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

Q1 FY08 Earnings Call

May 6, 2008, 11:30 AM ET

Executives

James R. Craigie - Chairman and Chief Executive Officer

Matthew T. Farrell - EVP and CFO

Analysts

William Schmitz - Deutsche Bank

Bill Chappell - SunTrust Robinson Humphrey

Connie Maneaty - BMO Capital Markets Corp.

Jason Gere - Wachovia Capital Markets, LLC

Joe Altobello - Oppenheimer

Alice Longley - Buckingham Research Group

Operator

Good afternoon, ladies and gentlemen and welcome to the Church & Dwight First Quarter 2008 Earnings Conference Call. Before we begin, I have been asked to remind you that on this call the company's management may make forward-looking statements regarding and 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 at Church & Dwight. Please go ahead, sir.

James R. Craigie

Good morning, everyone. It's always a pleasure to talk to you, particularly when we have good results to report. I will start out by giving you a brief summary of the first 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 first quarter results. When Matt is finished, I will provide some information on the factors driving our key business units. And finally, I will provide earnings guidance before we open the call to field questions from you.

Overall, we are very pleased with our first quarter business results. Reported net sales were up 7.5% versus year ago. Organic net sales, which exclude the positive impact of foreign exchange, were up 6% versus year ago. The strong organic net sales growth reflected solid gains in all three of our reported business units. These gains were driven by an improved pipeline of new products, increased marketing spending, excellent sales execution and cost-justified pricing actions on approximately 20% of the company's product portfolio.

On top of our strong organic sales growth, we delivered solid gross margin expansion despite significantly higher commodity and energy costs. Our gross margin was up 160 basis points from year ago to 40.5% of net sales for the quarter. Approximately 100 basis points of the 150 basis point improvement was driven by favorable timing issues and as such some of these costs will shift to future quarters of 2008. Matt will provide further details on this issue.

However, even if you exclude these timing issues, we still expanded gross margins by 60 basis points in the face of significantly higher margin costs. This reflects an extra ordinary focus on reducing cost that actually began back in 2006 when commodity costs started to skyrocket. This effort enabled Church & Dwight to maintain a flat gross margin in 2007 versus 2006, but we were not happy with that result since it fell short of our corporate objective to deliver our 100 basis point of gross margin improvement annually. As a result, we've stepped up our attack on cost savings starting in 2007 to make sure that we deliver the 100 basis point improvement in gross margin in 2008. Our Q1 results on gross margin are in line with our expectations to deliver that objective in total 2008.

Finally, our earnings per share increased 23% over the year-ago quarter to $0.81 per share. These excellent results have given us a strong start to what we expect will be another year of record sales, profits and earnings per share in 2008. I will provide more detail on our business unit results and my outlook for the year in a few minutes.

I'll now turn the call over to Matt who will provide you with greater details on the financial results for the first quarter.

Matthew T. Farrell

Okay. Thank you, Jim and good morning, everybody. As Jim just mentioned, first-quarter EPS was $0.81 per share compared with $0.66 in 2007. The strong sales performance and gross margin expansion were the drivers of our first quarter earnings results. The revenues were up 7.5% of which 1.5% was primarily currency. So 6% was organic growth. Of the 6% growth, approximately 3% was due to volume and another 3% is attributed to price and mix.

Now let's briefly review the segments starting with Domestic. The Domestic business had a strong quarter. Revenues were up 3.5% and this was lead by cat litter, Arm & Hammer liquid laundry, First Response, Arm & Hammer powdered laundry, Xtra liquid laundry and Arm & Hammer Dental Care. We also successfully raised prices in February for condoms and baking soda. And new product launches also contributed to the revenue growth.

International posted 5% organic growth, as this segment performed well in many countries. The specialty products business had an exceptional quarter as we can see in the release due to the strong demand coupled with a price increase for our dairy products and higher volumes in pricing in the specialty chemical side of the business. Specialty Products enjoyed higher year-over-year prices in Q1 for most its products.

With respect to gross margin, our first quarter gross margin was 40.5%. That's a 160 basis points expansion versus last year. We'd like to remind everyone that we have four levers that contribute to our gross margin expansion and they are cost reduction programs, pricing, OGI manufacturing synergies and of course the benefits of concentrated liquid laundry.

Our cost reduction programs have been in place for many years and are embedded in the Church & Dwight culture. Those cost reduction programs include things such as product reformulations, plant automation, more sophisticated forward buying and optimization of trade spending, just to name a few. These are the levers that serve to offset higher input costs for resin, corrugated paper, linerboard, diesel fuel and many others. A couple of items also affected the quarter, which we called out in the release.

Our slotting costs were lower in Q1 year-over-year and we had the benefit of having hedged a portion of our diesel purchases for the year. Those two items together added approximately 100 basis points of gross margin expansion. We should all remember that the timing of slotting varies from year to year as it is depended up on new product launches and also new distribution for existing products. So both of these items will have a bearing on future quarters.

