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

Q3 2012 Earnings Call

November 5, 2012 10:00 am ET

Executives

James R. Craigie – Chairman and Chief Executive Officer

Matthew T. Farrell – Executive Vice President and Chief Financial Officer

Analysts

Jason Gere – RBC Capital Markets

Joe Lackey – Wells Fargo Securities

Bill Schmitz – Deutsche Bank Securities

Alice Longley – Buckingham Research

Joseph Altobello – Oppenheimer & Co.

William Chappell – Suntrust Robinson Humphrey

Christopher Ferrara – Bank of America/Merrill Lynch

Leigh Ferst – Wellington Shields & Co Llc

Nik Modi – UBS

Bill Schmitz – Deutsche Bank Securities

John Faucher – JPMorgan

Joe Lackey – Wells Fargo Securities

Operator

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Third 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 objective and forecast. These statements are subject to risks and uncertainties and other factors that are described in detail in the company’s SEC filings.

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

James R. Craigie

Thank you, Vanessa, and good morning everyone. It's always a pleasure to talk to you particularly when we have excellent results to report. It's also a pleasure we’re talking from our corporate headquarters from Princeton, New Jersey which was shut down all last week due to lack of power caused by Hurricane Sandy. That inconvenience was minor compared to devastation occurred by many of our fellow residents of New Jersey. As a corporate citizens of great state, we deeply feel for them and we’ll be donating $1 million to New Jersey chapter of the American Red Cross to help provide food, clothing and shelter to those in need.

Now, I'll start off this call providing you with my overview of 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 performance of our key brands and discuss our updated earnings guidance for the year, we’ll then open the call with questions from you.

Let me start off by saying I'm very proud of my team for delivering the excellent third quarter business results in such a difficult economic environment. If you almost saw, Fix the Six winning ticket in your account since the company delivered very positive results on the six most important business measures.

First, the organic revenue growth of 4.6% was very strong, particularly on top of the 4.5% organic growth achieved in Q3 of 2011. This organic growth is driven by both our domestic, international business units which respectively delivered 4.8% and 6.7% organic growth. Second, we delivered on our promise of gross margin improvement with a 100 basis point gain in Q3 versus year ago.

Third, despite lower marketing spending as a percent of net revenue, we grew share on our four biggest brands, representing over two-thirds of our total revenues and profits. This includes all time high quarterly shares on ARM & HAMMER liquid laundry detergent, XTRA liquid laundry detergent and TROJAN condoms. Fourth, we continue to tighten our belts in view of the difficult economic environment and lowered our overhead cost by 70 basis points.

Fifth, the strong organic revenue growth, higher gross margin and lower overhead cost drove an operating margin of 20% which was 200 basis points above year ago. Our ability to deliver an operating margin in the third quarter which is higher than majority of our key competitors reflects the strength of our brands, the strong consumer demand for our innovative new products and the lean cost structure of our company.

Six, our Q3 EPS result of $0.66 was 22% above year ago, far better than any of our key competitors. The 22% EPS increase was ahead of our expectations for the quarter. So at the end of this call, I’ll discuss the implication for this year’s earnings guidance. I hope with this brief overview of my company’s third quarter business results, hope you should understand my jubilation for referring to it as a Fix the Six winning lottery ticket.

Now, those of you who would know me know that I’ve been a long term pessimist about the business environment. I believe we will continue to face strong headwind for the rest of 2012 and the next few years, including ongoing uncertainties surrounding commodity cost and weak consumer spending. All consumer packages, copies are funding in the same headwinds, but I believe that no other CPG company is as well suited as Church & Dwight to continue to deliver exceptional performance in a tough environment. I’ll film my rationale to that statement a few minutes after Matt provides you with greater insight on the financial results for the third quarter.

Matthew T. Farrell

Thank you, Jim. Good morning everybody. I’ll start with EPS. Third quarter EPS was $0.66 per share compared with $0.54 in 2011, which is a 22% increase from year ago. Reported revenues were up 3.5% to $725 million.

Organic sales was 4.6% which excludes the impact of 2011 brand acquisition, foreign exchange rate changes and the positive impact in 2011 of sales in anticipation of an information systems upgrade and those three items together had a negative impact of 1.1%. Of the 4.6% organic growth, approximately 5.5% is due to volume with about 0.1% positive product mix and pricing. Given our strong year-to-date organic sales growth, we expect to deliver organic sales of approximately 4.5% for the year.

Let’s now review the segments. The Consumer Domestic business’ organic sales increased by 4.8% primarily due to higher sales of ARM & HAMMER liquid laundry detergent, ARM & HAMMER cat litter, OXICLEAN Laundry Additives, TROJAN products, NAIR depilatories and the introduction of ARM & HAMMER CRYSTAL BURST power pack laundry detergent. These increases were partially offset by lower sales of ARM & HAMMER powdered laundry detergent, ARM & HAMMER SPINBRUSH, ANSWER diagnostic kits and ARRID deodorant.

