of you may not be aware of the Church & Dwight Company, it actually started over 160 years ago, Dr. Austin Church and John Dwight got together, their families each had a large baking soda business. Then they put their businesses together and had a monopoly on the baking soda business and they converted to the ARM & HAMMER name. And that was the beginning product of the company. Today that brand name has been diversified into many different product lines and the one fact I love to say is that no other brand covers more isles of the grocery stores than the ARM & HAMMER brand, you can see all the different categories that we’re in. On top of that we had a lot of acquisitions particularly since 2001, you can see we’ve added businesses in the laundry detergent business, in personal care with underarm deodorants and Nair… Nair is the depilatory, underarm deodorants like Arrid, Trojan condom business, the First Response pregnancy business, we picked up two face brands, that we bought the Crest SpinBrush business just two years ago, and most recently bought the Orange Glo Company, which had the OxiClean brand.

Consumers love our product and this is a very fascinating slide we put together. You can see from this a lot of facts on there, but you can see we used to bake over 688 trillion choco-chip cookies, we are involved with 450 million loads of laundry every year, and we enable 520 million safe sex acts. And fairness is a very integral part of your life and it just tells how deeply immersed our product lines are in people's lives. My portfolio has also very rapid change as the result of the acquisitions. You can see here, in the year 2000, we were largely a household product company and then the acquisitions we’ve made from since have changed the whole profile of our company and today we have a very well-balanced portfolio between household and personal care, very much like Procter & Gamble. And that's a great advantage that makes us very ambivalent about future businesses that we acquire. We have plans in household, we have plans in personal care, and as long as the acquisition meets our targets we will buy in either side of the fleet.

We’ve achieved very consistent and top-tier earnings per share growth over the past five years despite commodity cost pressures. Our EPS growth is driven by a combination of solid organic growth and acquisition synergies, and we expect to continue this trajectory in the future through solid organic growth and future acquisitions. You can see on this slide, that we have more than tripled our market cap since the year 2000. And we are TSR junkies. I know you have a lot of choices to make what the companies you invest for money in. We know you are almost required to look at the large-cap players like Procter & Gamble and Kimberly-Clark. But if you look at our history, we’ve delivered a tremendous amount of total shareholder return to our shareholders. We’ve actually been a better investment over the last 10 years than every company on this list. $100 invested in Church & Dwight 10 years ago would be worth $510 today. In contrast, if you've got a median return of the companies on the list, that would be about 7.5% return, and that $100 today will be worth about $206, that's quite a difference.

Let me talk about our future vision. To start with, the most important thing is a very strong portfolio of leading brands, you can see on this chart the brands that we want to be in number one or number two brands. If we're not number one or number two, we want to have a very defendable niche like we have in the laundry business with a very solid value positioning. Our vision is quite clear. We are focused on organically building those number one or two brands. We are explicitly focused on total shareholder return. And our goal is to deliver shareholder return at places in the top quartile of the S&P 500 over the long term.

You can drive... or you can tie the main drivers of shareholder value being growth, margins, and free cash flow directly to our strategic priorities. In that context, we are going to continue to remain focused on improving the positioning of our brands in the marketplace, accelerating the rate of innovation of new products, entering new global markets and expanding our business in existing markets, driving costs out of our system both the supply chain and overhead costs, and pursuing TSR accretive acquisitions to build up on our strong foundation. And I want to spend a few minutes talking about each of these TSR drivers.

Let's start first with improved brand positioning. We’d seek to drive strong organic growth through a combination of factors. We try to put our marketing... more impactful marketing every year. We seek bigger and better new products, improved sales execution. We focus our spending behind our key brands and we want to minimize the decline of our weaker brands. I will give you two case examples of those. First, our biggest brand, the ARM & HAMMER brand, which represents about 35% of our total portfolio. This is a brand consumers love. You can see from this ranking against others brands out there. It's one of the most beloved brands in America. And the good news is 75% of the US households purchase at least one form of ARM & HAMMER. However, the majority of households, almost 50% of that, only purchase one form. And we ask why, they honestly just aren't aware of the other forms of ARM & HAMMER. So, it's a great opportunity for us to get people to try other forms.

A big part of the problem was, if you went back before 2005, the ARM & HAMMER brand was what you would call a dysfunctional family. They had different packaging graphics among the forms, there was minimum product news, they had different advertising messages for each of the forms, and it was minimal efforts at retail to join the products together. Well, since that we made a great effort to change this dysfunctional family into a highly performing family, you can see on the packaging side what we looked like before and what we look like today, the product line does look like a family. They are a very pretty family with very attractive packaging. We've also launched a SKU of new products out there. I'll talk about these over the course of my talk today. Two examples to start with, as we took our oldest product, ARM & HAMMER Baking Soda has been out there over 160 years. And two years ago we launched it in a form… it looks like the hockey puck that kind of attaches to the side of the refrigerator. By getting it up off the shelf and up in the air on the side shelf, it gives better odor elimination in the refrigerator and keeps your fruits smelling fresher and longer.

We've also launched some other great new products. We started a sub line called Essentials. It’s a line of products made largely from natural ingredients that appeal to a rapidly growing segment and environmentally friendly consumers. This is available already in several forms of ARM & HAMMER, laundry detergents, the fabric softeners, and you'll see it in more forms in the near future. I also want to say, we're going to play the advertising, we could show you for a second one of commercials that have unified the brand. Please play the commercial. [Advertisement].

And this effort is working. This brand is growing at a rate of 1% in 2004, it is now growing at a rate of 7% this past year. So, we are very proud of that. Le me talk about our second biggest brand, Trojan. This is a great example of brand positioning with a number one brand that’s facing opportunities out there to double or triple the size of this business. Here is the problem, the United States has the worse statistics on sexually transmitted disease than any developed nation. You could see the facts up there. I mean there is literally 65 million people, almost one in five people in this country have an incurable sexually transmitted disease. The rates of people getting in are growing very rapidly, you can read the rest of the statistics there. It's a very shocking situation. And other than accidents [ph], the only way to stop a sexually transmitted disease is use a condom. Being simple, three-fourth of the time people aren't doing it. And the situation is when two people are having sex and they don't know each other’s sexual health situation and the only way again to stop disease is a condom, three out of four times people are not using a condom, three out of four times they are risking getting a sexual disease. We are attacking that problem. We are doing it in every form of media we can out there from traditional TV and print, to magazines to websites, online, in-school, in-store. We’ve also increased over the last several years our advertising spending by over 50% and we are trying some very provocative campaigns. I would like to show you this one that just broke last June. Please roll the commercial. [Advertisement].

We're trying to appeal to your psyche, we don't know what women call men who don't care about them, they call them pigs. We're trying to impress women who are 50% more likely to get an STD than a guy, to be careful about who you want to go home with. Do you want to go home with a guy who care's about you, who's going to protect you or you want to go home with a pig. Let us see, it’s in process and the early read on that is very promising and people are starting to become more aware of the risk that they are taking.

We've also taken the brand into new adjoining categories, launching vibrating rings out there and we only sell those with a condom and we've also just recently launched in the finger vibrators and it's working. You can see here the history of the company since 1985. We had terrific results and even, we get to the point where our 50, 60, 70 share, you kind of believe you can't keep growing the share that we have, we've grown just in the past year our share by over two points.

And I said earlier about focusing our marketing efforts and it is part of the brand repositioning and we've done that. We have focused our marketing spending behind our largest brands and after all a dollar is a dollar and a dollar spent in a larger and more powerful brand will generate more revenues and profits than in weaker brands.