Nevertheless, it is fair to say we are delighted with our gross margin performance in the quarter, which was up a solid 60 basis points if you exclude the timing of slotting and diesel hedge. Looking ahead to Q2, we expect healthy expansion of year-over-year gross margins in Q2 as well as each of the remaining quarters in 2008.

Now marketing, marketing spend was 9.7% of revenues. This is a 80 basis point expansion over prior year spend rate of 8.9%. Marketing expense was about $7.5 million higher for the quarter than a year ago. This higher spending is a key driver of our organic revenue growth along with our innovative new products, which Jim will talk about in a few minutes.

Our first quarter spend was about $54 million and we expect to significantly exceed that level of spend in the second quarter. In fact, we are targeting marketing spend in the second quarter to be approximately 13% of net sales.

Now, SG&A, SG&A year-over-year was up $6 million due to $5.4 million of asset impairments, higher litigation costs, higher R&D and of course foreign currency changes. These increases were partially offset by a $3 million gain on the divestiture of a small specialty product subsidiary.

SG&A as a percentage of sales was 14.1% in Q1 and this is consistent with the year ago. Looking ahead to Q2, we expect second quarter SG&A as a percentage of sales to be comparable to Q1 due to much higher R&D spending as we continued to invest in new products.

Operating profit, the operating margin for the quarter expanded to 80 basis points to 16.8%, again driven by the higher gross margins. Moving down to P&L, other income and expense includes a $2 million currency gain and reflects lower interest expense as both interest rates and our debt levels are lower than a year ago. With respect to income tax, as you can see in the release, our effective rate for the quarter was 35.7%. Remember that we started the year with an expected range of 36.5% to 37%. So we now forecasting the lower end of that range, an affective rate of approximately 36.5% for the full year.

EPS, EPS of $0.81 is a 23% increase over the prior year. About $0.05 to $0.06 of the year-over-year EPS improvement is due to the timing of slotting and the diesel hedge gain. So, all in all, a very good quarter. And our free cash flow, we generated $56.4 million of free cash flow in the first quarter and ended the quarter with $208 million of cash on the balance sheet.

Our total debt to LTM adjusted EBITDA, per our bank agreement, was approximately $1.9 million at quarter end, which puts us actually below our stated range of two to three times EBITDA. So we are in a very comfortable position to complete the Orajel acquisition in July.

Just a few comments on the balance sheet, accounts receivable are up $14 million versus a year ago and that's primarily due to higher sales in the quarter and the effects of currency. Inventories, you'll see are flat versus year ago and this is a result of our working capital management efforts.

And in conclusion, short summary for the first quarter would be 6% organic sales growth, good gross margin expansion, continued reinvestment in marketing and strong free cash flow.

A little bit of guidance now. With respect to guidance we have provided in our release an EPS estimate of approximately $0.61 for Q2 and this reflects strong organic growth, continued gross margin expansion, significant increase in marketing spending and higher year-over-year R&D spending, reflecting our investment in new products. This would make for a very balanced year in comparing the first half earnings and the second half earnings. So, we have about 51% in the first half, 49% in the second half, thus would be the split for 2008.

We would end the second quarter with first half EPS up 14%, which is right on track for our full year goal of 13% earnings growth in 2008.

Now back to you Jim.

James R. Craigie

Tanks, Matt. I'd now like to provide you with specific 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 is driving the company's results.

Let's first talk about Domestic business unit. Overall, we're very pleased with a 3% organic growth achieved by our Domestic business unit in Q1, driven by innovative new products, improved marketing programs, expanded distribution, improved merchandising and cost-justified pricing actions.

On a product line basis, the organic net sales growth was driven by sales gains for Arm & Hammer liquid and powdered laundry detergent, Arm & Hammer cat litter, Arm & Hammer toothpastes, First Response test kits and Trojan condoms. In total the Arm & Hammer brand grew 10% in the first quarter versus the prior year, reflecting the continued strength of our mega brand marketing campaign initiated in 2006.

On the new product front, we are continuing to see the benefit of a corporate new product team that was created in 2006 to deliver more innovative new consumer products with strong consumer appeal.

Last year, this group launched over 50 new products, a record for our company. This year the new product team will launch slightly fewer new products in total but the revenue impact of these new products is expected to be greater than the new products launched in 2007.

The new product launches impacting 2008 sales include the following. A new form of the essential sub line of our Arm & Hammer liquid laundry detergent business, which was first launched in 2006 and is formulated from environmentally sensible plant-based surfactin to deliver the same powerful cleaning capability as regular Arm & Hammer detergent. We've had excellent sales results to date on the essential sub line. We are now adding a new form of essentials called Free that is dye and perfume free and which appeals to the growing segment of consumers that are both environmentally sensible and have sensitive skin.

