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Executives

James R. Craigie - Executive Chairman, Chief Executive Officer, Member of Executive Committee and Interim President of Domestic Personal Care Division

Matthew Thomas Farrell - Chief Financial Officer and Executive Vice President of Finance

Analysts

Alice Beebe Longley - The Buckingham Research Group Incorporated

Christopher Ferrara - BofA Merrill Lynch, Research Division

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Jason Gere - RBC Capital Markets, LLC, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Ian J. Gordon - S&P Equity Research

Constance Marie Maneaty - BMO Capital Markets U.S.

Lauren R. Lieberman - Barclays Capital, Research Division

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Erin Swanson Lash - Morningstar Inc., Research Division

Nik Modi - UBS Investment Bank, Research Division

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

Church & Dwight (CHD) Q2 2012 Earnings Call August 7, 2012 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Second Quarter 2012 Earnings Conference Call. Before we begin, I have been asked to remind you, on this call the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecast. These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings.

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

James R. Craigie

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

Let me start out by saying that I'm very happy with the second quarter business results. In our last earnings call in May, we told you that we exited 2011 with strong momentum towards achieving our annual organic revenue growth target of 3% to 4%. We expected the organic revenue growth for the first half of 2012 to be higher than the second half due to the higher organic revenue growth levels in the back half of 2011.

That is exactly what has happened, as we have delivered 8.4% organic revenue growth in the first quarter of 2012, followed by 3.7% growth in the second quarter, for a net of 6% organic revenue growth in the first half of 2012. That puts us in great shape to deliver our annual organic revenue growth target of 3% to 4%.

We also told you in May that we expected a lower gross margin in the first half of 2012, followed by higher gross margin in the second half, to deliver our annual gross margin target improvement of 25 to 50 basis points.

Despite our gross margin being 110 basis points lower a year ago in the first quarter, and 100 basis points lower a year ago in the second quarter, we are right on track to achieve our annual target, although it will be at the lower end of the range forecasted in our May earnings call. Matt will tell you in a minute the initiatives that we have already implemented, which will drive higher gross margins in the second half of this year.

The second quarter results also reflect that we continue to tighten our belts on overhead costs, as SG&A as a percent of sales improved by 80 basis points versus year ago. As forecasted in May, we achieved our marketing -- we increased our marketing spend in the second quarter by 200 basis points versus the first quarter to support the launch of new products in our 8 power brands.

This increased marketing spending is paying off, as we achieved market share gains in the majority of our power brands in the second quarter.

Most importantly, we delivered a 6% increase in EPS versus year ago, excluding a $0.04 onetime tax benefit in the year-ago numbers.

This EPS result is ahead of our expectations for the quarter and puts us in line to deliver our annual adjusted EPS target of 9% to 10%. Those of you who know me know that I've been a long-term pessimist about the business environment. I believe we'll continue to face strong headwinds in 2012, including higher commodity costs and weak consumer spending. All consumer packaged goods companies are fighting the same headwinds. But we believe that no other consumer packaged goods company is as well suited us Church & Dwight to deliver exceptional performance in a tough environment. I'll explain my rationale for that statement in a few minutes after Matt provides you with greater insight on the financial results for the second quarter. Go ahead, Matt.

Matthew Thomas Farrell

Thanks, Jim. Good morning, everybody.

I'll start with EPS. Second quarter EPS was $0.56 per share compared with $0.57 in 2011. EPS was up approximately 6% from year ago compared to an adjusted $0.53 of earnings per share, which excludes the second quarter 2011 tax benefit as a result of New Jersey corporate tax reform.

Reported revenues were up 3.2% to $696 million. Organic sales growth, 3.7%, which excludes the impact of a 2011 brand acquisition and foreign exchange rate changes, which together had a net negative impact of 50 basis points. Of the 3.7% organic growth, approximately 6.3% is due to volume, with 2.6% negative product mix and pricing.

Given our strong first half of 6% organic sales growth, we continue to expect to deliver organic sales at the high end of our 3% to 4% annual target for the year.

Now, let's read this segments. I want to start with the domestic business. Consumer domestic business' organic sales increased by 5%, primarily due to the higher sales of ARM & HAMMER Liquid Laundry Detergent, period.

Other products that contributed to volume growth were XTRA Liquid Laundry Detergent, ARM & HAMMER Cat Litter, Kaboom cleaners and the introduction of ARM & HAMMER CRYSTAL BURST unit dose laundry detergent. These increases were partially offset by lower sales of ARM & HAMMER Spinbrush, Answer diagnostic kits and ORAJEL oral analgesic products.

Volume contributed approximately 8.6% to sales, partially offset by the 3.6% negative effect of product mix and price, but mostly this was product mix.

I'll now turn to international. Our international organic sales decreased by 2.7% in Q2, due to lower sales in Europe. This decrease is driven by a volume decline of 2.4% and -- with 30 basis points from product mix and price. The decline is concentrated in the U.K. and France. It is largely in our toothpaste and depilatory businesses and caused by competitor actions. We don't expect a repeat in Q3, and the international business is off to good start in July.

With respect to our Specialty Products Division, organic sales were higher by 6.3% with volume up 5.6% and price up 70 basis points. The price is driven by animal nutrition, where we are recovering raw material costs, and the organic increase is primarily due to stronger end markets.

Now back to the total company. Looking ahead for the balance of the year, to remind everybody, we still expect to be at the high end of our 3% to 4% organic growth target. Organic sales growth was higher in the first half of 2012 as a result of easier comps in the first half. The comparisons are far more difficult in the second half due to 5% and 7% growth rates in the third and fourth quarter of 2011, respectively.

We continue to expect our value products, particularly in the laundry category, to continue to benefit from the weak economy and deliver strong organic growth.

Next up is gross margin. Our reported second quarter gross margin was 43.5%, a 100 basis points contraction from year ago. The decrease in gross margin is consistent with our expectations and is primarily due to unfavorable product mix, as well as sales of lower-margin consumer domestic household products, which rose 10.5%, and net sales of higher-margin consumer domestic personal care products, which were 5.1% lower.

The contributors to Q2 contraction include the startup of the new California plant, which is now fully operational, and in-house production of unit dose laundry.

Because of the trend in product mix, we continue to expect full year gross margin expansion to be at the lower end of our 25- to 50-basis-point range for 2012. Despite gross margin contraction in the first half, we expect to hit the lower end of the annual 25- to 50-basis-point target as a result of the following:

Number one, productivity improvements from our new plant in California and in-house production of the unit dose laundry products; number two would be the launch of new products in the second half; number three would be lower slotting in the second half versus the first; number four would be recent pricing, which went into effect last week, on ARM & HAMMER Cat Litter; and finally, the benefits of our commodity hedging program. So we are confident in our expectation of second half gross margin expansion because these initiatives have already been implemented.

Now, marketing. Marketing spend for the first quarter was $88 million or 12.7% of revenues. This is a 30-basis-point decline from the prior year spend, but slightly higher on dollar spend.

We grew dollar share on 5 of our 8 power brands in the second quarter. This to due to great execution by our sales and marketing teams. Looking ahead, we expect to increase spending for the balance of the year.