And you can see these are our key powerful brands, we've increased the spending behind them and we got terrific consumption results as a result of that in 2007. That doesn't mean we're getting up in our weaker brands, we do have some weaker brands in categories like antiperspirants and value toothpaste. They represent about 10% of our total business, but we changed the way we go to market on those brands. It's much more retail focused, it’s much more account by account and this effort led by a new team that we assigned these brands to has actually slowed the sales decline of these brands in half in 2007, so we're very happy with that result.

Let me turn next to TSR drivers, which is accelerating new product development. New product developments had a very big impact on our success, we put a new product team focused just on new product development in 2006. Last year 2007 they launched a record number of new products, they just generate a very strong organic growth, you can see there a 5% and they’ve developed a very strong pipeline of products for future growth.

Here is a few examples, in late 2007 we launched ARM & HAMMER Laundry Detergent with OxiClean that combines the great deodorization and cleaning power of ARM & HAMMER detergents, with the powerful stain fighting benefits of OxiClean and this terrific co-branded product delivers premium laundry detergent cleaning performance at a value price and we supported this new product launch with strong marketing programs and it’s off to a fantastic start. It's one of our most successful new product launches ever.

In cat litter, in late 2007 we also launched a product called Odor Alert, which is the only cat litter that changes color when the cat soils it, so the consumer can see and remove the soiled product before they smell it. This is also off to a great start, led to some record double-digit share gains and volume gains in our cat litter business and we'll continue to grow the distribution in this business in 2008 for further growth. The products that are brand new coming to market, first one is new First Response Gold. This is a pregnancy kit that uses what we call gold technology, making it more sensitive than other kits and gives you accurate results within five days after you... before your miss period. This brand is on fire. We gained market leadership on this business in pregnancy kits last year and we exited the year with great momentum and this product will help us keep that momentum in 2008.

Our Trojan business, as I told you the story before on that one, but we're capitalizing the momentum in that business. We're going after the thin segment, which is a growing segment of the condom category and it provides… which provides obviously greater sensitivity. And we're launching two new products this year, Trojan Thintensity and Magnum Thin.

In oral care, we have two terrific products. First, a product we called ARM & HAMMER Age Defying toothpaste, which protects and rebuilds enamel.

Secondly, kind of a unique concept in toothpaste, this is what we call a Whitening Booster and this a tube that looks like toothpaste, but you basically will apply this on top of your toothpaste. With your our toothpaste on your brush first and you apply this on top of it and it gives you two times the whitening power of the leading whitening strips. And if you've ever used whitening strips how messy and inconvenient they are. So, this is a very much more convenient and less-messy way of getting... of whitening your teeth.

Also in the depilatory line, we have a new product called Shower Power. This is quite unique. Most women like to shave their legs in the shower using razors. You couldn't do that before with depilatories because they would wash off before they had their effect of removing the hair. Well, this product has been reformulated. It's now thick enough, a woman can put it on, get in the shower, take her shower, and two to three minutes later when she's finishing her shower, she can take a sponge and wipe it off and you get the benefits of depilatories versus razors. Razors kind of leave you with lots of nicks and cuts and scrapes. Depilatories leave your skin smoother and the time lasts longer between shaving because they cut the hair off lower on the sensitive skin. So, it's a great benefit that we hope will grow the whole depilatory category.

Let me talk next about the next TSR driver, which is increasing global leverage. As you can see here, our international profile changed a great deal over the past seven years largely as a result of the acquisitions we've made. We went from 2% of our net revenue in the year 2000 to now 17% of our total business. And this is very, very important part of our growth. The international business represents, like I said, 17% of our net sales and now it represents 13% of our operating income and that's almost all personal care products, which have higher margins, so good potential. We’ve got very steady growth in our key subsidiaries. As you can see there Canada, Mexico, UK, France, and Australia. We are also entering some new large markets out there. We have a fast-growing business in Brazil, a depilatory business, which we bought a business down there to help that. And in China, we have OxiClean and SpinBrush and we’ve recently launched Trojan via some distributors in China. So that's off to a good start and we're also... we export our products to 70 other countries.

Next, let me talk about the TSR driver of achieving lower cost. We've consistently grown our earnings over the past three years despite commodity pressures and the key driver of that EPS growth was gross margin. We have a very laser focus on organic cost savings and acquisition synergies. You can see from this chart, we expanded gross margins by 900 basis points since 2003, and even in years like 2005 and 2007, which were shocked with significant cost increases, we were able to hold gross margin in those years as a result of our cost-cutting machine. And we expect to continue to increase gross margin by 100 basis points a year starting again in 2008 despite significant cost increases. And that will be driven by a finely tuned company-wide productivity program, acquisitions synergies, laundry compaction, and pricing. And Matt will talk more about that in a few minutes.

As a company, we set a goal for the future. Our goal is to get to a 50% gross margin. We're going to do that at a rate of 100 basis points to 125 basis points a year. And we see half of that coming from organic cost savings and half of that coming from acquisitions. And there's a lot of sources of those organic savings. We have a very effective cost-saving program that has been in place for years. We'll be selectively pricing brands to offset commodity costs. We've reduced our trade spending, reduced our SKUs, in this past year alone we've cut our SKUs by 39%, enabled us to close a warehouse and save a lot of money. And we also see us investing in state-of-the-art manufacturing facilities to help reduce our costs.

Last but not least, the TSR drivers creating value through mergers and acquisitions... sorry about the button here, must have been a patriot button here... quite operative, right. We're very disciplined about the acquisitions that we make. We will make only TSR accretive acquisitions. We will buy the brands at reasonable prices so we can capture value and we will drive significant cost synergies out of the businesses we buy by integrating into our company's strong foundation.

I will just give you a fact on that a little factoid as I call it. Four years ago when I entered the company, the sales in this company were $1.5 billion and we had slightly over 4,000 employees. Four years later, our sales are $2.2 billion, 50% larger and there are 3.800 employees in our company. So, we have done 50% more sales with less employees, and that's what we seek to do. We're very focused on finding brands that are bolt-on number one and number two brands or defendable niches. They have higher growth, higher margin brands, and they have sources of sustainable competitive advantage.

And our last two acquisitions were in the size of about $300 million. That’s about the size we seek to make. Our competitors can have $1 billion brands. We will be very happy to have number one or number brand in the $300 million to $400 million category and grow it very successfully as we have with businesses like OxiClean.

Let me give you an example of that. This is the... what's called the Orange Glo Company, its key brand was OxiClean and that was owned by the Apple Family, kind of the fruitcake situation there. But we bought this company in late 2006. It had several appealing products, the largest of which was OxiClean. And this is a great example of what we do as a company. Now here is a… OxiClean was a premium-priced household brand. It was in a growth category. The additive... laundry additive category is $1 billion category. This was the number one brand. It's got what you love about household products is the high purchase frequency and it bolted on beautifully to our businesses. We already made liquid and powder detergents and this product was being sourced out of co-packers at high margins. So, we bought a number one brand, we bolted it onto our laundry business and took a lot of costs out in the process. We also had more muscle at retail than they did, so we closed a lot of distribution boys, we increased yields for our merchandising support, we increased the advertising support, we launched some innovative new products like the little [inaudible] that kind of leveraged with the success tied go... [inaudible] and we drove a lot of synergies out of the cost supply chain, and the results have been terrific.

We have gained over 9 share points from this business in just 18 months and already was the number one brand in this category. We’ve delivered over $20 million in synergies and we usually took this brand, as I mentioned before, we co-branded it with ARM & HAMMER to create a terrific new laundry detergent that offers premium laundry performance at a value price still.

Now, before I turn the podium over to Matt for a few minutes to talk about our results, let me talk about our experience and motivated management team. Our company loves to attract people and I am example of that, but my whole staff is too. We've been trained at the Giants, we've been trained at the Procter & Gambles, the Crest, Reckitt Benckiser, Johnson & Johnson, and then we’ve also gone on to the private equity world and we have learned how to work and turn around situations with nickels and dimes versus the $100 bills you have in the big companies. And we love this environment. It's a small environment. You can really control the company in what you do and you have a big impact on the company from your performance. You are not just one of the 1,000 people like you.