Volume contributed approximately 5.2% to sales, partially offset by 0.4% negative impact of product mix and price for domestic. International increased organic growth by 6.7% in Q3 due to higher sales in Europe and Australia. This increase is driven by a higher volume of 6.6% and 0.1% from a negative from product mix and price.

The international business had sequential improvement from Q2 to Q3. This was largely driven by the performance of NAIR in Europe and BATISTE in both the UK and Australia where we recently introduced BATISTE.

For our specialty products division, organic sales were lower by 0.9% with volume down by 4.7% and price up 3.8%. The price is driven by animal nutrition where we are recovering raw material cost. We expect our value products particularly in the laundry category to continue to benefit from the weak economy and deliver strong organic growth.

As communicated throughout the year, we expect this quarter to post smallest year-over-year increase in organic sales as we are camping 7.1% organic growth in the fourth quarter of 2011. With respect to gross margin, our reported third quarter gross margin was 45.2%, which is 100 basis point expansion from year-ago. The increase in gross margin is consistent with our expectations and is primarily due to reasons we discussed during the second quarter conference call.

And those were productivity improvements from our new plant in California, and in-house production of the unit dose laundry products, the launch of new products, there would be lower sliding. Fourth would be pricing such as ARM & HAMMER cat litter, and finally the benefits of our commodity hedging program.

We continue to be confident in our expectation of full-year gross margin expansion excluding Avid, because these initiatives have already been implemented. We expect gross margin to be above 45% in the fourth quarter and for full year we expect gross margin expansion to be at the lower end of our 25 basis points to 50 basis point range, excluding Avid.

Now marketing, marketing spend for the third quarter was $92 million or 12.7% of revenues, which is 40 basis points decline from the prior year’s spend rate and slightly higher on a dollar spend. This reflects a shift in spending from the third quarter to the fourth quarter of 2012 as we support new product launches in Q4. We grew dollar share on five of our eight power brands and this is due to a great execution of our sales and marketing teams.

SG&A was lower year-over-year by $1.9 million. SG&A as a percentage of sales was 12.4%, down 70 basis points from year ago. The lower SG&A cost in the quarter primarily reflect lower legal costs and a timing shift from Q3 to Q4 related to R&D development expenses. For the full year, we expect SG&A to be approximately 13.2% of sales which is down 20 basis points from year ago; this is due to reflection of our continuous vigilance to control SG&A.

Operating profit margin for the quarter was 20% and that margin is 200 basis points higher than last year’s 18%. Income from affiliates decreased year-over-year primarily due to lower income from our Armand Products joint venture as well as start-up cost related to our Natronx joint venture.

Other expense was favorable year-over-year do primarily due to an FX loss in 2011 that did not repeat in 2012. And income taxes, our effective rate for the quarter was 35.7% compared to last year’s 36.9%. The 35.7% for the quarter was expected and with respect to our full year, the full year effective tax rate should be approximately 35%.

Cash flow; we generated $315.9 million of net cash from operations for the first nine months of 2012 which is a $3.3 million decrease from the prior year. Remember that’s net of an $8.9 million increase in year-to-date CapEx. We spent approximately $50 million in year-to-date CapEx, large percentage of that it’s actually $24 million of that was for our new California manufacturing and distribution facility.

Next I'm going to discuss the share buyback, which we announced in the release. So we’re pleased to announce the Company's Board of Directors has authorized a new share repurchase program, under which the company may purchase up to an additional $300 million of the Company's common stock. Under the program shares will be repurchased in the open market at time and amounts considered appropriate by the Company based on factors including prices and market conditions.

The company has approximately 140,000,000 shares out standing, we have an additional $20 million remaining on our existing repurchase program, the primary purpose of the program is to cover share creep and we expect to limit our purchases to approximately $100 million between now and end of 2013. And we may purchase some shares beginning in the fourth quarter.

And I'm going to turn my remarks to Avid. On October 1, the company closed on its acquisition of Avid, the purchase price was approximately $650 million financed primarily with $400 million of senior notes at a coupon rate of 2.875 due in 2022 and commercial paper.

Jim will discuss Q4 and 2013 outlook in a moment, but I want to take this opportunity to provide cloudy and some of the one-time charges in the fourth quarter that we're taking into account within our guidance. So we expect our transaction costs of approximately $4.5 million, we expect to inventory and fixed asset step up of approximately $7 million, which will be in 2012, and we expect to have $2.5 million of incremental amortization in the fourth quarter. There will also be transition expenses of approximately $1 million in Q4 related to severance and information technology system design. With respect to 2013, we do not expect to have a material amount of transition cost next year. I would estimate it to be $0.01 or less and will not be calling them out separately.