SG&A is next. SG&A was lower year-over-year by $2.5 million. SG&A as a percentage of sales was 13.2%, which is down 80 basis points from the year ago, and the lower SG&A costs in the quarter primarily reflect lower legal costs.

For the full year, we expect to maintain approximately 13.1% of sales for SG&A, which is down 30 basis points from year ago. This is a reflection of our continuous vigilance to control SG&A.

With respect to operating margin, the reported operating margin for the quarter was 17.6%. Our operating margin was 10 basis points higher than last year's 17.5%.

Income from affiliates decreased slightly due to lower income from our Armand Products joint venture. On a full year basis, we expect a decrease of $3 million on JV income, in part due to the start up of our Natronx joint venture.

Other income was virtually unchanged in the quarter. We do not anticipate any material changes for the full year as compared to 2011.

Next is income taxes. Our effective rate for the quarter is 35.6%, compared to last year's 30.6%, which included a onetime benefit, which I spoke about earlier. We continue to expect the full year effective tax rate to be approximately 35%.

Now turning to cash. We generated $189 million of net cash from operations for the first 6 months of 2012, which is a $17 million increase over last year. And I think it's important to remember that this is net of a $16 million increase in year-to-date CapEx. We have spent $40 million in year-to-date CapEx, of which $21 million related to our new California manufacturing and distribution facility.

I'm going to wrap up now. So in conclusion, the second quarter highlights include 3.7% organic sales growth, driven by 6.3% volume growth and we increased share in 5 of our 8 power brands, resulting in 6% adjusted EPS growth. We expect third quarter earnings per share of approximately $0.58 per share, compared to $0.54 for the prior year. We anticipate a high-quality second half, with gross margin expansion and higher marketing spend in each of the next 2 quarters.

Now remember that we averaged less than 12% marketing spend in the first half of 2012, and we expect to average about 14% in the second half. Now this all results in a balanced year when comparing first half and second half earnings per share. So we are maintaining our annual earnings per share goal of $2.41 to $2.43 for the year, which is an increase of 14% to 15% over last year's reported $2.12, and a 9% to 10% earnings increase, excluding the fourth quarter 2011 deferred tax charge.

Back to you, Jim.

James R. Craigie

Thanks, Matt. I'll finish off our call today by adding a little color to the solid second quarter business results Matt just took you through and my outlook on the rest of the year.

Our second quarter business results are directly linked to the 7 factors that support my earlier statement that we believe that no other consumer packaged goods companies is as well suited as Church & Dwight to deliver exceptional performance in a tough business environment.

First, we have the most unique product portfolio in the CPG industry. It consists of both premium and value brands, which puts us in a position to thrive in any type of economy, as exemplified by our consistently strong double-digit EPS growth over the last 10 years. In particular, our value brands, representing about 40% of our revenue base, have experienced strong growth in this recessionary economy, as consumers are making smart choices by switching to, and staying with, our high-quality but lower-priced brands.

A great example of this is the fact that our value based ARM & HAMMER laundry detergent business, which is our largest business, achieved over 15% dollar sales growth in the second quarter, which is the highest growth of any brand in the liquid detergent category. This is a remarkable result in the liquid laundry detergent category, whose consumption actually declined 2% across all channels in the second quarter on a dollar basis.

Our resulting share growth in ARM & HAMMER liquid detergent was an all-time quarterly record for the brand and far outpaced any other brand. By the way, the much heralded launch of the unit dose form has done nothing so far to help sales in the laundry detergent category, as the total combined category consumption of liquid, powder and unit dose form in dollars across all channels, was 0.3% below year ago in the second quarter.

In fact, of all the major liquid laundry detergent brands that have now launched in unit dose form, ARM & HAMMER was the only brand that grew its consumption of its liquid laundry detergent form in the second quarter. And Church & Dwight was the only company that grew its consumption of laundry detergent in the second quarter.

The second factor which was a key driver of Church & Dwight's success is that we have a proven record of building our power brands. We have over 80 brands, but 8 of these brands are our power brands, which generate 80% of our sales and profits.

From 2008 to 2011, we grew market share on these 8 power brands in almost 80% of the quarters. In both the first and second quarter of this year, we grew market share on 5 of our 8 power brands.

Two key factors drove these excellent share results. First, we have effectively reinvested some of the increased profits from the strong growth of our value brands to increase marketing support on our 8 power brands by a total of 130 basis points from 2007 to 2011.

While our marketing spending in the first and second quarters of 2012 was approximately equal in dollars spent a year ago, we expect to spend more marketing dollars in the second half of this year than a year ago to support the launch of our new products, which will achieve full retail distribution in the second half.

The other factor driving the growth of our power brands is our robust pipeline of new products. Over the past 4 years, new products delivered over 50% of the company's organic revenue growth. We have shipped innovative new products in every category this year to support delivery of our organic growth target of 3% to 4%. We expect these new products to be as successful as the new products we launched over the past 4 years.

A sample of these new products include a new sensitive skin product for our ARM & HAMMER Liquid Laundry Detergent line that is designed to significantly enhance the brand's appeal to the over 50% of consumer households who have sensitive skin issues.

Our sensitive skin detergent has an appealing fragrance, which has a unique advantage versus competitive sensitive skin products which have no fragrance. This new product will help to drive continued strong growth of the ARM & HAMMER Liquid Laundry Detergent business, which has achieved 13 consecutive quarters of growth.

Another great new product launch in 2012 is ARM & HAMMER Ultra Last Cat Litter. Every granule of this new cat litter is covered with baking soda to deliver long-lasting odor control. Ultra Last is off to a great start and follows the highly successful launch of the ARM & HAMMER Double Duty Cat Litter line in 2010. These 2 new products now represent over 50% of the brand's total cat litter sales, and helped drive a 15% in dollar consumption and a 2.0% share gain in the second quarter versus year ago.

As a result, the ARM & HAMMER Cat Litter brand has now achieved 34 consecutive quarters of net sales growth, 13 consecutive quarters of share gains and is now the clear #2 brand in the clumping cat litter business. That's pretty impressive for a category which we entered only 14 years ago.

It also shows a strong consumer appeal to the ARM & HAMMER brand, which now delivers over $1 billion in total sales.

On the personal care side of our business, we have several exciting new products in 2012. First is our new toothpaste for sensitive teeth, which combines the ARM & HAMMER and ORAJEL power brands to provide maximum pain relief in a low abrasion formula that is gentle on enamel. This new product helped to drive a share gain for the ARM & HAMMER brand in the second quarter and a higher rate of consumption growth in the leading toothpaste brand.

Another new product in the oral care category is Tooth Tunes, which is a line of toothbrushes for young children that uses proprietary technology to play 2 minutes of music from a broad range of artists, such as the Black Eyed Peas, Queen and Selena Gomez. For those of you with young children, I guarantee that if use the Tooth Tunes toothbrush, you'll have to yell at your kids to stop brushing instead of yelling at them to brush.

Tooth Tunes represents our first entry into the $800 million manual toothbrush category. And initial distribution results of this new product, which began shipping in July, are very strong.