We are also pretty stingy, I hate to say, we don't have company cars, we don't company planes, we don't have club memberships, but that's just fine. We are also committed to creating shareholder value, our net worth only increases with your net worth, because our bonuses are tied to the packers that drive the business, and our equity is 100% stock option. So that stock doesn't go up is what you want, we don't get rich, you don't get rich, so we are in the same boat. And we also have significance in the game.

Let me turn it over for a few minutes to Matt who is going to take you through the 2007 financial results and I'll come back up and talk about the earnings guidance. Thank you.

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

Hello, everybody. I am going to do four things. I am going to spend a few minutes on our business model, and I am going to review Q4 and the full year and spend a little bit of time on the balance sheet, and I'm going to conclude with our priorities for 2008, and then I am going to turn it back over to Jim, he will talk about the guidance a little bit.

We have a pretty simple formula, though if you're new to Church & Dwight what you are going to hear us talk about constantly is following. It's pretty simple, we focus on three things, top line growth 3% to 4% annual growth. So this is an evergreen target within the company. Second thing is margins. It's common out within the company, what we try to do every year is expand our gross margins 100 basis points and 125 basis points and increase our operating margins 70 basis points. And the third thing is free cash flow and two things about this company is, it's like a lot of CPG companies, it's not capital intensive. So, we’re pretty vigilant about how much we spend in the plants, as well as our working capital management. I'm going to take you through some of those stats later. Free cash flow conversion is important to us as well. So quality of earnings matters.

Okay, next slide is important, too. You can tell a lot about a company by what gets talked about internally. So, we’ve used this slide before, and we use this internally as well as the last slide quite frequently with employees. And if you look at the right-hand side of this slide, these tactical programs. So, what do we mean by all these various programs?

So, let's start with the top on the P&L, so sales. New product development, we have a new product development team. You've heard Jim talk about that was formed in early 2006. So, it’s really bore fruit in 2007 with 51 new products that we launched. In 2008, we are going to have 35 new products coming out, fewer but bigger.

If you go down the page now, trade spending, what's meant by that. We spend several hundred million dollars a year with the trade. So, this is an amount that’s netted in our net sales amount. So, we're constantly asking ourselves, okay, what kind of lift are we getting from the money that we are spending in trade?

Continuing down cost reduction, SG&A. We try to grow the SG&A line... we actually don't try to grow it, but if it's going to grow, we try to grow it at a slower rate than our top line, so say 2%. As far as procurement goes, we are a much bigger company than we were a number of years ago as a result of acquisitions as Jim said. 2003, this was a $1 billion company; today it’s a $2.2 billion company. So, we're trying to take more advantage of the kind of leverage that we should have as a result of that size.

Marketing spend. We spend over $2 million a year in marketing. So, we're constantly asking ourselves, hey, are we getting the return on what we're spending in television and print? The same is true for R&D, we spent $50 million in R&D in 2007. The same question, that's 2.3% of sales. Are we getting the return on that? And then M&A, we acquired Orange Glo in August of 2006. So, the constant drumbeat is, hey, are we getting the synergies that we expected? We expected $20 million of synergies, $10 million from SG&A and $10 million from cost of goods sold. Now cost goods sold benefit, we got a little bit of it in the fourth quarter, we’re going to get three quarters of it next year, but I would say more about that in a moment.

And then finally, cash, I'm going to cover this a little bit later on, but you see the trends in this company is pretty consistent with respect to how much we spend on CapEx as a percentage of sales. And there's also how much working capital as a percentage of sales that we allow.

Okay, 2007, terrific year with 19% EPS growth, we had a 5% organic growth, that is a little bit supercharged by the results in our specialty products business, and we got our targeted 70 basis points of operating margin expansion and we did get did get ODI integrated into the company. So we now not only are obviously shipping and building, we have all the co-packers that we've taken out of the game and we are now producing in-house as of the fourth quarter. Then final free cash, we’d a record $200 million of free cash flow in 2007.

Now, I am going to roll through the fourth quarter, the headlines. So EPS $0.46, $0.36 last year, 9% organic growth, operating margin is 160 basis points, and free cash flow of $77 million. So now, if you look at some of the pieces, we’ll start with the domestic business, so domestic business had terrific topline growth. Lots of contributors there, cat litter, as Jim talked about earlier, a great quarter; Trojan, SpinBrush a terrific quarter as well, lots of displays out there, pregnancy kits, and also ARM & HAMMER toothpaste. So all that combined to have a 70 basis points expansion in gross margins. And something to keep in mind there is that we have all the commodity headwinds that all the other CPG companies are dealing with. So we had to overcome that as well as the transitional costs that we experience as a result of liquid laundry concentration. So it was a terrific quarter for the domestic business.

Moving to international, we’d a nice quarter as well. We dad 3% organic growth in the quarter. And then finally, the specialty products business, you see that number, you see 31% revenue growth, so that is obviously a pretty supercharged number. So what is driving that? What's driving that is primarily our animal nutrition business. You heard Jim mention that the animal nutrition business primarily serves the dairy market. So what is going on in dairy? What is going on in dairy is just tremendous demand for milk worldwide, particularly in developing countries. So that combined with a weak dollar has made exports just explode. And if you are a student of this market, you probably also know that inventories have been declining over the past three years, this is powdered milk inventories. So what that means is that historical production actually wasn't matching demand. So this bodes well for this business going forward.

On the downside, one of the key ingredients in this business is something called palm fatty acid distillate. The things that you really need to know is that simply that that has been driven up because of demand for biofuels. So a terrific quarter from the topline, both volume and price, but certainly on the cost of goods sold, we only got hammered from the increases in palm fatty acid distillate. So what they did was drove the gross margins down. So we have a mix issue in the fourth quarter. So this is the business that drove us… the margin percentage down year-over-year.

Okay, here are the numbers for the fourth quarter. So you see going down the page we had 9% organic growth. Gross margin, I just talked about, that was largely driven by the results in the specialty products business. Marketing, a lot of spending behind the brands, 13% of sales, and SG&A we got a nice leverage leap year-over-year, so that all combines to expand our gross margins by 160 basis points. And you also see that we overcame very different effective tax rate in 2007 versus 2006. You may recall in 2006 Congress passed the R&D tax credit very late in the year, so we got the full-year benefit last year in the fourth quarter, so all in all, a very nice quarter for the company. Now, here is the full-year, up 19% to 246, 207 last year, 5% organic growth, again we had the 70 basis points margin expansion and $200 million of free cash flow. And again, similar slide as before, we're going through each of the businesses, first domestic. So, domestic growth driven by OGI of course, so we had full-year of OGI in our numbers for 2007, but also Super Scoop, ARM & HAMMER liquid laundry, Trojan, SpinBrush, all had terrific years, and we were able to hold gross margins in spite of the commodity headwinds and the transition cost of concentration.

International also delivered organic growth, so their organic growth was over 3%, and also had gross margin expansion. And finally, specialty products, nice year with respect to volumes, but also the issue of palm fatty acid derivatives drove their margins down year-over-year. Here are the numbers, so 5% organic growth, gross margin flat year-over-year. The marketing is an interesting trend, if you went back to 2005 we spent 10.6% of sales on marketing, so you see a 50 basis points increase '05 to '06, another 50 basis from '06 to '07, and we should see a similar trend in 2008. SG&A, a very nice trend there, down year-over-year 120 basis points, and then operating margins of 70 basis points expansion, and finally EPS up 19%.