We are also expanding the distribution of Arm & Hammer laundry detergent with OxiClean stain fighters in both powdered and liquid form. This new co-branded product delivers premium laundry detergent cleaning performance at a value price. It started shipping in the fourth quarter 2007. It is on track to be one of most successful new laundry products. As I mentioned earlier, these new Arm & Hammer products are being supported by more appealing and unified packaging, a trademark advertising campaign and increased levels of marketing spending as part of the new Arm & Hammer mega brand marketing campaign that we started in 2006. This marketing campaign has driven net sales growth for all Arm & Hammer brands from 1% in 2004 to over 6% in 2007 and again we did 10% growth in the first quarter of 2008.

We've also launched innovative new products in our other core categories, including two new additions to the Trojan line called Thintensity and Magnum Thin, which capitalize on the growing thin segment of the condom category. A new Nair depilatory product called Shower Power, which enables women for the first time to use a depilatory product in the shower where the majority of women remove hair in their legs. This overcomes a key barrier to depilatory usage so

that women can now enjoy the superior benefits of using a depilatory being smoother legs and a longer time between hair removals. Our new SpinBrush toothbrush called Swirl, which is a value-oriented product designed to encourage manual brush users to trade up into the battery-powered toothbrush category. Finally, the First Response brand has launched both the digital pregnancy kit and a daily ovulation test kit.

At the same time, as we are driving growth of our largest brands in core categories, we've been successful in reducing the decline in our weaker categories, particularly antiperspirant and value toothpaste. Overall, we are very pleased with solid organic sales growth of our Domestic business unit. Our efforts to launch innovative new products supported by more impeccable marketing campaign and increased marketing spending is working.

Finally, let me make a few comments on the industry wide initiative to reduce water content and liquid laundry detergent by moving to concentrated offerings. The rollout of concentrated line extensions began last September in the southern half of United States, expanded to the Central and Northwest U.S. in the first quarter of 2008 and the final wave for the Eastern U.S. will be completed by the end of this quarter. Church & Dwight has fully supported this initiative since the beginning and so far this rollout has gone very smoothly. The results are in line with our expectations in terms of reactions by our customers, our competitors and, most importantly, our consumers. All major retail customers have accepted distribution of the concentrated product. All competitors appear to have met the conversion timetable with the exception of private-label and a few accounts, but we understand those accounts will soon convert. And consumers have accepted the concentrated product, although some have a slight tendency to bypass our specific directions and overuse the product. If everything continues to go well this initiative will be a winner for our customers, our consumers, the environment and for manufacturers.

Now let me talk for a minute about our two other business units, our International business unit and our Specialty Products division. Our International business unit, which represents over 17% of our total sales, also had a strong first quarter. Reported sales increased 15% over the prior year. When foreign exchange is excluded, this translates into 5% organic growth. This increase was driven by strong results in many of our foreign subsidiaries, particularly Australia and higher export sales.

In our Specialty Products business unit, which represents about 11% of the total company's sales, net sales grew 22% over last year's first quarter on a reported and organic basis. This significant growth was largely driven by price improvement in animal nutrition and specialty chemicals as the business aggressively pursued recovery of their increased raw material costs. However, the growth of these categories also benefited from continued strong demand for these products.

Finally, I'd like to make a couple of brief comments on our recent signing of an agreement to purchase the assets of Del Pharmaceuticals. This acquisition, which consists mainly of the Orajel brand, is expected to close in July 2008. We are looking forward to adding this number one brand into the Church & Dwight portfolio starting in the second half of 2008. We expect that this acquisition will be neutral to earnings in 2008 and solidly accretive in 2009 as we integrate these brands into the Church & Dwight infrastructure.

Now let me switch gears now and talk about the future. While we are pleased with the first-quarter results, as I often state, we are never satisfied. First in terms of dealing with issues, we've been able to absorb an unprecedented level of cost increases for raw materials, packaging and transportation and still delivered solid gross margin improvement and earnings growth. We have a well-organized pipeline of cost-saving initiatives in the area of manufacturing, purchasing, distribution and trade savings that is being executed.

We've announced price increases on about 25% of our company's product portfolio so far in 2008. These cost saving and pricing initiatives have been bolstered by manufacturing synergies from the Orange Glo integration, liquid laundry detergent compaction and volume scale leverage. The net effect of all these initiatives are expected to lead to a further steady improvement in our gross margin throughout 2008 to deliver our target of 100 basis point improvement versus 2007. This improvement in our gross margin should also enable us to increased marketing spending in 2008. We will focus this increased marketing spending behind our strong pipeline of new product innovations in every one of our core categories.