We are also pursuing 2 other high-margin white space categories to help drive the company's future growth. First is the vibrator category, which is over $300 million in size, with no major branded players. We first entered this category in 2005 with our iconic TROJAN brand. And this year, we are launching full-size vibrators into new channels. We are very pleased with the distribution and sales gains in our entire Vibrations line, which we believe has been aided by the popularity of the Fifty Shades of Grey novels.

Second, we have entered the dish-washing additive category, which is over $100 million in size via the OXICLEAN brand. The government's mandated removal of phosphates from dishwashing detergents has created a need for a booster product to deal with the noticeable increase in cloudy film on glasses and dishes.

Our new OXICLEAN dishwashing booster product boosts the cleaning power of dishwashing detergents to once again deliver crystal-clear dishware. This new product has already achieved a 9% share of the dishwashing additive category after only 4 months in distribution.

There are many other new products that we are launching in 2012. But in the interest of time, I'll move on with my review of the factors driving Church & Dwight's continued success and discuss our updated earnings guidance for the year.

Let me quickly run through the 5 other key drivers of our success. Number three is that we have a proven history of ferociously defending our brands as evidenced by our defense of OXICLEAN, when a large competitor entered the category in 2009.

In fact, OXICLEAN's second quarter share of 40.9% is 200 basis points above its share at the time when the major competitor launched its attack. So we've not only successfully defended our position against this multibillion-dollar mega brand, but now we are attacking back by improving our #1 share position in this category.

The number four factor behind our continued success is the strong growth of our international business. While international business represents only 20% of our total revenues, it has delivered high single-digit sales growth and double-digit operating profit growth over the past 5 years. The strong growth continued in the first quarter of 2012, but did not continue in the second quarter due to some issues largely focused in Western Europe, which Matt mentioned earlier.

I am fully confident that we will reinvigorate growth in our international business in the back half of the year based on the programs we have put in place to deal with these issues.

Factor number five is our long history of success in expanding gross margin through cost optimization programs, supply-chain restructuring, acquisition synergies and launching higher-margin new products.

We expanded gross margins by 1,550 basis points in the past 10 years. While we did not improve our gross margins in 2010 and 2011, we were successful in holding 380 of the 430-basis-point gain achieved in 2009 despite major headwinds for higher commodity costs. This result was better than all of our major competitors who incurred larger gross margin declines during that period.

As Matt and I told you earlier, our gross margin declined about 100 basis points in the first and second quarters of 2012, but that was in line with our expectations. We have a broad range of initiatives that have already been fully implemented for the back half of 2012 that should enable us to achieve our gross margin target at the low end of our 25 to 50 basis points improvement we originally forecast over 2012.

Factor number six is our ability to tightly manage our overhead costs. Church & Dwight currently has the highest revenue per employee of any major consumer packaged goods company. Despite this best-in-class position, we were able to lower our SG&A overhead cost by an additional 80 basis points in Q2 versus year ago and a full 60 basis points below year ago for the entire first half of 2012. This significant reduction reflects how aggressively we continue to manage our overhead cost to stay best in class in our industry.

Finally, factor number seven is the strong record in free cash flow conversion. We've almost quadrupled our free cash flow over the past 10 years. Over the past 5 years, our free cash flow conversion, as a percent of net income, was up 128%, which was best in class in the CPG industry.

Our free cash flow for the first half of 2012 was 10% ahead of last year despite a significantly higher level of planned capital expenditures in the first half of 2012, largely related to the new plant in California.

We expect capital expenditures to be lower than year ago in the back half of the year, which should lead to higher cash flow for the total year than year ago.

Our cash flow and strong balance sheet enables us to smartly invest in our future through investments in our supply chain, including construction of more efficient plants, and acquiring new businesses that adds to our portfolio of power brands. All of these factors give me great confidence about our ability to deliver our aggressive 2012 business targets despite the very tough business environment facing all companies these days.

In my biased opinion, no other consumer packaged goods company is as well suited as Church & Dwight to thrive in any type of business environment.

We were delivering exceptional EPS growth before the recession. We are delivering exceptional EPS growth during the recession. And we are taking actions to ensure that we continue to deliver exceptional EPS growth going forward, regardless of the future economic environment.

Let me switch gears now so that we talk about our outlook for the second half of 2012. As stated in the press release, as a result of the fact that our first half results were very strong, we remain confident that we can deliver our previously announced earnings per share estimate of $2.41 to $2.43, which is an increase of 9% to 10% over 2011 adjusted EPS numbers. We strongly believe that we can deliver this aggressive EPS target despite continued expected headwinds from higher commodity costs and weaker consumer demand.

Our confidence in delivering this aggressive EPS target is based on 2 key factors. First, we strongly believe that we continue to deliver the market share gains in our power brands required to deliver our target of 3% to 4% organic growth. These share gains are expected to result from increased traction in our innovative new products, significant distribution gains across the majority of our power brands and increased marketing spending behind our power brands in the second half of this year.

We achieved 6% organic growth in the first half of the year, and these 3 factors should contribute to continued organic growth in the second half of 2012, although this growth will not be as strong as the first half because we are up against strong organic sales in the second half of last year.

Second, we strongly believe that we can still deliver gross margin expansion within our targeted 25 to 50 basis points despite being down almost 100 basis points in the first half of 2012. Our gross margin expansion is expected to result from a wide range of initiatives that have already been implemented, as Matt highlighted earlier.

As a result of these factors, I feel highly confident that we can deliver diluted earnings per share growth of 9% to 10% for total 2012 on an adjusted EPS basis, which exceeds what most of our competitors are promising in this tough environment.

In conclusion, 2012 is shaping up to be a very challenging year due to weak consumer demand and high commodity prices. But when things get tough, you should place your bets on the company with the product portfolio that can thrive in such an environment and a management team that has the track record of knowing how to successfully leverage their portfolio to deliver strong EPS growth.

That ends our presentation. I'll now open the call to questions that you may have, which Matt and I will do our best to answer.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Alice Longley with Buckingham Research.

Alice Beebe Longley - The Buckingham Research Group Incorporated

My first question would be, were promotional levels up year-over-year? I mean, the negative price mix in the quarter was more than I thought, and I'm wondering if some of that was a shift from advertising to promotional spending more than you expected?

James R. Craigie

Yes, Alice, this is Jim. Not really, not really. Promotional spending was in line. Again, consumers continue to move down to the value brands, we keep benefiting from that. But really, promotional levels were fine. Pricing was a little bit below year ago, but nothing significant.

Matthew Thomas Farrell

Yes. And then to add to that, Alice, the household versus personal care mix is very skewed in the quarter.

Alice Beebe Longley - The Buckingham Research Group Incorporated

The promotional spending, did it take more off sales than it did a year ago?

Matthew Thomas Farrell

We don't think promotion is a factor in the story this quarter. It's really around the mix of the products.

Alice Beebe Longley - The Buckingham Research Group Incorporated

Okay. My next question is, you're expecting the third quarter to be a -- looks like 7% in the fourth quarter, up 13%, can you -- and that, just to get to the low end of your EPS guidance, can you explain why the shift to the fourth quarter within the second half? And also, could you comment on gross margins in the third quarter? Will they be up yet?