So in conclusion, the third quarter highlights include 4.6% organic sales growth driven by 4.5% volume growth and we had a 22% increase in EPS. We expect fourth quarter earnings per share of approximately $0.55 compared to $0.53 last year excluding the deferred tax valuation allowance charge of $0.09 per share. The company reported $0.44 in the fourth quarter of 2011.

So we are expecting a good fourth quarter. We are raising our annual earnings per share goal to $2.43 for the year which is an increase of 15% over last year’s reported $2.12 and 10% higher excluding the fourth quarter 2011 deferred tax charge of $0.09 per share.

Back to you, Jim.

James R. Craigie

Thanks, Matt. I’ll finish off our call today by providing a little color to the outstanding third quarter business results that Matt just took you through and my outlook for the rest of the year.

Our strong third quarter business results are directly linked for the seven factors that support my earlier statement that I believe that no other CPG company 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 that consist about 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 past 11 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, the lower price brands.

A great example of this is the fact that our value based ARM & HAMMER laundry and Trojan business which is our largest business achieved almost 10% dollar sales growth in the third quarter and reached an all-time high quarterly share. This record of high quarterly share enabled ARM & HAMMER to pass the all brand to become a number three brand in the liquid laundry detergent category.

In addition, the strong share gains achieved by ARM & HAMMER liquid laundry detergent, ARM & HAMMER power laundry detergent and extra our extreme value liquid laundry detergent, enable Church & Dwight to pass the Sun Products company to become the number two laundry detergent company in America. This is the remarkable achievement for my company which has been driven by a combination of new products, increased distribution, higher marketing spending, and increased merchandising support behind our value oriented brands.

The second factor which is a key driver of Church & Dwight success is we have a proven record of building our Power Brands. We have over 80 brands in total, but eight of these brands are our Power Brands which generate 80% of our sales and profits. And each of the first, second, and third quarter of this year we grew market share on five of our 8 Power Brands. The key factor driving the growth of our Power Brands is our robust pipeline of new products.

Over the past four years, new products delivered over 50% of the company's organic revenue growth. We have shipped innovative new products at every category this year to sport delivery, organic growth target of 3% to 4%. We expect the new products to be a successful as the new products introduced over the past four years. A sample of these new products include the new sensitive skin product for ARM & HAMMER liquid laundry detergent line that has been signed to significantly enhanced the brands appeal to over 50% of our consumer households who have sensitive skin issues. We believe this will help to drive continued growth of the ARM & HAMMER liquid laundry detergent business which has achieved 14 consecutive quarters of growth.

Another great new product launch in 2012 is ARM & HAMMER ULTRA LAST cat litter. Every granular, this new cat litter is quoted with baking soda to deliver long lasting order control. ULTRA LAST is of to a great start and files the hugely successful launch of ARM & HAMMER Double Duty cat litter line in 2010. These two new products now represent over 50% of the brands total cat litter sales and help drive over a 15% increase in dollar sales growth and a 2.4% share gain in the third quarter versus year ago.

As a result, the ARM & HAMMER cat litter brands have now achieved 35 consecutive quarters of net sales growth, 10 consecutive quarters of share gains. It is now the clear number two brand in the clumping cat litter business. That’s pretty impressive for a category which we entered only 14 years ago. It also shows the strong consumer appeal of the ARM & HAMMER brand which now accounts for over $1 billion in total annual sales.

On the personal care side of our business, we have several exciting new products in 2012. First is our new TROJAN condom called CHARGED, which had deep ribs and special lubricants to provide intensified pleasure. This new product help to drive an all-time record quarterly share of 76.6% for our TROJAN condom brand, up a full point versus year ago.

Another new personal care product is Tooth Tunes, which is a line of toothbrushs for young children, that uses proprietary technology to play two minutes of music, do your job own do you hear from a broad range of artists such as Black Eyed Peas, Queen and Selena Gomez. For those of you who have young children, I guarantee you that if they use to a Tooth Tunes toothbrush, you will have to yell your kids start brushing instead of yelling at them to brush.

Tooth Tune represents our first entry in the 800 million manual toothbrush category and initial distribution, sales and share results for this new product which began shipping in July are very strong. We are also pursuing two other high margin white space category 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-sized vibrators in the new channels. We are very pleased with the consumption gains in our entire vibrations line which were up 25% in the third quarter.

We also recently initiated a free sample program in key urban markets across America, which we are giving away several thousand vibrators in this city to demonstrate the broad consumer appeal of this product. The first event was held at New York City in early August, and it created such a buzz that it was temporarily shut down by the Mercy’s office due to the traffic jams that created.

Now, the second white space category that we recently entered were the OxiClean brand with a dishwashing additive category, which is over $100 dollars in size. The government mandated removal of phosphate from dishwashing detergents in 2010 creating the need for a booster product to do with the noticeable increase and cloudy film and glasses and dishes.