Finally, we are keeping a very tight lid on overhead cost. One example of the tight management overhead cost is that in 2004 Church & Dwight delivered $1.6 billion in sales with 3800 total employees. Four years later, we expect to deliver over $2.3 billion sales, over 40% more sales with no increase in the number of total employees.

Now let me translate all this in a specific guidance for the rest of this year. In view of our solid organic revenue growth, gross margin improvement and tight overhead expense control, we are confident that we can deliver our previously announced earnings per share forecast of $2.77 for 2008, a 13% improvement over 2007, despite a significant rise in commodity energy cost this year. In line with these annual earnings per share goals, we expect a 14% growth of earnings per share in the first half of 2008.

I would challenge any of you to name one consumer products company who delivered our Q1 results and is promising what we are in 2008. We delivered strong organic growth and we're promising continued strong organic growth. We delivered strong gross margin expansions and we are promising a 100 basis points of gross margin expansion in the total year. We've maintained tight control overhead cost. We're investing in marketing to drive our future organic growth. We are making smart accretive acquisitions and all of this is adding up to 13% EPS growth despite significantly higher commodity cost. I'm not aware of one CPG company that doing that.

With that that ends our presentation. I will now open the call to any questions you may have, which Matt and I will do our best to answer. Operator, please go ahead.

Question and Answer

Operator

[Operator Instructions] Your first question will be from the line of Bill Schmitz of Deutsche Bank. Please proceed.

William Schmitz - Deutsche Bank

Hi guys, good morning.

James R. Craigie

Hi, Bill.

William Schmitz - Deutsche Bank

Hi. Can you sort of extrapolate on what solidly accretive 2009 names for Orajel? Is it like $0.05 or like $0.20?

Matthew T. Farrell

Hi, Bill, this is Matt. As you know, it hasn't been our past practice to be that granular and call out what the EPS is going to be, particularly when we haven't even closed on the deal yet and that's going to be till July. But we took everybody through what the numbers were. Remember $28 million of trailing EBITDA and $10 million of synergies and it won't be till the end of '09 that we can be confident that we will have everything integrated into the company. So you would assume then the run rate would be $38 million at some point and we said how we are going to finance. We have a financing underway now for $250 million worth of new debt plus $100 million of borrowings on existing either our revolver or our asset securitization and the rest in cash. So the simple way to think about it is, I think I may have said this previously, just assume 5% interest rate on the new money. And then you can figure out what the EPS accretion will be, but it's really too soon to tell when the integration will be complete.

William Schmitz - Deutsche Bank

Okay, that's fair. And then on the U.S business, can you tell us what the volume growth was in the quarter?

James R. Craigie

This is for just the U.S business?

William Schmitz - Deutsche Bank

Yes.

James R. Craigie

Yes. I think we can help you with that. Hang on a second. The volume for the first quarter for domestic would be around 2%.

William Schmitz - Deutsche Bank

That's great. And then I'd say one last one. Can you talk about some of the gross margin drivers, what's the impact of energy and raw material inflation was, some of offsets were?

Matthew T. Farrell

Yes --

William Schmitz - Deutsche Bank

[inaudible] excess slotting and the diesel hedge.

Matthew T. Farrell

Yes, well we typically do that on an annual basis, Bill. We try to break out what the impacts of our cost inputs and the impacts of our cost reduction programs. It's fair to say that our cost reduction programs, which are the biggest drivers for us and that's true every quarter, every year and that's part of the backbone of the company. So we are no different to anybody else. We have significant price increases up and down the line. Some single, some double digit increases for resin, diesel, linerboard, corrugated, the works and we are able to overcome those. So we probably have comparable increases to other companies but we wouldn't call it right now.

William Schmitz - Deutsche Bank

Okay. Great. Thanks so much.

Operator

Your next question will be from the line of Bill Chappell of SunTrust Robinson Humphrey. Please proceed.

Bill Chappell - SunTrust Robinson Humphrey

Good morning.

Matthew T. Farrell

Hi, Bill.

Bill Chappell - SunTrust Robinson Humphrey

Just wanted a clarification, on the slotting fees and diesel, do they represent an upside surprise to you in the quarter or they are just the difference between last year and this year in terms of earnings growth?

James R. Craigie

Yes, it is the year-over-year comparison, Bill. And we weren't surprised by the diesel because we we put the hedge in January, so we knew it was coming. So we hedged at a significantly lower than what the spot price is right now. So that was a wind flow for us in first quarter but obviously that doesn't help you in future quarters. And with respect to slotting, that's just timing. If you want to think about some of the things that impacts slotting; so it's going to be timing of your first ships to the accounts, the shelf resets will vary by account. Mix can affect as well, slotting costs are much higher for household versus personal care etcetera. So a lot of factors that will influence and it's going to hit but they do hit eventually.