Matthew Thomas Farrell

Yes, we don't really look at it as a shift to the fourth quarter, Alice. As I said earlier, we have low marketing spend, less than 12% in the first half. So if we're going to be consistent with our marketing spend on a full year basis, we're going to have, average 14% marketing in the second half. So that's just math. As far as the EPS goes, we called $0.54 for the second quarter. So we beat it by $0.02, arguably because marketing was lower. So that $0.02 has to go somewhere, so it goes to the third quarter. So absent that, probably third quarter may be more like $0.60. So we're pretty relaxed about that. And as far as the fourth quarter goes, as far as year-over-year, fourth quarter year-over-year last 3 years has been up pretty high, 15% to 20% on an annual basis, so if you went back and looked at say, '09 to '10, '10 to '11 and now '11 to '12. So from our point of view, it's all in line. What is your gross margin question?

Alice Beebe Longley - The Buckingham Research Group Incorporated

Your gross margins, you're expecting to be up for the year. Of course, they were down in the first half. So will they start being up year-over-year in the third quarter?

Matthew Thomas Farrell

Yes, absolutely.

James R. Craigie

Alice, this is Jim. Let me add to our marketing spending. If you look at our year-ago numbers, we spent more marketing in the fourth quarter than the third quarter. We're kind of reversing that this year. We're going to spend more marketing "spending" in the third quarter than the fourth quarter. Still very high in the second half, but we're putting a very strong focus in the third quarter, because we got great distribution on new products. In some cases, faster than we got a year ago. And we're going to go out there and very strongly support that in the third quarter this year.

Alice Beebe Longley - The Buckingham Research Group Incorporated

And is it fair -- you just said that you beat your own guidance in the second quarter maybe because marketing was lower. Was it lower than you had originally expected? And if so, why?

Matthew Thomas Farrell

Look, there's lots of factors, Alice. But if we're down -- we were down a little bit on marketing year-over-year, so we came in around 12.7%. So it's all a function of timing and when we want to spend the money. So we were having a good quarter, so we pushed it back to the third quarter.

Alice Beebe Longley - The Buckingham Research Group Incorporated

Okay. And then I have one final question. And that is you said that your high-margin personal care products were down 5.1% in the quarter. Could you tell us which products those were? And maybe that's Spinbrush, does that reverse in the third quarter?

Matthew Thomas Farrell

Yes. It was Spinbrush, ORAJEL and Answer were the 3 that gave us trouble in the second quarter. But when you think about why is the second half going to be different for personal care than the first half? There's really 4 reasons for that. The first would be the new products. So you've heard -- you read about and you've heard Jim talk about Tooth Tunes and also the ORAJEL single dose. That's the new products. The second thing is we're building a lot of traction for our ARM & HAMMER ORAJEL sensitive toothpaste, as well as the TROJAN Charged, and also Vibes in bricks and mortar. So we're getting a lot of traction there and a good distribution. The third thing is the Q2 consumption actually outpaced our shipments. So when that happens, that actually bodes well for personal care. And last thing is really July is off to a pretty good start for personal care. So we have some confidence in the third quarter.

Operator

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

Christopher Ferrara - BofA Merrill Lynch, Research Division

I know last quarter you said that marketing would be 13% of sales this year, and I think you're still suggesting that. Is that right, you still think marketing is going to be 13% of sales in 2012?

Matthew Thomas Farrell

Yes, it will be close.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Okay. And I guess, I wanted to ask about the mix drag, right? And looking, Jim, to your point, right, I mean, this is a tough world out there, right? And people are trading down to your products, which is driving disproportionate household growth. I know the mix piece is getting -- is going to get a little better in the back half, but has your thought process evolved at all on that? And that, I mean, do you -- are you looking at mix as something that might be more of a permanent drag, not withstanding all the personal care activity? I mean, you just think it's going to be a longer drag than expected? Or do you still think it's sort of a temporary phenomenon?

James R. Craigie

I think it's temporary, Chris. We were pleasantly surprised by the numbers we got on the household side in the first half. We knew we had good growth, but it exceeded our expectations. And as Matt told you, we've adjusted for that in the back half to reflect what we think is a better mix now knowing that, between household and personal care. And as Matt just told you, there's reasons why we think personal care would be stronger in the back half, which are very solid, and we feel very comfortable about. And as he said, Q2 consumption outpaced shipments which means we entered the quarter in a good inventory position. And as expected, July is off to a very good start across the board. So we feel very good. We looked at the past results very closely. You've seen what's happened on the mix issue, and adjusted for our back half forecast between household and personal care, given all the stuff that's going on, the higher marketing spending, the new products going out there, the traction we're gaining on the new products. So we think we have a much tighter handle on the whole mix issue in the back half quarters. That's why we have great confidence around the calls we're making.

Christopher Ferrara - BofA Merrill Lynch, Research Division

Great. And just one last one. I think in Q2 of last year, you called out the vibrations category at a $1 billion, then it went to $700 million in Q3, $500 million at CAGNY. I think you said $300 million today. So is there a change in behavior going on? Or are you guys just kind of taking a fresh look at the numbers on that category?

James R. Craigie

It's a fresh look, Chris. It's a hard category to estimate because a lot of it is done in nonmeasured channels. So we keep trying to get close to this channel. We could be off by a factor of 2. We've been kind of just downsizing it just to kind of get a better handle on it. It's still an enormous category with no competition basically. And we're coming out there and doing very well. We're very happy with our results. It's a slow build because a lot of it is mom-and-pop stores versus big chains initially in that. So we're building very nicely. We're happy with the results. We're just trying to be more conservative on this category call. But again, this is a category we basically face no branded competition. So it's just all gravy to us, and we're slowly gobbling it up.

Operator

Your next question comes from Joe Altobello with Oppenheimer.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Just first, one clarification. I think you said, Jim or Matt, that marketing spending will be higher in the third quarter than the fourth quarter. That seems to be a bit of deviation from historical precedence.

James R. Craigie

Yes, that's true. That's true, Joe. It's just -- we're again, very happy with the distribution gains that we've made so quickly on a lot of our new products. And in light of that, we're pulling forward some marketing spending for the third quarter to take advantage of that. Normally, the new product build would probably not get the full distribution by the middle of the third quarter. This time, we pretty much got where we want by the early part of third quarter. So we want to support those new products so we're pulling forward the marketing spending, and we feel very confident that will drive some really good results in the third quarter and then fourth quarter will be strong, too. Like Matt said, our spending in the back half of the year is going to be higher than the front half and that should really drive the power brand share gains we want.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Got it. Okay. And then just in terms of the overall pricing and promotion environment, what's going on, I guess, in powder detergent, oral care? You're hearing, obviously, a handful of your competitors doing some pricing actions there. And also, are you guys prepared for the higher merchandising in the laundry unit dosing?