Our new OxiClean dishwashing booster product enhances the cleaning power of dishwashing detergents, so once again delivered crystal clear dishware. This new product has already achieved a 10% share of the dishwashing additives category after only seven months in distribution. There are many other new products that we have launched in 2012, but at the interest of time I'll move out my review with the factors driving Church & Dwight continued success, and discuss our updated earnings guidance for the year.

Let me quickly run through the five other key factors of our continued success. Number three, is that we have proven history of ferociously defending our brands as evidenced by our defensive OxiClean when a large competitor enters the laundry additives category. In fact, OxiClean’s third quarter share of 41.1% is 200 basis points above year-ago twice the size in the year’s competitor and a higher share that won the major competitor first enter the category.

So we have not only successfully defended our position, I guess this multibillion dollar competitor, but now we are tackling back and growing our share position. The number four factor behind our continued success is the strong growth of our international business. While our international business represents only 20% of our total revenues, it is delivered high single-digit sales growth and double-digit operating profit growth over the past five years. This strong growth continue in the first quarter of 2012, but did not continue in the second quarter due to some competitive issues. We promised you in our last earnings call on August, the programs that are put in place are reinvigorate or get a growth in our international business, and we delivered on that promise. As stated earlier, our international business achieved organic growth of 6.7% in the third quarter. This was driven by strong sales gains across a wide range of markets and countries including Western Europe, Australia, Mexico and Brazil.

Factor number five behind Church & Dwight success is our long history of expanding gross margins through class optimization programs, supply chain restructuring, acquisition synergies and launching higher margin new products. We expanded gross margin by 1500 to 1600 basis points in the past 10 years. While we did not improve our gross margin in 2010 and 2011, we were successful in holding 380 of the whopping 430 basis points gross margin gain achieved in 2009 despite major headwinds from higher commodity costs.

A despite of 100 basis point decline in gross margin in the first quarter and second quarter of 2012, Matt and I promised you back in August that a broad range of initiatives have been implemented that would enable us to achieve our gross margin improvement in the back half of 2012, and once again we delivered on that promise with 100 basis points improvement in gross margin in the third quarter versus year-ago. We expect even a stronger improvement in gross margin versus year-ago in the current fourth quarter.

Factor number six behind Church & Dwight’s long-term success is our ability to tightly manage our overhead costs. Church & Dwight currently has the highest revenue per employee of any major consumer packages company. As mentioned earlier our SG&A overhead costs were down 70 basis points in Q3 versus year-ago, and a full 60 basis points below year ago for the first three quarters of 2012. This significant reduction reflects how aggressively we manage our overhead cost to stay best in class in our industry.

Finally, factor number seven is the strong record on free cash flow conversion. We will quadruple our free cash flow with the past 10 years. Over the past five years, our free cash flow conversion as a percent of net income was 128%, which was best-in-class in the CPG industry. On a full year basis, we will again exceed 100% free cash flow conversion in 2012. Our cash flow and strong balance sheet have enabled us to smartly invest in our future through investments in our supply chain including construction of more efficient new plants and the acquisition of faster growing leading 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 bias opinion, no other CPG 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 can continue to deliver exceptional EPS growth going forward regardless of the future economic environment.

Before I switch gears and talk about the outlook for the rest of 2012, I’d like to make a few comments about our recent acquisition of the Avid Health Company. For those of you who are not familiar with Avid, it is one of the fastest growing company in the vitamin, mineral and supplement category. This category is over $5 billion in size and is one of the fastest growing categories of consumer package goods with a 5% to 6% historical steady growth rate.

Avid’s L'il Critters brand is the number one brand of children’s gummy vitamins. Avid’s Vitafusion brand is the fastest growing brand in the adult gummy vitamins. Overall, Avid holds a two-to-one share advantage relative to the number two gummy vitamin competitor. There is a great deal of future growth opportunities in this business. We believe the upside is two-fold.

First, gummy vitamins represent about 58% of all children vitamin sales today with only about 3% of the adult vitamin category. However, the total adult vitamin category is about 19 times a size of the kids’ vitamins or about $5 billion. So we are confident there is a huge opportunity to grow the gummy form in adult vitamins which Avid first entered in 2008. That growth has already happened as we speak, as the gummy form is the fastest growing segment of both kids and adult vitamins.

Second, Avid’s gummy vitamins have won awards for the best taste profile of any gummy vitamin. Unlike other vitamin companies to sell all forms of vitamins including pills and capsules, Avid sales only the gummy form. Its excellent R&D capabilities are 100% focused on making great tasting gummies, and itself manufacturing this product were just competitors are largely produced by co-packers.

As result of having the best tasting gummy vitamin in the fastest growing segment of gummy business, Avid has tripled its sales over the last three years, and is one of the fastest-growing vitamin, mineral and supplement businesses. It represents a significant new growth platform for our company that should enable Church & Dwight to continue to deliver superior EPS and TSR results to our shareholders. As Matt told you, the Avid acquisition closed on October 1, and a multifunctional team from Church & Dwight is now in full control of the business and integration is underway.