Bill Chappell - SunTrust Robinson Humphrey

And does the hedge carryover and give any benefit in the second quarter?

Matthew T. Farrell

No.

Bill Chappell - SunTrust Robinson Humphrey

Okay.

Matthew T. Farrell

Well, not unless these will got to $5

Bill Chappell - SunTrust Robinson Humphrey

Let's hope not.

Matthew T. Farrell

And then it really rockets.

Bill Chappell - SunTrust Robinson Humphrey

And I guess this is a nice way of asking, with you beating Street estimates by $0.08-$0.09, are we that bad at modeling or was this better than expected and your kind of forward guidance is just staying conservative with everything going on consumer spending?

Matthew T. Farrell

No, there's no way, there's now way with respect to the Street estimate, which we have a casual interest in. It was about maybe $0.06, as you said if we came at $0.81 and $0.06 worth is the timing slotting in the diesel hedge, then it's only... then it's a lot closer to what the Street estimate is.

Bill Chappell - SunTrust Robinson Humphrey

So $0.03, $0.04 better than expected?

Matthew T. Farrell

Yes. Yes, it is. We had a very good quarter.

Bill Chappell - SunTrust Robinson Humphrey

No. I agree.

Matthew T. Farrell

Yes.

Bill Chappell - SunTrust Robinson Humphrey

And then I guess, Jim, can you may be talk a little bit about the quarterly trend, January, February, March, do you see any changes in ordering patterns and are you seeing any kind of trade down from the higher price products to may be some of the Arm & Hammer products?

James R. Craigie

Yes, Bill, the quarterly pattern wasn't that unusual. We had a couple of strong months, one little soft month. Q2 outlook is pretty much in plan with what we expect. We are noticing across some categories some category softness, which I just think reflects that we are in a recession. We are noticing a little bit of growth at private label in some categories. But I think we have always told you, we kind of feel our company is pretty recession resistant in some sense. We do up some premium brands, we worry about like OxiClean and SpinBrush, but we also have a fair number of value-oriented brands in our laundry business, our biggest business.

We have value test kits are doing very well, we have value toothpaste doing well. So we are very conscious of the economy out there. We are very conscious of what's going on. We think consumer spending will take a hit. That's why we have been so aggressive as we have in managing overhead costs and cutting costs we can in the manufacturing side. We think we are pretty well set up to handle that. I mean of course I just saw Goldman Sachs' estimate today that oil can go to $150 to $200, we're not set up for that, I don't think anybody is. But I think we are pretty well positioned to handle what the current outlook in the environment given our product portfolio, and like I said Bill, we have been bunkered down for almost a year on cost as we somewhat thought the commodity cost will continue to spiral and it's paying off right now in terms of the ability to grow gross margin, while most of our competitors are not.

Bill Chappell - SunTrust Robinson Humphrey

And just finally on that, did you see a net benefit from compaction in 1Q and will you in 2Q?

James R. Craigie

Yes. We did Bill but it wasn't the biggest driver. In fact, a lot of times when we put the release together we tried to give some order to the factors and if you will notice, we had concentration last as the driver of gross margin.

Matthew T. Farrell

As we have told, because of the roll of timing, the benefit of compaction will grow quarter to quarter to quarter. By the third quarter of this year, the whole country will be in compaction. So, that will help us deliver, as we've said, continued gross margin improvement as we go across the year.

Bill Chappell - SunTrust Robinson Humphrey

Okay, great. Thank you.

Operator

Your next question will be from the line of Joe Altobello of Oppenheimer. Please proceed.

Joe Altobello - Oppenheimer

Thanks. Good morning, guys.

James R. Craigie

Hi, Joe.

Joe Altobello - Oppenheimer

It's actually nice to hear that you have a casual interest in our estimates. So, it's heartening. But anyway, in all seriousness the $0.05 or $0.06 boost in the first quarter, how much of that reverses in the second quarter and how much in the second half?

Matthew T. Farrell

It's not that academic, Joe, because again the slotting costs are going to be again a function of all the things that I described but some is going to hurt us in the second quarter but also second half, it's not all Q2.

Joe Altobello - Oppenheimer

Okay. So, roughly a third, a third, a third; is that fair to say?

Matthew T. Farrell

No, I didn't say that. I said it can be as much of all of it or half of it.

Joe Altobello - Oppenheimer

Okay. Fair enough. And then in terms of the inventories, the inventories were flat year-over-year and they were flat sequentially and I'd expected them to start to build ahead of the new product launches, given that slotting fees, it sounds like, will be bigger in 2Q given the timing of the launches. So I am curious why you mentioned that your working capital controls are doing very well. But I was just curious why the inventories didn't build this quarter a little bit.

Matthew T. Farrell

You probably have heard us say that we are cash flow junkies and we are getting a lot of traction with respect to our working capital management. I think, this is still yet to come out of the balance sheet, particularly in inventories.