James R. Craigie

Yes. We're fully aware of what's going on out there in pricing. Our competitors have announced their actions. We have held our pricing on the powder side. We still have a very strong advantage. The only sad news about that is the powder category now has become more expensive than the liquid category, which is a change. In the past, powder was less expensive. But because of the actions in that category and the aggressiveness in the liquid side, powder detergent is really hurting. The latest quarter consumption dollars on this powder category, for the category, we're down almost 19%. That was the worst quarter in -- I can go back over a year or 2. So powder has really taken on the chop from all the activity in liquid and the new unit dose. So we'll see what happens. We've done very well. We were the only company -- we grew share in liquids, powder. And obviously, unit dose was a pure plus. So we're the only guys who grew share across all 3 categories. But the powder category has taken a real beating right now given where it is. But we feel very competitive. We're in a good position, and the people keep trading down. They love ARM & HAMMER Liquid Laundry Detergent. They love the new product. Our powder is doing well. Unit dose is -- we're getting our fair share of that. But I've always had my fears about unit dose, that it's going to hurt the overdosing in the liquid category. And after 4 straight quarters where the category grew, the category liquid declined in Q2. I didn't like that. But we grew share enormously, record shares, I told you. And I -- the jury is still out on unit dose, but it is not off to a good start for the category.

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

Okay, and just one last one in terms of uses of cash. I think you mentioned, obviously, cash flow is very strong in the first half and looking to be strong for the full year. And I think last call you said no more share repurchases after April. Is that still the case? And a dividend payout, I guess is now about 40%. So I would imagine, going forward, your dividend increases would probably follow earnings growth. Is that fair to say?

Matthew Thomas Farrell

Yes. Two things, Joe. One is with respect to share repurchase, that is correct. We don't anticipate any additional share repurchases for the balance of the year. As far as our payout goes, yes, our payout is 40% of earnings. Our historical practice has been to increase the dividend at the same rate as our annual earnings increase. But we don't make those decisions until the February announcement or the fourth quarter announcement each year.

Operator

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

Jason Gere - RBC Capital Markets, LLC, Research Division

I guess I just want to first talk about the laundry growth. Did you give a number in terms of what the shipment trends in laundry was in the quarter?

James R. Craigie

Our numbers?

Jason Gere - RBC Capital Markets, LLC, Research Division

Yes, the actual -- within household products, up 10.5%. How much was -- what was the year-over-year increase in laundry as opposed to some of the other, cat litter, deodorizer? Was that double digit?

James R. Craigie

Yes, double digit. I'm trying to figure out what exactly the -- you asked for sales? We don't give sales by specific things. It was -- well, it was in the double digits, for sure.

Jason Gere - RBC Capital Markets, LLC, Research Division

I guess the follow-on question is really thinking about the back half of the year, where you do start to anniversary some tougher comps. How confident are you with some of the, as you said, some of the competitive actions that are out there, that if you look at it maybe on a 2-year stack rate, that the trends can really kind of stabilize here? And the reason why I say this is that personal care obviously has been a little bit more challenged, you do have some new innovation, but how confident are you that if the personal care sales don't deliver what you think they will, that laundry can continue to overcompensate?

James R. Craigie

Jason, I feel very confident. Household will continue to be strong. We've looked in great detail on our merchandising support in the back half, our marketing support, how our new products are doing, the distribution gains we've achieved. So even though we're comping huge growth in the back half of last year, we still feel solid about that. And the personal care stuff is really gaining traction. I think I told you, in Q2, ARM & HAMMER toothpaste grew more in consumption percentage basis than the leading toothpaste brand. The sensitive thing is off to a good start. The other new products are doing well. Tooth Tunes distribution results so far have been incredible. So we feel very well. And we exited with a low inventory position going into the back half. So the personal care is off to a really good start. So, I don't have a crystal ball of perfection but, boy, I'm feeling great about the second half of the year right now.

Jason Gere - RBC Capital Markets, LLC, Research Division

Okay. And then just with personal care, so is third quarter more about the sell-in and fourth quarter more about the sell-through?

James R. Craigie

Well, it depends. it's sell-in on the Tooth Tunes and the ORAJEL single dose cold sore product, new products. But on the stuff we launched in Q2, like the ARM & HAMMER ORAJEL toothpaste, Nair products, TROJAN Charged, those are out there. So it's kind of a mixed bag because some were launched in late Q1, early Q2. They've got full distribution now, and the other ones are just starting. But the Tooth Tunes we think will be pretty fast, because it's hot and the trade loves it. And ORAJEL single dose will be a little slower because it's just a slower category overall, and it's more towards the cold season in Q4. So -- but, just I'm really excited about the new products this year there. Obviously, over-delivering what we expected, which is great news, and I think it just makes for a good second half of the year.

Jason Gere - RBC Capital Markets, LLC, Research Division

The second question, just on the international and you're -- yes, you're right, I think it was, the organic sales, it might've been negative for the first time in 6 years, I think. Europe is what, 6%, 7% of sales? I guess, can you talk about, I guess 2 things. One, can you talk about how Canada and Mexico are holding up? And two, should we expect that the whole international organic sales returns to positive trends in the third quarter? And if so, why?

James R. Craigie

Well, you can definitely expect the international to return to positive growth in the third quarter. We viewed that in great detail [ph]. We feel confident. Canada and Mexico. Mexico is very strong. We're doing terrific down in Mexico. We had a great quarter. Canada was a little short of expectations in Q2 based on some minor issues, which have been corrected. And we feel very good about our Q3 in Canada. In Europe, we put programs in place to deal with some of the competitive pricing stuff on oral care in there. So I feel we've dealt with the problems and look forward to international coming back to being a nice, solid contributor to our growth.

Jason Gere - RBC Capital Markets, LLC, Research Division

Okay. And then the last question is a housekeeping. Matt, you were talking about the equity in earnings of affiliates. Did you say it was going to be down $3 million year-over-year? There was a $3 million number you threw. So in 2011, it was $10 million. So are we looking at $7 million, or what was that $3 million?

Matthew Thomas Farrell

Yes, that's correct.

Jason Gere - RBC Capital Markets, LLC, Research Division

So it's going to be $7 million for the full year. So the back half will probably be only like $1 million in equity?

Matthew Thomas Farrell

I don't have the 4 quarters laid out in front of me, but you're correct on the full year basis.

Operator

Your next question comes from Bill Schmitz with Deutsche Bank.

William Schmitz - Deutsche Bank AG, Research Division

So can you talk about what you're hedged and when the hedges start to roll off? Because I think September was kind of when you put in the hedges in last year. So how much of the gross margin that you guys are predicting for the back half of the year is sort of contingent on some of the hedges rolling off? And is it more than just diesel?

Matthew Thomas Farrell

Yes, we have -- 70% of our most volatile inputs are hedged for the second half, Bill. And it's not just diesel. It grows everything from surfactants, resins, soda ash, latex, palm fatty acid distillate carbonates. There's 7 or 8 categories that we focus on. So we've got 70% of that hedged, so we have some sense of what our most volatile inputs are going to do. And as far as next year goes, we've been just doing some selective hedging of 2013 now, taking advantage of some of the dips that have happened over the last couple of months.

William Schmitz - Deutsche Bank AG, Research Division

Okay. But it sounds like it's going to be favorable in terms of lower-price hedges rolling off in the back half. Was that one of your prepared comments, when you talked about the gross margin bridge?

Matthew Thomas Farrell

Remember, we came into the year, we were more than 50% hedged, almost 60%. So that was on a full year basis, so that's always been in place.