Now let me switch gears and simply talk about our outlook for the rest of 2012 and our initial forecast for 2013. As stated in the press release, as a result of our outstanding Q3 results, we now expect diluted earnings per share for 2012 to be $2.43. This is an increase of 15% on a reported basis, and 10% over 2011 when you exclude our deferred tax violation allowance of $0.09 per share that we incurred in the fourth quarter of 2011.

Please also note that the new EPS forecast for 2012 does not include any potential EPS impact as a result of Hurricane Sandy. We also previously announced that the recent acquisition of the Avid Health Company was expected to be approximately $0.02 dilutive to 2012 earnings per share. We have now improved visibility into one-time charges as Matt told you about in his result; we believe the acquisitions will be earnings neutral for 2012.

So in total be improved our 2012 EPS outlook by $0.04, $0.02 we are now forecasting the high end of EPS range for our core business and $0.02 from the elimination of dilutive effect of the acquisition. In addition to the higher EPS forecast for 2012, we plan to redeploy some of the higher than expected earnings in Q3 to increase marketing spending in Q4 that will drive strong consumption, enable us to exit the year with strong momentum just as we did last year. We strongly believe that we can deliver these aggressive EPS target despite continued weak consumer demand.

Our confidence delivery in this aggressive EPS target is based on two key factors. First, we strongly believe that we can continue to deliver the market share gains at our power brands to deliver organic growth of 4.5% for the full year of 2012 which is above our annual target of 3% to 4%. These share gains are expected to result from our innovative new products, significant distribution gains across majority of our power brands and strong marketing support.

All three of these factors help to drive 5.5% organic growth in the first three quarters of this year and to contribute to continue organic growth in the fourth quarter 2012. However, the organic growth in the fourth quarter will not be as strong as the first three quarters because we were up against 7% organic sales growth in the fourth quarter 2011.

A second, I’ve stated earlier, we strongly believe that we can still deliver strong gross margin expansion in the fourth quarter to achieve our annual target of 25 basis points to 50 basis points despite being down about 100 basis points in the first half of 2012. Our gross margin expansion is expected to result in a wide range of initiatives that have already been implemented as Matt highlighted earlier.

As a result of these factors, I feel confident that we can deliver diluted earnings per share growth of 10% for total 2012 on an adjusted EPS basis. 10% EPS improvement for total 2012 is terrific in this tough business environment and better than all of our key competitors. However, we are going to do even better in 2013 when we expect earnings per share growth of approximately 13% to 15%, driven by 9% to 10% earnings growth from our strong core business and accretion from the recent acquisition of the Avid Health business. And we expect to deliver the 13% to 15% EPS growth while also increasing the marketing investment by the newly acquired gummy vitamin business and our 8 Power Brands. Is this outlook for the Church & Dwight business doesn't excite you as much has excites us, then call me for some gummy vitamins and a free vibrator to wake you up.

In conclusion 2012 shaping up to be another very challenging year due to the weak consumer demand, but when things get tough you should place your best from the company with the product portfolio that can thrive in such an environment and the management team that has the track record of knowing how to successfully leverage our portfolio and new acquisitions did deliver strong EPS growth.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Gere from RBC Capital Markets.

James R. Craigie

Hey Jason.

Jason Gere – RBC Capital Markets

I have two just kind of housekeeping things and then just kind of more strategic question guys. Matt you were mentioning about the fourth quarter of those one-time items, is that including or excluding in the $0.55, I just wanted to be clear on that?

Matthew T. Farrell

It's all in.

Jason Gere – RBC Capital Markets

So it's all in. And what's the total EPS impact I mean, when would you calculate that to be when you look at the $0.55 is that a couple of pennies?

Matthew T. Farrell

Well if I rack those numbers up, we said the transaction class were $4.5 million, we got $1 million for transition. The incremental amortization is $2.5 million, that’s still an estimate by the way through – the appraisal done. We got step-up of 7, so your act is up and you are going to say, well, that’s $15 million. And then if you want to add some more to that, you’d see the incremental interest also of $3 million, we got to finance the transaction, that’s 18 and a penny is about $2.2 million, so you can kind of do the math from there, 8 plus cents.

Jason Gere – RBC Capital Markets

Okay. That’s good to know. Okay and then I guess the second question, when you talk about the marketing shift in the third to fourth quarter, where are you looking then for the fourth quarter. So obviously last quarter you guys were talking about third quarter was going to be higher marketing than the fourth quarter and clearly I think lot of us like the set up here that you will have strong momentum heading into ’13 with the step-up marketing in the fourth quarter, but where should we end the year with marketing expense and then how should we think about that for ’13 when you look at including Avid in there, is 13% the right way to think about it as a long term target?