Little more detail on product lines here, so you can see the break-up between household products and personal care. So that 20%, that's driven largely by the OxiClean business somewhere… Orange Glo. Remember, we had 12 months of that in 2007. But also ARM & HAMMER liquid and odor were driving that. Personal Care, driven by Trojan's SpinBrush and Nair, but I think that one thing to keep in mind here is that, that is net of the value toothpaste businesses and aerosol antiperspirant business, which had been problems for us and have been declining year-over-year. So that is a really nice result for personal care on a full-year basis.

Now, here are the quarters, just another very interesting and telling slide. So you see in Q1 when we started the year, we were down 1% and that is because we had a very difficult comp year-over-year, but then you can see how the organic growth really accelerated in Q2, Q3 and Q4. So strong last three quarters of the year. We ended above our 3% to 4% target. Innovation is a big driver of this, but also I think a lot of good things happened in packaging, our marketing is working giving some additional distribution as well. And the results of our specialty products business, they're up tremendously year-over-year. That drove us to the way over our range of 3% to 4%, up to 5%. We ended the year with a lot of momentum, so you run your eyes down the page and you see these are very important products to us and we had record market shares. So this is a very good sign for Church & Dwight as we enter 2008.

Now here's the balance sheet, just a kind of a brief look here. The numbers are a little bit smaller, but if I call your eyes to the middle of the page, you see net debt right now is $606 million. That is the lowest it’s been since September of 2001. It's very, very low right now for the company. Second thing is working capital, so that number in the first line of 295. The way we calculate that is we have simply inventory accounts receivable and accounts payable tracking around 13% of sales and similar to where we were in 2006, so very consistent.

Capital investment, so you can see historically we will spend about 2.2% to 2.4% of sales on CapEx. So, we spent around $49 million in 2007, expectation would be around $55 million in 2008, so enough said there.

Okay, one of my favorite slides is free cash flow conversion. A very good measure of earnings quality is cash flow conversion, so we generated $200 million of free cash flow. Our definition of free cash flow, by the way, is cash from operations minus CapEx, so that's before dividends, so 118% conversion rate. What's notable here is that we've had 100% or better now three years in a row. I mean free cash flow conversion is just a very important contributor to shareholder value.

EBITDA, just one more illustration of EBITDA, this is defined by our bank agreement. You can see that [inaudible] by 21% over this period of time. So now our financial capacity, very strong balance sheet right now. You can see we're sitting on a lot of cash, $250 million, net debt as I said before, around $600 million, and we're in a very good position to be acquisitive. With a debt-to-EBITDA of 2.3, our stated target is 2 to 3 times, and that's total debt-to-EBITDA. If you look at it from a net debt standpoint, we're well under 2 right now.

And now, the uses of free cash flow. What this slide is intended to do is to give everybody a handle on how we intend to deploy free cash flow. It's an important decision and one that's of great interest to shareholders. We regularly evaluate what is the best way to use our cash, and they are prioritized for you on this slide. If you saw this slide last year, you see debt reduction was at the top of the page, and that is because we had a goal to drive our debt-to-EBITDA down to the low end of the range, which we have done right now. So our M&A has moved up on our list as a result of the debt ratios being now in a comfortable range. I would say just moving down the page, we are going to be responsibly investing in new product development as well as maintain our current CapEx levels to protect our brands. Debt reduction, if you’ve listened to our earlier calls in the year, you’d know that we'd started to stockpile cash starting in June 2007 when the credit markets went off a cliff. So we’ll probably continue to do so in the foreseeable future. The reason we did that is because our credit facility is largely term debt. So if you pay down term debt, you don't get to borrow it back. We don't have a big revolver in our credit facility.

And finally, return of cash to shareholders, that's last in the list right now, but that's something that we evaluate periodically as a management as well as the Board of the company's focus right now, is growth. So consequently, there is now intention of share buybacks at the moment. And last, I get this question quite frequently, but we haven't bought back shares since 2001.

And now, priorities for 2008, there should be no surprises on this page, obviously a 3% to 4% topline growth. I mentioned earlier that we have 35 new product launches planned in 2008. Most of those will go out during the first six months of the year. Second on the list is 100 basis points of gross margin improvement. These will fall differently and I'm going to show you that on the next slide. So we have OGI manufacturing synergies. So as of October, we started manufacturing all the Orange Glo, or OxiClean products in our plants. So we had one quarter of benefit in Q4, we're going to get three quarters next year.

Second on the list, price increases. You probably saw in the release we have price increases planned for Trojan, baking soda as well as cat litter. It’s also true we’re going to have price increases in international and also in our specially products business. And an obvious question might be, what might be the average price increase for this 20% of the company, and that would be around 5%. The thing to keep in mind though is that typically when your price increases, you also have some hits on volume. So we clearly do not expect all that to fall down through gross profit line, but we would expect a good piece of it fall. And then benefits of concentrated liquid laundry, you probably know that the first wave is complete. The second wave started on Jan 21. The third wave starts on April 21. So as we exit 2008, we're going to start getting the full benefit of liquid laundry compaction. But in the meantime, there are transition costs not only that we experienced in Q4, but we will have a bumpy ride initially on the way but there... the benefits of liquid laundry, it’s going to be a net positive for us in 2008 and it's going to help us expand our margins.

Cost reduction programs, those are things that we do all the time, they are ongoing. And the last analysis is free cash flow conversion. When we're meeting in next year we would like to have… continue our steak of 100% free cash flow conversion. We do sometimes… some opportunities reduce our international inventories and hence SKU reduction is something that we are very vigilant about as well. This is just to burn it in, the comment I just made a moment ago, how to think about the catalysts for gross margin in 2008.

Now I think about this… there are four leverage that we have. Two of them are ongoing. What most companies are going to avail themselves of, that is cost reduction and pricing. There are two others that are specific to Church & Dwight. Those will be the OGI synergies and laundry compaction. Now, the timing of those are going to be a little bit different, cost reduction programs obviously hit throughout the year, the pricing… and domestic being our biggest business, is going to start on February and beyond. So we get more of the benefits after Q1. The OGI synergies are really going to be Q1, Q2, Q3 because Q4 we are going to the lap it year-over-year. And laundry compaction is just ongoing throughout the year. So we would expect gross margin expansion in each quarter, the lightest quarter being Q1. We would expect it to build as we move through the year.

That concludes my remarks. I am going to bring Jim back up here in order to wrap it up.

James R. Craigie - Chairman and Chief Executive Officer

Thanks, Matt. Can I have the [inaudible] back? Thank you. Good handoff. This is generally the shareholder return model we have used historically, and Matt kind of took you through the pieces. I would just tell you, we are very confident to achieve all these metrics including the gross margin expansion despite the significant commodity headwinds out there. As Matt said, we will be raising price at this point on about 20% of our business and everyday we pickup news from some of our competitors, so we might even placed beyond that in 2008 we pick up news. And we’re going to be increasing our marketing spending as Matt said in order to deliver that operating margin improvement by at least 70 basis points. This is the official release you saw out there. And basically it says, at point in time, given what's going on in the new environment, we feel comfortable at raising our earnings per share target by 13% over 2007 to a target of $2.77. That will be driven by very solid organic growth. Gross margin expansion of at least 100 basis points, and that will be driven, as Mat said, through the combination of pricing, the OGI synergies, laundry compaction, and ongoing cost savings across the company. And we will also be increasing our market spending.

So let me open the floor now to questions. And also I would ask you, when you ask a question, please state your name, your company, so the people listening in the conference can answer.

Question and Answer

James R. Craigie - Chairman and Chief Executive Officer

Alice?