Joe Altobello - Oppenheimer

Okay. And then last on de-stocking, are you seeing any de-stocking activity in your major categories from retailers?

James R. Craigie

I would say we have seen a little bit, Joe. We've seen a little bit in some categories. That's very typical for the retailers if they expect less consumer demand, to be careful managing inventories. There has been a little bit, but not much and that's part of the reasons we are being so careful on our inventories too. But we manage... our consumption is very strong. So whatever extent they lower inventories, they are going to have to buy back. But, it has been very minor.

Joe Altobello - Oppenheimer

Okay, great. Thanks.

Operator

Your next question will be from the line of Connie Maneaty of BMO Capital Markets. Please proceed.

Connie Maneaty - BMO Capital Markets Corp.

Good morning.

Matthew T. Farrell

Hi, Connie.

James R. Craigie

Hi, Connie.

Connie Maneaty - BMO Capital Markets Corp.

Let's see, you said you were going to be expanding Arm & Hammer with OxiClean stain removers. Does that mean you are already adding new SKUs since the thing just shipped in the fourth quarter or you getting new distributions?

James R. Craigie

No, it's no distribution, Connie. We launched it in both liquid and powder form and it's driving growth of both the liquid and powder detergent businesses. The later has happened in a long time. So, it's been helpful in that side of the business, too and it's just getting better and better distribution out there as we grow, we don't have the power to get full distribution in a short time period like some bigger companies are. So our distribution growth takes a little longer.

Connie Maneaty - BMO Capital Markets Corp.

Okay, so you're not at 100% ACB yet?

James R. Craigie

No.

Connie Maneaty - BMO Capital Markets Corp.

How far long are you?

James R. Craigie

Pretty well, pretty well. We've started advertising, so we're more than two thirds of the way.

Connie Maneaty - BMO Capital Markets Corp.

Okay. Do you think Arm & Hammer, the 10% growth through the mega brand in the first quarter is pretty impressive, does that last for the whole year?

James R. Craigie

I don't think we will keep up with that level, Connie but we got it up into the 5% to 6% level last year and I think we feel pretty comfortable on that for the total year.

Connie Maneaty - BMO Capital Markets Corp.

Okay. And then finally, I don't recall that you used to give quarterly guidance. Have you changed in the way you you talk about the outlook?

Matthew T. Farrell

We did that once before Connie at the end of the first quarter last year. We thought we can give people some help, so we did the same this year. But we're not going to make a habit out of this.

Connie Maneaty - BMO Capital Markets Corp.

Okay. Thanks very much. That's all I have.

Operator

Your next question will be from the line of Alice Longley of Buckingham Research. Please proceed.

Alice Longley - Buckingham Research Group

Hi. I have gross margin questions. When you say your gross margins are going to be up a 100 basis points for the year, does that include the 160 basis points in the first quarter?

James R. Craigie

Yes.

Alice Longley - Buckingham Research Group

Okay. And if we take out the special items, it was 60 basis points. From that point will we get increase in gross margin expansion through the rest of the year like 60 basis points to 70 basis points to 80 basis points?

James R. Craigie

Yes.

Alice Longley - Buckingham Research Group

All right. Are the $0.05 to $0.06 from the special items in the first quarter, how much... was half of it diesel costs hedging?

James R. Craigie

Well, $0.02 of it was diesel.

Alice Longley - Buckingham Research Group

That was $0.02, because that doesn't reverse, right?

James R. Craigie

No. That's a big windfall in Q1 and then you wind up having higher costs there after.

Alice Longley - Buckingham Research Group

Okay. So that it basically does reverse?

James R. Craigie

Yes, if you think about it in your words may be.

Alice Longley - Buckingham Research Group

May be. And within Specialty how much of the 22% increase was pricing?

James R. Craigie

More than half.

Matthew T. Farrell

More than half of it.

Alice Longley - Buckingham Research Group

Okay.

James R. Craigie

We had a price increases in virtually the entire portfolio in Specialty Products. Remember, we also had that surcharge that we put in place last year in August. So that's carried forward too. So out of that 25%, it's probably 20% is price.

Alice Longley - Buckingham Research Group

Okay.

James R. Craigie

So, it's huge.

Alice Longley - Buckingham Research Group

Now with that pricing, are gross margins up for that Specialty business or they still down?

James R. Craigie

They're not down. They are flat year-over-year.

Alice Longley - Buckingham Research Group

So that means the Consumer business gross margins were up even more without this?

James R. Craigie

Yes, that's correct.

Alice Longley - Buckingham Research Group

All right.

James R. Craigie

You are absolutely right.