James R. Craigie

If you look at the trend over the last couple of years, you probably will remember we were at 12%, I guess we went from 12%, back in 2009, I think we went up to 14% then we went down in 2011 to 13.1%, yeah, that’s right. And then 2012, we think we are going to be more or like mid-12s and we have found that given the growth of our value business that the mix has changed within the company and 12.5 collar makes more sense on a go-forward basis in order to support the growth rate.

As you can see in the third quarter, we had mid-12s marketing as a percentage of sales that we had 4.6% organic growth, so which is a good trend.

Jason Gere – RBC Capital Markets

So, when you talk about ‘13 and saying you're going to invest more behind the brands as well as Avid, should that trickle up, but maybe not get close to ’13, I guess I’m just trying to conceptualize what you’re saying, I understand the dollar sales will be higher, I guess just so we kind of have something in the benchmark against.

Matthew T. Farrell

Yeah, I would use just round numbers 12.5%, because you remember, you also keep in mind is Avid when we took over that company, they have 6% to 7% historical marketing spend. We're going to say, we're going to take that up to double-digit. And I don't know that will take it up as high as 12% or 13%. But I think 12.5% is a good walk-in around number for 2013 marketing spent.

Jason Gere – RBC Capital Markets

Okay.

James R. Craigie

Jason, this is Jim, always remember we start the year in the Q1 with our lowest spreading of the year because before the new products are launched and then we steadily increase it and this Q4 will be the strongest quarter of the year in marketing support in the neighborhood of above 14%.

Jason Gere – RBC Capital Markets

Okay. And then I guess the bigger picture question is, now you guys kind of blessed the nine to ten core for next year. Can you talk about the top line, and how that shaping up. I mean this year you guys are going to do better than 4%, 4% seems to be you always said I think historically 3% to 4%, but you comp up against some tough laundry comparisons double digit type of growth even starting in the fourth quarter, personal care, very pleased to see that sequentially that improve, so I guess can new kind of frame up how you see top line for ’13 playing out, household versus personal care as you start to think forward there?

James R. Craigie

Jason, we’re still at the process of finalizing our 2013 plans. At this point in time, I would tell you to stick within our 3% to 4% evergreen target. Right now the mix we’d have to get back to you on that. I think you are right, we're very happy with the household side, continues to have a strong growth, and personal care just below came in flat versus being down in prior quarters. So we’re very happy with the improved mix, which has been driven lot for the new products. But for right now just gauge 2013 in the 3% to 4% range.

Jason Gere – RBC Capital Markets

Okay, fair enough. I'll turn it over to the next caller.

Operator

Your next question comes from the line of Joe Lackey from Wells Fargo Securities.

James R. Craigie

Hello, Joe.

Joe Lackey – Wells Fargo Securities

It was down for the four of the eight Power Brands, but I guess 70% of your volumes go up, but I guess maybe if you could run through the categories were market share was down, and may be describe the dynamics on what's going on there with your competitive position?

James R. Craigie

Yeah, Joe. Again ARM & HAMMER have very strong quarter, extra strong quarter, OxiClean very strong, TROJAN record share, first response was flat, so really five of our eight Power Brands doesn't all of our biggest one as were up or flat versus year ago. The story of three that were down it's actually different by rebrand.

SpinBrush, if you just look within the power battery toothbrush category was down a little bit. If you look on a total toothbrush category when you add in the initial pack now was Tooth Tunes was actually up top of the share point, so we’re happy with that and Tooth Tunes are come on stronger in the fourth quarter and we have some big display support coming from that.

NAIR actually had got a great year, NAIR sales were up single-digit with the category explored with over 20% category growth driven by a new product from Proctor, which did very well, so a facial depilatory. So we had a very good year on NAIR and this one time unusual event of new competitor in the category drill the category sales even higher than our sales. So well our share is down, we're very happy with NAIR this year. The only brand that’s having trouble is ORAJEL that’s an issue with private label right now. Plans are in place to improve that and the share results are already getting better on that. So quite honestly of our 8 Power Brands, only one ORAJEL is one that had true share declines that are something to worry about and we are fixing that.

Joe Lackey – Wells Fargo Securities

Okay. Thanks. And if you could just maybe talk a little about U.S. category growth rates, if we look to attract channels by our main categories like liquid laundry, we’re seeing the growth rate of the category as a whole slowing down. Maybe if you could run through your bigger ones, I mean are you kind of seeing it overall slowing here in the third quarter and how are you seeing it starting to shape up in the fourth quarter?

James R. Craigie

Yes, Joe I’m going to just tell you, it’s kind of stuck in neutral right now. Overall, we are in 12 categories. We look at, six were up, six were down in the fourth quarter, but all relatively anemic up a little bit on some, down a little bit on others and it’s been kind of that way for several quarters right now. So I would just say that the economy has stuck in first gear and I don’t think there are any signs right now of getting better. I wouldn’t say there is any signs to get the worse either, but it’s just of kind of stuck in neutral overall.

Joe Lackey – Wells Fargo Securities

Okay. Thanks.