Alice Longley - Buckingham Research

Alice Longley, Buckingham. My question is about Unilever Detergents. I think everybody knows that they are up for sale I guess, and could you outline why Unilever Detergents might be a good acquisition for you, why it might not be a good acquisition for you, and in particular talk about the market share losses in Unilever Detergents, why would you possibly want that business given that they keep losing market share, aside from the cost synergies?

James R. Craigie - Chairman and Chief Executive Officer

Okay. I would love to talk about acquisitions, but I legally can't.

Alice Longley - Buckingham Research

Just speculatives.

James R. Craigie - Chairman and Chief Executive Officer

Just speculatives, right. Well, the patriots were a 12-point speculative answer and that didn't work out either. I would say… as I said before, we are very ambivalent about between buying household and personal care. Our last acquisition was a household business… actually a laundry business. So we look at everything in those categories. It’d awful nice to pick up a nice chunk of a laundry business. The OGI acquisition was tremendously beneficial to our company. So I would just say, like other players we are looking at it, and there are pluses and minuses in a deal that honestly I can't go into, even for competitive reasons I don't want to go into it. But it's a big thing out there right now. We are definitely looking at it, I’ll tell you that, I shouldn't even tell you that, but I can't tell you anymore than that.

Alice Longley - Buckingham Research

Can you compare it to the acquisition of the Unilever Toothpaste, which continued to lose share after you bought them? Do you think that this situation is different and you could possibly stop market share loses in those detergents?

James R. Craigie - Chairman and Chief Executive Officer

That I shouldn't say anything. I would just say to you that I would… those are night and day, those toothpaste... honestly, the one deal we wished we never made. Those brands were in much worse shape. They were really old, clouding brands, these are not. There are some very good brands in that portfolio of Unilever Laundry and in much better shape. So they the have been declining, but nothing near what the Unilever Toothpaste brands were.

Unidentified Analyst - JP Morgan Securities

[inaudible] from JP Morgan. Aside from laundry, are there any specific parts of your portfolio that you think you need to fill holes with acquisitions or any ancillary businesses that you would be attractive to combine with what you've got?

James R. Craigie - Chairman and Chief Executive Officer

It's a good question. I don't think we have any holes quite honestly. I think there is always ways to strengthen. Again laundry was our biggest business and we strengthened it by picking up OTI with the OxiClean brand knowing that we pick up a brand that we grew, but like I said we co-branded that with ARM & HAMMER to even help our ARM & HAMMER brands. So that was a home run. We just love acquisitions like that where we picked up a number one brand and I think we even shocked ourselves a little bit, we've grown the share from like a 25 to a 34 in just 18 months. We've grown the margins. We've cut costs. It’s just been a beautiful acquisition. So I guess we were ambivalent.

I have 17 plants worldwide that make household products and personal care products. I can fill bottles with liquid, I can fill boxes with powder, I can fill tubes, I can fill creams and lotions and things like that. So honestly, it puts us in a great position to look at businesses. Now, I would tell you, we are very picky. We are sticking to our guns. We want number one or number two brands available out there. Oral brand has a very unique positioning. It may not be number one or two. We want ones that we can bring in-house and knock a lot of cost savings out either through the supply chain or through SG&A, and generally… we’d love them to be bolt-ons to our existing categories, but we will look at new categories too. If we hadn’t done that we never would have bought the Carter-Wallace business back in 2000, which bought us the condom business we weren't in, bought us [inaudible] we weren't in, brought us depilatories we weren't in, and brought us pregnancy kits, and the bulk of that franchise has grown dramatically over time. So, it expanded our business.

So again we prefer bolt-ons to existing businesses, which we have a lot. One of the issues our company talks about a lot is complexity. We are very complex for a little company, but the advantage of that is we can pick up acquisitions in those categories because we're in a lot of businesses and have a lot of different manufacturing techniques. We've people who understand a lot of those businesses. So we're very, I would say, agnostic when we go look at acquisitions, but we are very quick to... within only our criteria... I’d probably reject an opportunity because the moment we see them we look at versus our criteria, if it doesn’t meet it we stop looking. And even though I don’t care how attractive it is, but what the investment bankers tell us it is. I'll tell… I’ll make a comment. I am very stunned at some of the acquisitions recently by some of our competitors. I won't name names, but I am stunned in what should be a buyer's market honestly right now since the private equity world has plenty of money, but the banks won't loan them any money. So they are pretty much out of play. It should be a time where opportunities to acquire companies goes at fair values, but not ridiculous values and I think they are being paid some very ridiculous prices recently for some good properties, but at a very high multiple. So I will not pay those kind of multiples. So honestly, if the world stays that way, we'll be fine in driving the results we showed you organically. If the sellers believe in fair prices we'll be doing some acquisitions. If they believe they can get the prices that some companies recently sold, then they're going to have a nice day because they're not going to be talking in an efficient way.

Dara Mohsenian - JP Morgan Securities

And then are there any categories you'll avoid?

James R. Craigie - Chairman and Chief Executive Officer

I'll avoid, there probably are. Honestly, the personal category is a crazy category, there's 23 brands in that category which are about 15 too many. We're one of the 15 too many. If a very tough category dominated by four or five players who spend a modest amount of money and the other 15 spend a 20% of that, you just can't compete unless you buy one of the big five. So I probably would not enter that category because [inaudible] the big five because the category dynamics are such that you just can't win where it's so different between the big players and the small players and just too many players. So I don't think you'll see as buying any personal brands.

Thus if we look at the categories, we have to believe we can successfully compete in the category and do it. I would say, do we prefer smaller categories, I love being the number one brand in a $500 million less category because, guess what, there's a guy in Cincinnati who wants $1 billion brands. Well, you can't have a $1 billion brand in a $500 million category, that math doesn't compute. So they can have all the $1 billion brand if they want. I will take the $300 million number one brand in a $500 million category that has growth potential and that's where we are very successful. The Trojan businesses, the pregnancy kit businesses, laundry additive businesses, things like that, that's where we find our success is greatest, so that's where we care to play. Mr. Schmitz?

That's all right. The [inaudible] with the microphone wins the game okay.

Jason Gere - Wachovia Capital Markets

Sorry about that, Bill. Hey, it's Jason Gere with Wachovia Capital Markets. Just a question about the pricing that you're taking, can you talk, one, about the competitor response, and two, I think you've said that most of that it will fall through. So can you talk maybe a little bit about the balance of trade spending and advertising? I know trade spending is an area that you want to cut back rather than increase, but especially in terms of the fears of the U.S. recession, can you talk maybe a little about the balance between the two this year?

James R. Craigie - Chairman and Chief Executive Officer

Yes, very good question. On pricing, we generally lead in categories we're number one and we follow where we’re not number one. So that's just the simple rule of thumb. The price increases we're taking are just helping us to offset most of our cost increases, which have been again dramatic, which has gone out there, and corrugates and resin and diesel are just... we thought we had one shockwave in late 2005 and it's another shockwave coming through. So that's... it's largely how we look at it. We don't... we're not trying to do anything, but kind of recover our cost structure there.

As far as trade spending, we're very vigilant about that. We've had a Seibel system in place, a very radical computer system that analyzes every trade deal we do. We've been trying to cut back on that at a rate of about $5 million or plus year on trade spending, what we think is just totally inefficient. It is sometimes hard to... it is hard to cut trade spending when you are taking price increases. It's almost like a double price increase. If you’re able to trade and say, I'm taking prices of 5% and taking trade spending on 5%, that's a 10% price increase. So when years like it was in 2006 where there was a lot of price increases coming out of 2005, we generally backed off on taking trade spending reductions. So you might see this next year backing off a little on trade spending reductions because price increase are going on and it's just too much to absorb all at once. But we are... we analyze over 10,000 deals a year and figure out which ones work, which ones don't, and if they don't work we try to work with the trade to rework the deal or cut the deal. And it's been effective in helping and it’s part of our gross margin expansion opportunities.