Matthew T. Farrell

Because we have a growing SPD business with 22% margins. So consequently, the Consumer gross margins expand, if you want to do math, if you said if I took out the two timing items, slotting and diesel and said the company was up 60 basis points year-over-year. Then if you took the Specialty Products business out of the equation and said okay, what did the Consumer business worldwide expand and you would say it was 110 basis points. So it would be 110 basis points minus 50 basis points for SPD gets you the 60 basis points, which is a 60 basis points number we've talking about on the call. So it's an excellent quarter for Consumer.

Alice Longley - Buckingham Research Group

Okay. Great.

Matthew T. Farrell

And so obviously that delta that helped us in Q1 would have some reversals in future quarters but you can see the Consumer business worldwide was over 100 basis points up.

Alice Longley - Buckingham Research Group

Okay. And the final question, you made a little comment about how you see private label up in some categories, and you said, your premium brands might be a little vulnerable and your excited aboutOxiClean and SpinBrush. Where are you seeing private label gain share and are you seeing any slowing in OxiClean and SpinBrush?

James R. Craigie

We're seeing private label gain share in laundry, we've seen a little bit in cat litter, we've seen some in pregnancy kits. But in each one of those categories, our consumption is up very strongly. So far private label is not affecting us because of our new product innovations and our marketing spending. But it's a concern, we're watching it, it's typical in those kind of economy right now. But we feel just fine. We had record shares this quarter on cat litter, record shares on Trojan, record shares on our pregnancy kit business. So again, we're doing what we have to versus private label, which is launch innovative new products to be product differentiated and supporting them with strong market support and keeping our price gaps appropriately. Don't forget that laundry were value-oriented starts with. So that's a good place to start versus private label. And we also have value pregnancy kit in the brand called Answer, which is getting strong growth on top of the growth of First Response. So we're watching it carefully, but so far we are handling it we think very well.

Alice Longley - Buckingham Research Group

So just to get more on that, is First Response pregnancy test kit also gaining share?

James R. Craigie

Yes. It is now the market leader on a brand basis alone.

Alice Longley - Buckingham Research Group

And are you gaining share on laundry?

James R. Craigie

Yes.

Alice Longley - Buckingham Research Group

Okay. And how are OxiClean and SpinBrush doing?

James R. Craigie

They're both doing fine. OxiClean had a very strong quarter, consumption growth. That's a category really it isn't private label you worry about, Alice, you more worry about people, it's an additive product, which people don't have to use quite honestly. They can just use their laundry detergent, they don't have to use the additive. So the concern there isn't private label at all. It's more that people will just forego using the product. And SpinBrush also had a sales growth in the quarter. But there again people could trade down to a manual toothbrush for less, but there again I mentioned to you, we are launching a new product, which will be the lowest price SpinBrush ever introduced in the marketplace. So, just like we have the Answer brand for pregnancy kit, we are going to have the lower price SpinBrush. So, we hope that not only we will keep driving our volumes if there is any kind of pricing concern, but actually we will get people who are buying manual toothbrushes to convert over to power toothbrushes and then from there trade up to even the better products in the category.

Alice Longley - Buckingham Research Group

Okay, thanks a lot.

James R. Craigie

Okay.

Operator

Your next question will be from the line of Jason Gere of Wachovia. Please proceed.

Jason Gere - Wachovia Capital Markets, LLC

Great. Good morning.

Matthew T. Farrell

Hi, Jason.

Jason Gere - Wachovia Capital Markets, LLC

Just, I guess, one question first just on the marketing spending. Can you talk about where that spending is going? Are you looking into more non-traditional means like online or are you sticking more with cable and print?

James R. Craigie

Jason, we are making a little bit of shift but for smart reasons. We are making some shifts from brand like Trojan to go more online just because it's a more appropriate form to reach the younger target audience. Other than that, no we are largely sticking to our traditional world. We spent about a quarter of our money in print and a fair amount of the rest in TV and radio and other vehicles. So, I would only tell you on the Trojan business, the only one you will probably see a more significant shift into online and probably start in the back half for this year.

Jason Gere - Wachovia Capital Markets, LLC

Is there anything that you're seeing because I guess the scatter rates are... have been going up on advertising in terms of number of impressions, have you seen any change there?

James R. Craigie

I can't give you the details on that. I would just say that I expect the market to be very soft going forward and be a buyers opportunity and we feel fortunate to be in a position to invest in marketing. So we are to get even a bigger bank for our buck in the future quarters.

Jason Gere - Wachovia Capital Markets, LLC

Okay. And then I guess the last question, just want to talk about the trade spending and obviously you guys have been focused on efficient trade spending. I'm just wondering what you're seeing out there in the channel. I mean, certainly you see a lot of deep discount promotions out there and I just was wondering what you're seeing from your competitors in the categories, especially when they are slowing at this point. And do you think this is a year that may be you shy away from net efficiency gains and you see more of the gains coming back may be in the next few years once we are out of the recession?