Operator

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

Bill Schmitz – Deutsche Bank Securities

Hi, Jim. Good morning.

James R. Craigie

Hey, Bill.

Bill Schmitz – Deutsche Bank Securities

Hey, is there any financial impact if you decided to kind of look at the sort of 72 brands that (inaudible) non-core, but I think you said 70% is in 8 Power Brands. So if you got rid of those financially, would there be might decent savings about the gross margin and EBIT line or is it so small to play no that material.

Matthew T. Farrell

Hi, Bill. This is Matt. Yeah, I think like any CPG company there is a fair amount of tail brands that a lot of people don’t talk about, and these are brands that you don't advertise, and they kind of bump along and many of them are kind of flattish year-to-year and have a very loyal customer base and these have a lot of overhead in their plant. So as you know, we have picked the few things off over the past couple of years. We've got rid of BRILLO, get rid of Lambert Kay, the brands we picked up on ORAJEL were six orphan brands that we booted as well. But we continue to look at tuning, but they wouldn't be wholesale (inaudible) minor brands that wouldn't make any sense.

Bill Schmitz – Deutsche Bank Securities

Got you, great. Thanks. But also a month, but if you could put something like the scan channel data would tell Wall Mart and obviously and some of other dollars 200 stuff and it likes the whole industry for the last couple of months saw sort of pretty big slowdown, is there anyway to explain that?

James R. Craigie

Please tell Obama.

Bill Schmitz – Deutsche Bank Securities

Really just anything (inaudible) had the election.

James R. Craigie

Keep going.

Bill Schmitz – Deutsche Bank Securities

All right, that was actually the bulk of my questions, thank you guys.

Operator

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

James R. Craigie

Hi, Alex.

Alice Longley – Buckingham Research

Hi, okay, so my first question is on Avid, you gave us an update on what we should be adding into our model for its sales this year, I mean in the fourth quarter and then 2013? And then what are its gross margin and EBITDA – and EBIT margins ex all these charges for modeling? Is that 45% gross margin guidance for the fourth quarter, does that include Avid?

James R. Craigie

No.

Alice Longley – Buckingham Research

Okay.

James R. Craigie

All right. As you probably know and everybody in the call knows, as we don't call out sales and gross margin in line items for any of our brands and we haven’t done that historically nor we do that going forward. To give everybody a little bit of help on this, you may recall that we said that the trailing gross margins for this business were around 39% and we expect it to grow at 43% by 2015. Some of that will coming next but most of it – we had $15 million of synergies are going to come by mid-2014. We previously thought it would be earlier in the year, early in 2014, but we are thinking mid-2014.

Those $50 million of synergies are largely cost of goods sold, some of it is SG&A so it’s probably two-thirds, one-third split but as we get into the business, we are refining that. As far as the EBITDA margin, first a very good story. Historical EBITDA margins for 2011 were 21.5%, now we expect this year to be exceed 22% for the total company. This is Church & Dwight now and the business we bought had trailing EBITDA margins of 25%, that’s unsynergized. So we have a fair amount of synergies. As we said, we have 15% of synergies which is going to take that number up significantly as a percentage of sales.

To be somewhat offset and that, we did marketing spend was going to go up as well. We expect to go forward EBITDA margins, fully synergized to be in the high 20s. May as close to 20s, maybe closing to 30% which means this is a real casual generator for the company which I’ll by the way also influence are thinking with respect to free cash flow for next year, which we expect Avid to be a big transcript or. And consequently said, we might not even start our share repurchase earlier in the fourth quarter rather than May. And next just remind everybody we said, we are going to grow 13% to 15%. If you also said that 9% to 10% of our EPS growth was going to come from our core business, and the rest is going to come from Avid. So you could say two thirds of our growth next year in earnings comes from the core business, and one third comes from Avid. That helps you little bit.

Alice Longley – Buckingham Research

Yes, and then as a follow-up, could you take a part of your gross margin expansion in the quarter, the 100 basis points and tell us the components for commodity trends, mix and promotional activity. I'm wondering if promotional activity took more on to gross margin than a year ago for instance. Thank you.

Matthew T. Farrell

The promotional activity I would not say was a factor year-over-year, in fact it was probably more of a help because remember we had a price increase in cat litter that helped us, and I wouldn't say that the trade rates are getting any worse either. Certainly sequentially Q2 to Q3 or even Q3 to Q4, so I think on the shelf as Jim said, we sort of neutral.

Alice Longley – Buckingham Research

Okay, and mix how much to that help gross margin?

Matthew T. Farrell

I don't have the...

James R. Craigie

(Inaudible).

Matthew T. Farrell

I think mix would have helped actually to the quarter, because if you look at what happened with personal care, personal care was down in the first couple of quarters of the year, year-over-year whereas in the third quarter were only down 0.7%, which is quite a sequential improvement. So mix was help to us as well as the dental price increase.