James R. Craigie

The point is, Bill, we're pretty heavily hedged in the back half of this year, so there should be no surprises on us of gross margin from any commodity actions because we're pretty well locked in the back half.

William Schmitz - Deutsche Bank AG, Research Division

And then on the SG&A side, how much of the reduction was reversal incentive compensation? Only because I don't -- you're probably not going to hit the gross margin target again. And I know that's about 1/4 of your incentive comp target.

Matthew Thomas Farrell

No, none was reversal, Bill. We -- because we're doing so well on other factors right now, we didn't reverse any of our incentive comp.

James R. Craigie

Yes, it's a composite, Bill, for 4 other metrics as you know.

William Schmitz - Deutsche Bank AG, Research Division

Okay. And then just a sort of strategic question on the whole pods thing. I mean, can you maintain the price gap to the competitor when you have to put the same level of actives into the product? Does that make sense?

James R. Craigie

Bill, we're putting out a product that's comparable to our liquid product on the unit dose side. And it's doing extremely well in the marketplace. We got our fair share of the category. We're very happy with the results. I'm just, again, disappointed that it's -- the category hasn't shown any growth. In fact, slight decline from year ago, which is not good. But we're very successful. We're growing share across all 3 segments. But it's just -- I was always fearful of the impact and the lack -- on the -- it cannibalizes liquid, you lose the overdosing effect in liquid. I got no definite proof yet, but it appears to be signs of that as the overall category is down. Overall total dollars is down.

William Schmitz - Deutsche Bank AG, Research Division

Right. But won't the mix benefit of the profit of the pods offset that? Sort of like the profit pull from the industries actually go up, right, because the raw materials associated with making a pod is a heck of a lot lower than that with like a big plastic container of laundry detergent?

James R. Craigie

That's the hope, Bill. But right now, I think everybody had start-up costs on the pod. Everybody's doing a lot of merchandising on the pod. Everybody's doing a lot of couponing on the pod. And we'll see what happens when consumers get beyond all these trial offers as to what the end result is between liquid, powder and unit dose, especially with the potential loss of overdosing, which could hurt the liquid category. So I can say the jury is still out on unit dose, but it's not off to a great start.

William Schmitz - Deutsche Bank AG, Research Division

Okay, great. And just lastly, housekeeping kind of thing. But what was the price increase in cat litter? And do you guys lead that or follow it?

Matthew Thomas Farrell

We were 6%, and we followed.

Operator

Your next question comes from Ian Gordon with S&P Capital IQ.

Ian J. Gordon - S&P Equity Research

I just wanted to -- in terms of the laundry detergent again. Can you comment maybe on the trajectory of the sales and market share through the quarter? Because I think when you look at the scanner data and from some of the commentary from the big competitor there who seems to be a little bit more focused and maybe even more desperate, it sounds like things have been shifting their way later in the quarter. So could you comment on that?

James R. Craigie

Our big competitor seems to focus on one month. We focus on 3. Our 3 months results are very strong. Like I said, we had record share in ARM & HAMMER liquids. The only guys to grow our liquid consumption, our liquid share. Powder, we grew share also, despite the declining category. And we're getting our fair share of unit dose. So I'll take a long-term trend any day over a one-month trend. And knowing what we know about Q3 as far as our merchandising support and everything else, we feel very good about our laundry detergent business. You just can't beat the pricing advantages we've always had in this category. Consumers recognize, they're trading down. They're loving our products, and they keep buying more and more. And so I know the hopes from big competitors are out there, but I feel very confident we're going to continue to have very strong results in the overall detergent category.

Ian J. Gordon - S&P Equity Research

And then on the free cash flow conversion, I think, in my view that's one of the things that helps support the premium multiple. And I think a lot of that's been dependent on your ability to reduce working capital over the last couple of years. So I'm just wondering sort of what your outlook is on that going forward, and how much more can you continue to take out of the system?

Matthew Thomas Farrell

Yes, we have a focus on cash conversion cycle in the company. And for our cash conversion cycle, we focus on is trade receivables, inventory and trade payables. So if you went back a few years, we were in the mid-50s for a number of days for cash conversion cycle. And today we're under 30, and we target to be under 30. And we still have more room to go, not so much in the receivable side, but we think we can be a little more creative in inventory and also, as we get larger, to continue to extend terms on the payable side. So we do think there's some room left to go. And in the meantime, we plan on growing the company and keeping working capital flat, so we can keep throwing off increasing amounts of free cash flow.

Operator

Your next question comes from Connie Maneaty with BMO Capital.

Constance Marie Maneaty - BMO Capital Markets U.S.

Could you talk about the dynamics in the condom category as Durex seeks to gain share in the U.S.? Promotional activity, is that going up? Because it seems like your market share has been under pressure there. And I'm wondering if -- I guess I'm surprised that it wasn't one of the factors you mentioned in the decline in personal care sales.

James R. Craigie

Connie, we feel very good about the condom category. The new product Charged is doing exceptionally well out there. It's already heading towards one of the top 3 condoms in the marketplace. Our share is up in the category. And don't forget, when you're 75, I think we hit a 76, I think the latest monthly results would've been our highest ever, I think, in condom category as the Charged condom gains momentum. We feel great. So I -- our condom is good. The talk from Durex has been all talk so far. We have seen no sign in the marketplace of anything in the nature of new products or in the nature of merchandising or advertising support. I highly respect that company. And they've had terrible problems in the condom business for the past year with supplier problems. I think they've hit a record low share in the States. So I think, in some sense, they're trying to come back. But usually, when they fight, it's the other 2 guys who just battle it out and trade share. And we are, by far -- I think we spend 90% of the advertising dollars in the category, over 75 share, with the best new product. So they largely copy us, and we see nothing that gives me any concern about the condom category. And we're building now to the white space entries in the vibrators, and we have a lot more interesting things to come. So -- I'm a very big fan of my condom business, and gross margins have been growing there. We've done a lot of improvements in our factory to help gross margin in that category. So very, very happy with our condom business.

Constance Marie Maneaty - BMO Capital Markets U.S.

And then just a follow-up, a kind of clarification to the question that was asked earlier about the size of the vibrations category, and it went from, in your commentary, from $1 billion down to $300 million over the course of maybe 18 months. Was that -- are all of the numbers you've given us consistently retail sales or are they manufacturer's sales or a combination of both?

James R. Craigie

Connie, they're mostly retail sales. And again, it's very hard to measure, because so much of the business is done in mom-and-pop stores out there, done online, and it's not measured -- very little of it is measured by the Nielsens or IRIs of the world. So we, over time, as we get to know these channels better, attend the trade shows and everything else to try to get a handle on it. But I'll still take -- don't forget, condoms in total is a $350 million category. So this is still a great category. We have like over 60% share within the category on the premium condom -- sorry, premium vibrator side. We have a program going on in New York City in the next 2 days. We're going to give away, I believe, over 10,000 vibrators on the streets of New York, so stay tuned. And lots of fun stuff ahead as we continue to grow this category.

Operator

Your next question comes from Lauren Lieberman with Barclays Capital.