I can't talk to you [inaudible] microphone in your hand.

William Schmitz - Deutsche Bank Securities

It’s Bill Schmitz from Deutsche Bank. Just a little bonus formula for you guys, I think 75% doesn't really have a capital charge on it, so it's almost like it encourages you to do deals every single year. Have you noticed it, it’s like sales growth, gross margin, and operating profit, and there is no really capital charge except for the free cash flow? Is that intentional?

James R. Craigie - Chairman and Chief Executive Officer

No. Okay, well, first of all, our plans are built with known acquisitions. And so if there is new acquisitions are targets would all change.

William Schmitz - Deutsche Bank Securities

Okay, the resets [inaudible].

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

I didn't mention it, but our bonus structure changed slightly this year. It used to be 40% net revenue, 40% operating margin, 20% cash flow. This year, because gross margin is so important, we changed it to 25% net revenue, 25% gross margin, 25% operating margin, 25% cash flow. I honestly call 2008 the year of gross margin. And I’ve got... it's working so far. I’ve got marketing people talking about gross margin before they are talking about their marketing budgets because it is very critical with all these cost increases to drive that gross margin north. So we made it a bigger part of our bonus structure.

William Schmitz - Deutsche Bank Securities

And just in terms of sort of the timing of the charges that are coming off from last year like the transition cost on detergent, and also you had some pretty big growth in that spread in the first and second quarter of last year and I think this year you said it’s going to be fewer but bigger margins, is that fair?

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

Yes, that's our goal. We had over 50 new product launches last year. Every new product launch costs a lot of money to get the product on the shelf. And so our goal, we did really good. We had a really great year. We had over $100 million of net revenue from those new product launches. We are seeking to do almost twice as much of revenue growth, but try to do as you just said, fewer but bigger new products and we think we have that in our portfolio. So we’ll be more vigilant. We've had more than we would like of product launches that were just $1 million to $2 million to $3 million of net sales and that doesn't cut anymore. We will not launch something even if it is net positive at that rate because it's just too expensive and too time consuming. So we’ve put the onus on the new product team to step up the ante and make sure the product launches we're doing are bigger even if it is fewer because I think we can get twice as much revenue growth off those new products with fewer if they are bigger in ideas.

William Schmitz - Deutsche Bank Securities

Well, that might help.

James R. Craigie - Chairman and Chief Executive Officer

Yes.

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

One thing to add to that, when we launch new products we do slotting. And so typically, the slotting hits in the first half of the year, and in 2007 versus 2006 we had way more slotting in first half. You may remember, we might have been talking about that, '06 going to '07, so '07 going to '08 we have done slotting again, similar level of slotting in '08 versus '07 in the first half.

William Schmitz - Deutsche Bank Securities

That's not favorability because there are skewers that you’ll probably--?

James R. Craigie - Chairman and Chief Executive Officer

Yes, right. Exactly.

William Schmitz - Deutsche Bank Securities

Okay, and how about the transition costs, I know you're going to get $7.5 million from Orange Glo synergies next year, is that somewhere on those lines?

James R. Craigie - Chairman and Chief Executive Officer

Yes, I mean the way… the right way to think about that is we have about $10 million of synergies from bringing our Orange Glo into our plants. So just by math, if you’ve got one quarter you probably get about 7 or 7.5 in 2008, so that's correct.

William Schmitz - Deutsche Bank Securities

Okay, and then how about the transition costs from the concentrate, are you lapping that next year, because I think probably the big upfront cost already happened? Is that fair?

James R. Craigie - Chairman and Chief Executive Officer

No, not necessarily, because one of the things, when you're starting to make big bottles and small bottles, right, of concentrate, non-concentrate… we have two plants, we’ve got one in Missouri, one in New Jersey. So we have transition expenses frankly, cross shipping, trying to get right where we're going to make the concentrated stuff and non-concentrated. So we got some hits from that in the fourth quarter, goofy things that can happen to us. If somebody got big bottles, they want move them out, they want markdowns from here, so that's going hit gross to net as well. So you are going have that happen now in wave two to wave three, but as you get into back half end of the year, is the way I’ll answer that.

William Schmitz - Deutsche Bank Securities

Got you. And then what happens to all these issued excess filling capacity right, because you’ve these big tanks, you’ve these been filling facilities, the bottle is small, you are putting a lot less liquid in, it seems like you’re going to have massive excess capacity accepted through the bottleneck filling part of the line?

James R. Craigie - Chairman and Chief Executive Officer

Technically, there is Bill, but there was a lot before, there was a lot of excess capacity before this happened. So you just have to expect the industry to act rationally and I think it will.

I hate to say it, but one benefit of commodity costs going higher, if you've in a business like laundry which is very commodity sensitive, you are not about to do ridiculous things on pricing when you’ve got… you are facing higher cost. I mean when this effort started, oil was about $70 a barrel. Now it is about $90, so some of the benefits compaction have been eaten up by the higher commodity. And just to add on to it, the math, the first wave of compaction, which was the southern half of United States, which started in this last September, that only was about 35% of our national volume. So to your point, this year we've got… about 65% of our volume will convert between the first and second quarters and then by the back half nearly a 100% conversion. And that would add to… the first wave is a little easier in some sense for national retailers out there. They could move large sizes from areas being converted to areas not converted by sending it through a third way. There is no place to check whole bigger bottles. So that might be a little bit more caustic and we're the only bigger bottle, so… but the good news is by the third quarter of the next year the whole country will be converted to small bottles.

I will give you a little update on what we have learnt so far on compaction. The category growth has been… like category growth is a result of it. Unit pricing is holding, which is good. Shelf space is holding, which is good. And I would say to you, our sales are up nicely in the compacted markets, so we're happy. So overall... and overall I think the industry is very happy and the retailers are very happy with the compaction rollout, which has been as we've often said a win, win, win for everybody because we will win, because it will be… cost us less to make and shift these products. The retailers will win because it will cost them less to shift the product in their warehouse and to their stores, and the consumer wins because they will get the same number of wash loads and bottles that take less space in there shelves and less waste for their garbage removal services and things like that. So it is really a terrific effect going out there, and I think you're going to see it go across other categories. There is no need for retailers… or manufacturers and retailers who’s going to be shipping water. And I’d be honest with you, the old laundry bottles, the non-compactive [inaudible] in stores around here at New York because this is just the last way that it will happen in March. About 80% of that bottles is water, and everybody [inaudible]. So there is no need to be shipping you… eight-tenths of what you get is water. You can... the washing machine will add the water, so a good initiative, a very smart initiative.

Who gets the microphone next, how about that side of the room?

Connie Maneaty - BMO Capital Markets

Hi, Connie Maneaty from BMO Capital. I'm trying to figure out how the quarters are going to flow this year? And as I'm looking at the year organic sales growth, it seems that your second half of 2008 has some really tough comps where 6% increase in the third quarter and 9% in the fourth. Are you budgeting for sales increases in the second half of the year or does most of the sales growth come in the first half from all the shipment of new products?

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

No. We definitely building on share increases… or share and volume increase across all four quarters. We really feel we’ve got great momentum exiting this year. We have got great new products coming online. The new products will come on line mid to late second quarter. So really the second half of next year gets bulk of the benefit from the new products I talked about and that's why… you have a fair point, we’ve got some difficult comps to go over, but I think we can do that. So I'm very excited. The new product team has done a great job in putting out some exciting new products. We haven't told you all those new products by the way, we only will tell you new products that we've announced at a trade, there is more to come.

Connie Maneaty - BMO Capital Markets

So the slotting allowances, do they hit in the first or in the second quarter?