James R. Craigie

No, Jason, quite honestly, we are not seeing a more aggressive promotion activity to date in a category, particularly important in our largest category laundry. The whole move to compaction is kind of made that. There is a big change going on and we haven't seen promotion spending go up in that category, which is very pleasing to us. We are seeing prices stay at current levels and honestly with the price increase in some categories, we are still keeping normal levels in merchandising. And they are really, the retailers. We've not seen the pressure that you might expect in recessionary time. So we are continuing to try to carve out an efficient trade spending at this point in time going forward.

Jason Gere - Wachovia Capital Markets, LLC

Okay. And then just a last question. If you can just give a little more color I guess on the two more challenged businesses, deodorant you and value toothpaste, how you're managing these brands in a softer economy? Thanks.

James R. Craigie

Yes, those businesses represent a little less than 10% of our total sales. We about a year ago put a very aggressive team in place to manage those businesses and changed the whole approach going to market with them. We went from national advertising basis to much more of a retail focus, working with the key retailers who control the majority of that business than working for lot of in-store promotions and in-store activity. And it's been very successful. Those bands were declining at a low double-digit rate and now we got that down into a mid single digit rate decline and then continue to work on that.

So it's been a big improvement of reducing what you might call a drag on our company to actually have those brands declining at a much slower rate. We've actually had seen some positive progress with couple of businesses like Aim and Pepsodent, actually had positive sales growth in the first quarter because at the end of the program we're doing a retail. So the team has done a great job. We just took a total different approach to managing those businesses with the marketing spending they had and actually at the same time we shifted some of the advertising support over to our core businesses, our larger brands and it has driven even stronger growth on those brands. So the combination has been a big factor in the solid organic revenue growth we've had as a company and we continue to expect that going forward.

Operator

Your next question is a follow up from the line of Bill Schmitz of Deutsche bank. Please proceed.

William Schmitz - Deutsche Bank

Hi guys, a couple of things. Jim, just on the compaction stuff, have you seen some consumer pantry loading because some of the stuff we have seen is that people are kind of confused, and so they go about buying 100 ounce even though it's compacted?

James R. Craigie

Yes, it's a good question Bill, I mean we've read a little bit about it. We've actually read people doing that just in general because of recession running out there and buying products, I guess, probably more food oriented than maybe household and personal care. But honestly, we can't put a number on that. We haven't really seen anything measurable to date because honestly as I said, all the competitors are following the timetable. We haven't seen anybody try anything like loading excess inventories out there to drive more into the pantries. And consumers will pick up a larger bottle before they pick up the smaller bottles, but everything has been going smoothly with the trade on that. So I really don't think it had any kind of measurable impact on the business.

William Schmitz - Deutsche Bank

Okay. And then, Matt, just on the hedge, if you're with the capital hedge, should it be at other income line, why is that flowing through an operating line or am I just totally off?

James R. Craigie

No. It goes through Cost of Goods Sold.

William Schmitz - Deutsche Bank

Okay. But I thought hedge's typically ran through the other cash flow, this was like an operating hedge, right?

Matthew T. Farrell

No, it relates to an item that's an input in Cost of Googs sold, so that's appropriate place to match it.

William Schmitz - Deutsche Bank

Okay. And then on the other expense line, it also came down year-over-year, did you say why that was?

Matthew T. Farrell

Yes, we had FX gain in there of $2 million, plus interest isin there. So, interest expense is way down year-over-year, lower rates and lower debt.

William Schmitz - Deutsche Bank

Okay, great. Thanks so much.

Operator

And our last question will be a follow-up from the line of the Connie Maneaty of BMO Capital Markets. Please proceed.

Connie Maneaty - BMO Capital Markets Corp.

Hi, I was hoping you could share some observations of how the process for the sale of the Unilever detergent brand is going?

James R. Craigie

I know nothing about... honestly Connie we are in no position to comment on that. That's being run by another company, we are in no position to comment.

Connie Maneaty - BMO Capital Markets Corp.

Okay, just that I'd ask.

James R. Craigie

Okay. Anyway I want to thank you all for taking the time to tune in with us today. Again I would say we're very pleased with our first quarter results. We think we're very well positioned in this very tough economy right now going forward and as we said before we expect the year to have good solid organic growth. We expect to deliver the 100 basis points of gross margin improvement. We expect to keep tight control over overhead costs and on top of all that invest in marketing behind our brands to drive the organic growth. We are continuing to look for smart accretive acquisitions out there and we are committed to deliver the 13% EPS growth in the year despite the significant increase in commodity cost. And with that I'll say good-bye. Thank you.

Operator

Thank you for your participation in today's conference. This concludes our presentation and you may now disconnect. Have a wonderful day.

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Source: Church & Dwight Co., Inc. Q1 2008 Earnings Call Transcript
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