Lauren R. Lieberman - Barclays Capital, Research Division

Just first wanted to follow up again on personal care. Because I looked back at the commentary you guys have shared in the last couple of quarters about that widening gap between household and personal care growth. And the personal care business has been getting worse, right? So it was down about 30 basis points in the fourth quarter, down 2.5 and now down 5. So I understand why you're confident it gets better because of new product activity and the inventory position. But what are the pieces that have actually been getting worse? And are you thinking that if those pieces are getting better, why?

James R. Craigie

Lauren, this is Jim. One thing we haven't talked much about, but we did a whole restructuring of our toothpaste business in ARM & HAMMER in the past year. We had changed the sizes. We lined priced it. It wasn't lined priced before. We improved the packaging. And we also came out with a new product, ARM & HAMMER and ORAJEL sensitive toothpaste. And that's all paying off now. So we very much have fixed our ARM & HAMMER toothpaste business, which is the biggest part of the whole oral care business. TROJAN, again, the new product launch has been great. Nair has had a good year. Nair is kind of -- Nair share is down because a big competitor entered with a very high-priced product in the depilatory category. We had great results for the category. We didn't grow as much as the category growth, but our consumption is up, and our shares are up, and our sales are up. So we feel good about that. The problem in the category has largely been ORAJEL, which is a very high-margin product. We've been hit a bit harder than we expected by private label on that side of the business. And we're fighting back hard to fix that problem right now. But overall, we fixed the toothpaste business. TROJAN business continues to do very well. Nair business is doing well. ORAJEL business is the problem. We're in the process of fixing that right now. And it caused a bit of a hit because it's such a high-margin product for us.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. And so the -- I guess that's really helpful. On the ARM & HAMMER toothpaste, with that restructuring of the brand, was that part of the drag on sales over the last year, because there were some timing of shipments and working through excess inventory before you launched new packaging, things like that?

James R. Craigie

Definitely. It was -- again, the product line used to be at 2 or 3 different price points. We lowered the price on some, raised the price on others to be all the same price point, which is really doing much better. We changed the packaging. So there was a bunch of changes going on which impacted that key brand over the past year, but now I feel very good. That business should have very strong results going forward as shown by the Q2 results.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay, great. And then on the ORAJEL new product that you guys have coming out, the single dose cold sore, is that something that, technology-wise, is very difficult for private labels to match? Is there -- is it sort of a defensible new product that helps you widen that gap again?

James R. Craigie

Yes, that [indiscernible] case has some proprietary technology that we purchased from outside of our house. And it's a terrific product that I challenge anybody who suffers from cold sores to try it. The results are far better than anything else available in the marketplace.

Matthew Thomas Farrell

It's patented, Lauren.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay, great. And then also, just Specialty doesn't get a lot of attention from all of us, but pretty dramatic swing quarter-to-quarter. So just how should we be thinking about the rest of the year, pricing versus volume, or is the business going to be growing or down as it was in the first quarter?

Matthew Thomas Farrell

Lauren, we expect the second half to be up for the Specialty Products business. You may recall that half the business is exposed to dairy. So, obviously, we get a lot of questions about what's the effect of the drought on dairy and the use of our products. The answer to that is because our products increase the yield of milk in dairy cows, it's actually in more demand because of the drought than if there weren't going to be a drought. So it's kind of a good news, bad news thing. So yes, to answer your question, we expect to be up in the next couple of quarters organically year-over-year.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay, perfect. And then finally, on international, you told us it's U.K. and France -- it's just, I looked back, I can't find another quarter except for September, I think it was '08, when the international business volume was negative, and there, it was only like 30 or 40 basis points. So it feels like it there was a very dramatic swing there. It was really just competitive pricing activity in 2 categories and 2 countries and that was enough?

James R. Craigie

That was the majority of them, Lauren, yes. That was the key hit. And it surprised us a little bit. The oral care wars in the U.K. have been unbelievable, prompted by a big competitor's entry there, overpromising what they would do and then continuing to promote at ridiculous prices. And we've fixed that now. And then Nair is a big business in France for us. And one of our key competitors again did some very aggressive pricing, which we've now addressed.

Lauren R. Lieberman - Barclays Capital, Research Division

Okay. So when you say you've addressed, are you just matching the level of promotional activity?

James R. Craigie

Yes, we are, which should improve our business.

Operator

Your next question comes from Tim Conder with Wells Fargo Securities.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

On cat litter, and I apologize if I missed part of this, but in your press release, you cited that you have strong volumes in the ARM & HAMMER Cat Litter side of the business, but a competitor mentioned that they had gained share. Jim, can you just kind of reconcile what's going on there? And then, as it relates to your unit dose laundry, how is that performing against your expectations? Again, as you already mentioned, it's coming from -- basically it's all incremental at this point. How is that going against expectations?

James R. Craigie

Yes, Tim, I don't know what exactly the competitor said, but we are kicking butt in the cat litter category, continuing to kick butt in the cat litter category. We've had 2 big winner innovative products in a row between Double Duty and this new Ultra Last. The distribution gains have been terrific. The consumption gains have been terrific. The sales gains, all double digits. I mean, just in the latest quarter, to pick up 2 share points in the category like this, which has very formidable competitors, is outstanding. So we just -- like I said, we've had 34 consecutive quarters of sales gains in this category. It's something we didn't -- we only entered in 1998 as an extension of ARM & HAMMER. So again, I don't know what the competitor said, but we are really doing outstanding in cat litter.

On unit dose, a few facts on unit dose. In total, across the whole detergent category, unit dose is only about 5% of sales in total. For competitors who have a unit dose product, it's about 8% to 10% of their sales. And again, it's early in the phase. I don't want to downgrade it too much right now. But it's more promotional activity and advertise support will happen on this across the category in the second half of the year. But it's been 2 quarters since this product was launched. Usually, you'll see real strong results from the first 2 quarters. But like I said so far, it's really not making me happy to see that the total laundry category between liquid, powder and unit dose, if you add them all up in dollars, the consumption is down. So that doesn't do much to help the category, as far as my eyes, and it's hurting the liquid category. And the powder is now a more expensive product than liquid based on the pricing actions in both sides out there. So I think we're doing great. I mean we're gaining share in all segments. We're getting our fair share of unit dose. But I sure wish the category would go back to growth again, particularly in the big segment, which is liquid laundry, which after 4 quarters of good, solid growth, almost 5% in the last 2 quarters, was down 2% the latest quarter in consumption for total category dollars. That is not a happy result to me.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay. And again, you've talked about how you've got a lot of new products, especially on the consumer side, coming here in the back half of the year. You've shifted your marketing spend into the third quarter versus fourth quarter historically to sort of get out at the front of that. Given all that and given what's been alluded to a large competitor, you want to call it desperation, you want to call it hard change of course, whatever, however you want to frame it, but they're going to be more aggressive in changing their course correction here. How -- to what degree you can, how have you planned and factored that into the back half marketing spend plans, promotional plans?