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

More in the second than in the first, Connie. The other thing to think about when you think about the quarters, Q3 of 2007 you call is a big quarter for the company and we had a lot of help where we had a gain on a sale of a property in Canada, we had a tax benefit with about $0.06 help we got in the third quarter that obviously was not going to repeat in 2008. So that is probably the toughest comps, Q3.

Connie Maneaty - BMO Capital Markets

And then also, what is it that is going on in the specialty business? Why shouldn't gross margin contract early in the year from whatever is going on with that raw material, if it got hit so hard in the fourth quarter?

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

Well, we’ve got price increases going on in that business, so we had this surcharge where we are trying to pass on the increase of that particular raw material dollar for dollar. We just haven’t been able to catch up to it as fast that has been going on. We think that it is going to… it’ll level as we move through the year.

Connie Maneaty - BMO Capital Markets

Okay, great. Thanks.

James R. Craigie - Chairman and Chief Executive Officer

The price of PFAD has also started to drop a little bit, so that will help.

Dara Mohsenian - JP Morgan Securities

Hi, Dara Mohsenian from JP Morgan. Getting back to compaction a minute, you mention topline benefits earlier in the early markets. Can you quantify exactly how much topline benefit you are seeing? And then second, can you run through the longer term cost savings you are expecting from compaction?

James R. Craigie - Chairman and Chief Executive Officer

It is early on that. I would say we are seeing low to mid single-digit growth from that. It happens with most compaction efforts. The category is benefiting because consumer are very explicit as to usage instructions, which is to use half as much as they used to. They are overusing the product. And then our brands driven by the new product [inaudible] Arm & Hammer was OxiClean, was launched in the fourth quarter of last year right in the first initial wave and so that has been very helpful in growing our results. So that came out as one of the compacted forms. So we are benefiting both from industry trend and also from some new products that we had going out there. So low to mid-single digits, but it is till early but I’d rather have that than a sharp stick in the eye.

Dara Mohsenian - JP Morgan Securities

And the call savings longer term?

James R. Craigie - Chairman and Chief Executive Officer

No, we won't comment on that, because you know what, you tell what the price of oil will be? It is like I said, it has gone up $20 a barrel from where we started. I quoted you’re a number last August just before we started, I would have said actually you will be sitting here and telling me you didn’t get it, actually you missed it, I’d… I had to absorb $20 a barrel of oil. Resin costs have gone up since we have launched, and the resin price change almost everyday. So it is hard to put a number on it. I would just tell you, it is net positive assuming oil doesn’t go out of site further, it will be net positive move for us, but it will all vary on agrarian costs and diesel… what is the cost of diesel because that is what we’ve got to ship it. A lot of variables go into it, but it will be a net positive move if there is no further significant move in commodity prices.

Dara Mohsenian - JP Morgan Securities

Okay. And then on the gross margin line, it looked like the long term gross margin expansion in one of the slides it said 50% organic and 50% through acquisitions. Did I read that correctly, and does that mean the organic assumptions are lower than they were previously? And what is driving that?

James R. Craigie - Chairman and Chief Executive Officer

No, I just saying to you… I mean I think first of all to call it 1000 point increase in gross margin, which what I am basically doing, I am saying we are roughly 39, 40 today, and our goal is to get the 50. You look at companies like Procter and Colgate, they are 50 to 55, and Colgate just… I don’t know, about 56 or something gross margin. Part of that is their… they have advantages in that they are all leading brands with high margins out there. We have part of our portfolio, which is value like laundry, which isn't going to have the same margins. But we honestly believe we can over a course of eight to ten years, increase our gross margin at the rate of 100 basis points and 120 basis points a year through a combination of organic, that's a lot, that's seeing 500 basis points of organic growth, and the other combination would be through buying gross margin positive acquisitions, that are higher than the company's average to start with. So I think it's very... a lofty goal to say I am going to grow my gross margin by 10 points. I don't think anybody else in the industry is going to claim that right now. And I think we can do that in the face of high commodity prices right now. But I must be honest with you, if it wasn't for acquisitions I would you 500 basis points I think is very achievable through organic. I'm just saying I think I can add another 500 through acquisitions. I don't what they are, Alice will tell me, but I am working on it. Next question?

Unidentified Analyst - SunTrust Robinson Humphrey

Good morning. [inaudible] from SunTrust. Last week one your competitors also announced price increases in powder detergent, do you intend to match that?

James R. Craigie - Chairman and Chief Executive Officer

I think that was old news, and we have taken price increases through sizing and compactions in powdered laundry, which are an even marketplace. But beyond that, we would look at it… I've also heard they've announced price increases in liquid laundry, which is brand new news, and I haven't had time to get the details on that to know how to react. I am just telling you, it's a wild time out there with commodities right now, and we are doing our best to stay on top of it.

Like I said we lead in categories, we're number one and we follow all the categories. So we pick up the news sometimes as fast as you do and we’re very careful. We take a look at it, we just don't automatically follow in every case, we don't think it is good for our business. But when we think it's smart, we’ll follow in a smart way too. We just don't automatically match what they do, because sometimes you don’t want to cross certain [inaudible] where your volume will become will take a massive hit if you cross it. We have to study, I think it will take a little bit... my team is pretty quick and nimble, but we are just literally picking up some new news as you might be about to step out there. So if you have details about powder laundry price increase, I will be glad to take it afterwards.

Nik Modi - UBS Investment Research

Nik Modi from UBS. Jim, can you talk about the international business, any plans there to accelerate growth from here?

James R. Craigie - Chairman and Chief Executive Officer

As I told you, international is about 70% of revenue, 30% of operating income. We've had nice growth. It's mostly a personal care business, and we’ve got good situations in Western Europe, North America. We’re starting to get some penetration in South America, and just starting to get entries into China. We are careful. I would tell you, within that mix the biggest opportunity surprisingly enough are in pricing North America, our Canadian and Mexican subs are doing very well, and so we are pushing that hard. And then we are carefully exploring new markets, so China is a huge opportunity, but it can also be a huge place to lose a lot of money in the short term.

As I said, we have three that our best business in there right now. We picked by business there when we bought OxiClean, we picked up business there when we bought SpinBrush, and just we ended China through a distributor relationship with many distributors, but there is no one distributor in China to launch our Trojan condom business at premium end of the condom category.

So we are placing our bets, but I would still tell you we saw tremendous growth opportunities throughout North America. The US I still have probably more opportunity than most customer packages companies. We are so close in distribution voids on some of our major brand like OxiClean, SpinBrush, even Arm & Hammer has voids out there we’re closing in. As our brands grow with great new products and strength, the voids that are left we’re closing. You won’t find… some of the bigger players are out of easy lay-ups like that out there. We still have those, and we certainly have even bigger growth opportunities in Canada and Mexico.

I don’t want to go into details, but there is some of our core businesses in the United States are not as strong in those two markets and we believe we can get them there by launching and better supporting the products out there. So that's the lot easier to grow your business in North America than just overseas where there is a lot more difficult trade situation or costs and things like that and our brands aren’t strong in some of those markets. But I feel that international got a very good growth, very good contributor, and as we look at acquisition again we’re agnostic that if there’s good acquisitions overseas we’ll make them, but I am not… I won't say my first priority is international acquisitions, it’s not. I don't… I just want great number one and number two brands with the opportunity to grow and to plug into our system and where they fall, what countries, I will just take them as they come and only do the ones that make sense.

Joseph Altobello - Oppenheimer & Co.

Thanks. Joe Altobello with Oppenheimer. First, how does the trade react when you basically expand gross margin in your consumer businesses this quarter, talk about 1000 basis point increase in gross margin over the next few years and then turn around and try to take pricing in some of these category?