James R. Craigie

Well, first of all, Tim, I would say we talk and we deliver, and they talk and they don't deliver. I would tell you, we, we're fully cognizant. We're fully aware of that competitor and respect them with the greatest degree given their size and scale. But our brands are in great shape. They've been continuing to do well. The economy plays to our hand. We've looked very intently at our merchandise support in the back half versus a year ago, and it's very strong. Really, the competitor -- we're not seeing any promotional spending changes from them so far. We're probably seeing some advertising increases, some of which are aimed at us, but are very weak in my mind. And very interesting that a larger player talks about a smaller player in their ads. That's a new change. Thank you very much for the free advertising support. So I mean we're very cognizant of it. We watch them every day, but I -- we've been beating them consistently over time, and we think we'll continue to beat them in the back half of this year.

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Okay. And then lastly, on the acquisition front again. Thankful that you guys have been very disciplined, and we continue to appreciate that. But just maybe just update the framework of how you see this, especially, again we've been at this road before. Maybe the clock ticking on potential sellers from a tax perspective by year end. But maybe just give us an update there on how you see the current environment from an opportunistic standpoint?

James R. Craigie

Yes, Tim, we continue to be very disciplined. We continue to look for good acquisitions. We work hard on it, but we're not going to make one until we see the right one out there. And I thought the environment was favorable in the past, and I continue to think it is favorable. But there's been, overall in the whole industry, a pretty low level of activity so far. But other than that, I can't comment or disclose anything related to M&A transactions until there's something definitive out there. But we continue to work hard against it, and so far, nothing to report.

Operator

Your next question comes from Erin Lash with Morningstar.

Erin Swanson Lash - Morningstar Inc., Research Division

I wanted to touch on -- you guys generate a ton of cash. And so I was curious given that you don't intend to repurchase additional shares throughout the remainder of the year, where do you intend to -- or how do you intend to utilize that cash? And secondly, given the decline in the stock price this morning, whether you'd reconsider repurchasing shares throughout the remainder of the year?

Matthew Thomas Farrell

Yes, this is Matt. It's pretty well documented what our destinations are for cash. Number one is TSR-related acquisition. So this is an acquisitive company. We acquired 7 of our 8 power brands since the year 2000. So we're always looking for something to add to our portfolio, and we've very strict criteria around that. The number two destination is new products, investment in new products. The third would be base CapEx. The fourth is returning cash to shareholders. And fifth would be debt reduction. And debt reduction would be last right now, simply because we're only levered 0.4x debt to EBITDA. And as far as the share price today, that's today. We feel great about the second half. We anticipate a high-quality second half with gross margin expansion and high marketing spend. And we're going to be hitting our numbers for the year with 9% to 10% earnings growth.

Erin Swanson Lash - Morningstar Inc., Research Division

With regards to acquisitions, do you feel that the environment is more or less favorable in the U.S. versus abroad?

James R. Craigie

That's a one hard one, Erin. It's -- no, I really -- I think it's about the same on both sides. I know there is a lot more talk about tax law changes in the U.S., which could influence some sellers. But we're a North American-centric company. We do look everywhere, but we tend to focus a little bit more on North America. And I would say it's pretty much same outlook. I think it's somewhat positive or should be somewhat positive, but really not much has happened so far in the category or in the overall the CPG business, I mean.

Operator

The next question is from Nik Modi with UBS.

Nik Modi - UBS Investment Bank, Research Division

Just 2 quick questions. On retailer inventories, Jim, I was wondering if just given what's going on in the environment, deteriorating consumer confidence, if you're noticing any change with retailers in terms of their inventory buying patterns, at least in the near term here. And the second question is, just curious on when liquid laundry compaction happened last time, what was the actual impact on consumption or dosing, if you could just kind of frame it so we can think about pods in that context?

James R. Craigie

Yes, Nik, on retail inventory, nothing major. It's nothing overall. I think retailers understandably are struggling in this difficult economy. But we're not hearing or seeing anything broadscale on inventories out there. Little things ebb and flow, but nothing substantial. That's an interesting question on liquid laundry compaction. I'd honestly, Nik, have to go back and check the notes on that to give you an accurate answer. Maybe we can follow up and give you an answer on that one, but I'd have to go back and check on that.

Operator

Your next question comes from Leigh Ferst with Wellington Shields.

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

My question is about Tooth Tunes. And as I recall there were some issues in getting it to launch, but it sounds like you're really excited about it. And I just want to make sure you're -- if you could just quickly review what those issues were and how they were resolved? And also my impression is it's not a huge category. But there's a lot of excitement around it. And I'm wondering if you have line extensions planned if you meet your target sell-in.

James R. Craigie

Yes, I mean the details -- last year, was a minor technical issue. And we don't like to launch products unless things are perfect, so we held back on it. And the product's in perfect -- We already are shipping it. It's great. It works beautifully. This isn't -- Tooth Tunes is a manual toothbrush. And manual toothbrushes is an $800 million category in this country. So that's huge. And we think we really got a unique product. It's proprietary technology. The last time, this was -- Hasbro initially had this product about 5 years ago. In its first year of very limited distribution, it did about $50 million in gross sales. I'm not going to predict to you what we expect on it, but the distribution results have been very strong to-date, and it's just a very unique product. If you follow any kind of consumer packaged goods business, there are some universal appeals out there. And music is something which has a universal appeal in almost any category you go out there. So we really think this will kind of revolutionize toothbrushing, especially for young kids. As far as future line extensions, definitely. If this thing does as well as we think, we can definitely target older age groups and be very selective of the music. So we already have those plans in place for next year. I don't want to reveal them at this point in time, but we have some very exciting new news in that respect coming out next year.

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

I heard about some rock 'n' roll, but maybe you're not ready for that. And on the question -- I wanted to go back to the question about the mix. Is there anything unusual in how you measure your price mix versus your volume? And also, are you -- how do you look at organic growth? Do you -- are you happy to get all this volume even if you give back some of it in price and mix? How do you look at that tradeoff?

Matthew Thomas Farrell

Yes, you're right. It's a good news, bad news thing. So our household products are typically 15%, 20% lower gross margins than personal care. So yes, when the volume is really going great on the household side and personal care is suffering, the result is obviously pressure on your gross margins, and then a giveback on top line as well. So the good news is that we have such a balanced portfolio between value and premium that we're able to sustain our long-term targets of TSR, total shareholder return.

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

But your -- is your target on organic growth overall, and whether it comes from volume or pricing mix?

Matthew Thomas Farrell

Yes. The 3% to 4% organic growth is an all-in number. That's the evergreen target for top line organic sales growth, volume and price.

Operator

That concludes our call. I will now turn the call back to Mr. Jim Craigie.

James R. Craigie

Thank you all very much for taking the time to be with us today. I would just wrap up by saying to you is we're very pleased with the solid Q2 results we've had. We honestly feel we have the right brands at the right price in this environment. We had very positive trends on 7 of 8 key business factors: the higher revenues, the more marketing spending in total dollars than year ago, higher shares on 5 of our 8 power brands, lower SG&A spending, higher adjusted EPS, higher income from operations and higher cash flow. I really think you can't beat that, scorecard is good. The only issue is lower gross margins driven by product mix, but we already have already programs in place to deliver higher gross margin in the second half. So we feel very, very confident about delivering our annual target of our -- on organic growth gross margin EPS.

And let me just say, for those of you who sold Church & Dwight today, good luck with finding a better investment because you won't. So thank you very much for your time.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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