James R. Craigie - Chairman and Chief Executive Officer

They’re capitalists also. As I told you, they will benefit from the laundry compaction big time from all the stripping costs they’ll save. So we are capitalists and we all do that. We are working with them, trust me, growing their gross margins is usually the first priority in their eyes. So we work with them on ways to do that. It just work, it works. I believe I didn't… we’re are not going to go a 1000 points in one year. This is going to be through a lot of initiatives over time and I think we are entitled to keep the ones where we paid the money in our products and on word we help them not on saving on there end too. So it is a good relationship between the two sides. And we have great relationships with almost all of our retailers out there.

You’re going to see us bring to market from new ideas, which I think will really… will change the rule or some categories out there, which the retailers will truly appreciate. I don't want to go into any more news about that, but we know… you’ve heard about the sustainable trend out there, it is huge.

I was at a conference in Washington recently with the Grocery Manufacturers Association. That was all about sustainability at the environmentally friendly world. They expected 200 people to attend. They had over 600 attendees from every major CPG company, every major retailer, a lot of suppliers there, it is just unbelievable what's happening. The bottom line what's happening is sustainability of our [inaudible] has gone from a world of the tree huggers where you had products that cost a lot more to make and didn't perform as well as mainstream products. It's going to a world now where the manufacturers have figured out how to make products that are environmentally friendly, that are just as good in their efficacy as initial products that only cost a little bit more, and the population has just loves it. And we've been shocked by this central product line we launched, which is at the request of our... the laundry detergent, which is at the request of one of our major retailers. We launched it and the reaction of unbelievable. And we have taken that idea now, we’re spreading across the entire ARM & HAMMER line, and we are looking at other areas. That was some shocking news, some facts that I just love. If everybody country in this country, everybody, changed all the light bulbs in their house from traditional incandescent light bulbs to [inaudible] ones, you’ve to close a power plant in every state. Safeway has already converted 25 of their stores to solar power. The entire roof of the store is solar panel. Safeway was very progressive in this area, has already converted their 1000-truck trucking fleet into biodiesel trucks. It just recently saved them a lot of money. So there is a book out there I’d encourage you to read called Green to Gold, and that's what it is. Green is the new black and the green on the environmental move is very hot it’s funny because it's a way to do it that… we’re all well environmentally conscious, socially conscious, but the way to do it to be is to be good capitalists also. So everybody has figured out how to go green and make more money. So the manufactures love it the retailers love it and the consumers love it. So it's a very hot trend. I think it will be around, it won’t just be a one-year wonder. I think you are going to see this go on for some time now, and you’re going to se go on for some time now and you're going to see the explosion of green… the environmentally friendly products in the market place that are truly as good or better products than what’s out there right now, that might cost you a little bit more, but the consumer is willing to pay that little bit more for a better… for products that are environmentally friendly.

So we’re hot and heavy on that trend. We’re already into it, and you will see a lot more coming out of this.

Joseph Altobello - Oppenheimer & Co.

And then second, back in December you and I had this discussion about consumer and their ability to take additional price increases, given the economy. It seems like since then the date has been worsening, not getting better. What is your sense of how the consumer today is going to be able to handle this round or maybe another round later this year?

James R. Craigie - Chairman and Chief Executive Officer

Yes. I think it's shocking. I saw… I’m just repeating, you might have seen Wall Street Journal [inaudible] the other day reported, they had checked the major price increases and they said that the average food bill in an average family in America is going to grow forward $400 next year just from higher food costs out there. I don't know, Joe, it is concerning. Obviously, I’ve told my company, if there is recession we’re going to choose not to participate.

So we’re just going to go… thankfully, we have products, which are... everybody uses everyday. So we are not in the fast food business, we are not in the expensive apparel business, and that I am very happy to be in the everyday product needs business and keep supplying people with great things. But that we haven't really seen an effect so far. But I am… I may be, I am glad to be in the value side of the laundry businesses. If people want to shave a few bucks off your laundry bill, they can buy ARM & HAMMER or extra laundry detergents. They are great products and they cost a lost less than the guy in the big orange bottle, so anyways.

Unidentified Analyst

Could you just quantify pricing in your organic growth of 9% in the fourth quarter in 5% for the year?

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

Yes, the 9% would be 8 and 1 roughly… eight and one, just rounded. 8% volume and 1% would be price.

Unidentified Analyst

And the five is?

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

Full-year basis?

Unidentified Analyst

Yes.

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

Yes, it would be more… actually we would do price less mix. We got that fine, we can cut it just price. So that nine, eight being volume, the one is price and mix that’s baked in there. And you are also talking about the five for 2007?

Unidentified Analyst

Right I guess.

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

Full year?

Unidentified Analyst

Zero price mix?

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

No, there would actually be some prize… negative price mix in that number, in the five.

Unidentified Analyst

Like one negative?

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

Yes, roughly.

Unidentified Analyst

And just a follow-up to specialty division, how much of that 31% increased price?

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

The way to think about that is half of it is volume, just say 50%. Another 25% is just regular price and the other 25% is that surcharge I talked about related to PFAD.

Unidentified Analyst\

Thank you.

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

Okay.

Connie Maneaty - BMO Capital Markets

It’s Connie Maneaty again. I have some… I was hoping you would comment on what's going on with resins. Are you a believer that new capacity that's coming on will cost this to moderate? Secondly, have you increased your number of resin suppliers, and are you riding short of contracts now than you did when resin was in very short supply?

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

Yes, the last two are going to be tough to comment on, Connie, because we wouldn't announce publicly how many suppliers we will be talking to in our… what our tactics would be with respect to negotiating. As far as the first question goes, there is a great belief frankly that because there is new capacity coming on in the Middle East in 2009, I think it will be online in 2008, that will not begin supplying Asia that the ability for U.S. companies to export will be will be diminished to Asia, this is resin. The second thing is that because the economy is falling off, automotive, housing, accelerate, less demand for resin, as a result it's going to... so less demand, it's going to give less ability to negotiate. So we do think that there is some hope with respect to what we have been experiencing with the steady increase in resent prices over the past year or so, but we do think it will abate eventually.

Connie Maneaty - BMO Capital Markets

Any benefit in 2008, or it's more 2009?

James R. Craigie - Chairman and Chief Executive Officer

No, as Matt said right now literally the huge slump in housing in housing and automotive is causing a big enough drop in demand that there's news of some resin price increases being resented and stuff like that. So there is actually some… that was… those who are increases we weren’t planning when we started the year. So they started to come back, that’ll just get us back to where we were starting from, but that is the recessionary impact the slump in those markets could help 2008.

Connie Maneaty - BMO Capital Markets

Thank you.

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

Have we worn you out? One more thing from... Connie, I though we were going to get a little more in the [inaudible] there on something else, and I haven’t been asked about what's the tax rate for 2008. So I had ten people ask when we conclude. The tax rate for 2007 was 36.2%. So when I stood up here last year, we were estimating 36% to 36.5%, so not bad. So what we are using for 2008 is 37%, and the reason for that is because you probably know that once again the R&D tax credit has not been approved by Congress. So we are in the exact same position that we were in 2006, that's A. And B, just expect higher profitability in the US, that’s where we have the highest tax rate. So I would expect that if you wanted a range, it would be 36.5% to 37%, bit more likely to be to be in the high end of the range.

James R. Craigie - Chairman and Chief Executive Officer

I want to thank you. I just want to summarize, my company is doing great, we’ve got great momentum exiting last year, we’ve got a lot of good things going on this year, and we’re really optimistic. And the Giants won the Super Ball again. We'll be back here next year for another [inaudible]. Thank you.

Operator

Thank you for your participation into this conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Church & Dwight Co., Inc. Q4 2007 Earnings Call Transcript
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