Alice Longley – Buckingham Research

And commodity trends, what was the overall when the gross margin expansion?

Matthew T. Farrell

This some help in commodity trends, but overall, I would say that was neutral, I think a lot of the work that we do within the company to improve our unit cost, manufacturing good to get freight program, remember we brought the unit dose in-house, we get (inaudible) running now, we have less slotting, slotting would be an element of price as well. We had five or six factories all of them were contributors to the water.

Alice Longley – Buckingham Research

I guess the final question would be how do you feel about the unit dose packs at this point? Are they disappointing?

Matthew T. Farrell

Well I would say Alice the bottom line is there about 6% of the total category, Church & Dwight is the only manufacture with liquid business grew in Q3, the other competitors who had a unit dose farm we were the only one who held growth on our liquid business everybody else suffered declines on liquid. I’d tell you overall quite disappointing the total category of laundry detergent including liquid unit dose and power was down in the third quarter, the worse results of the year, first quarter was positive, second quarter was about neutral and third quarter total laundry detergent down about 1% that’s about 5% liquid was down, 20% powder decline and obviously unit-dose result incremental, but in total that only gave about a minus 1%, 1.3% actually hit on the quarter.

So, I’d tell you unit-dose is not doing anything in fact maybe heard in the category, we’ve long maintain there’s an issue with dozing that people tend to overdose liquid or you cant over dose really unit dose, and I think as people switch from liquid to unit dose its reducing the number of doses they use for liquid. So the net effect is all I can tell you is unit dose was launched pretty much in Q2 of this year, it’s been a decline in the total laundry detergent category.

Alice Longley – Buckingham Research

You said negative 1.3% for the category said dollar or the volume terms?

Matthew T. Farrell

That’s dollar consumption all channel.

Alice Longley – Buckingham Research

And how much where you up?

Matthew T. Farrell

We were up 5.4% consumption and about 10% in sales dollars.

Alice Longley – Buckingham Research

What was the difference between us to be?

Matthew T. Farrell

The channels that are measured, there are some channels, some of the club stores are measured, some of the dollars stores are measured.

Alice Longley – Buckingham Research

And how was – what was the comfortable numbers for your biggest competitor?

Matthew T. Farrell

Biggest competitor now, go look at, go talk to Neilson or go call them.

Alice Longley – Buckingham Research

Thank you.

Operator

Your next question comes from the line of Joe Altobello from Oppenheimer.

James R. Craigie

Hey, Joe.

Joseph Altobello – Oppenheimer & Co.

Your first question I guess is moving industry question, you got a couple of competitors one of which is in process of restructuring, another just announced the restructuring. Curious what your thoughts are on how that might impact activity going forward if it all?

James R. Craigie

I think there will be in total K as we’ll take advantage of it.

Joseph Altobello – Oppenheimer & Co.

Both of them or just one of them?

James R. Craigie

Both of them.

Joseph Altobello – Oppenheimer & Co.

Interesting. Okay, and second, in terms of gross margin you guys have had a pretty robust evergreen gross margin outlook historically, can you kind of give us a sense for where you think about gross margin maybe form ’13 and beyond with that new evergreen target might be with Avid?

Matthew T. Farrell

Joe that's a good question, it's little bit early to go and call gross margin for next year. As you know, this year presently we have 25 basis points to 50 basis points target. We think we're going to be at the low end of the range. My expectation is that we are going to have a reset here, because we’re going to have the Avid baked in obviously for the fourth quarter and then the full year. I would expect that think of it this way, 2011 gross margin was 44.2% for total company. And so, if we get 25 basis points expansion on that and ex-Avid, we are around 44.45%. Baken Avid in for the fourth quarter then when we got big step up charges and lots of things going on transition expenses things are going to hit the cost of good sold, I would expect that would depress the full year down to around 44%. So that would be the reported number my guess is on a full-year basis, but we'll see where that goes. And then that’s now we’re going to have a full-year of Avid next year, so obviously that will be a drag and you can kind of do the math, and if you got a business that’s got sub 40% gross margins and $300 million, its going to be a bit of a drag on us, but remember the EBITDA margin and the operating margin will be helped by Avid.

Joseph Altobello – Oppenheimer & Co.

Okay, okay that's helpful. Thank you.

Operator

Your next question comes from the line of Bill Chappell from Suntrust.

James R. Craigie

Hey Bill.

William Chappell – Suntrust Robinson Humphrey

Just wanted do follow-up and look at kind of [ad and promo] spend in the fourth quarter, I mean anyway to kind of quantify how much of it is offensive in terms of new products and how much is defensive in terms of what you’re seeing from competitive landscape and then maybe how much is laundry versus the rest of the business?

James R. Craigie

We can’t get into a breakdown Bill, but we spend and I'd probably say 75% of our advertising dollars on new products. So you’ll hear that we got a couple of new ones coming at fourth quarter with the new Tooth Tunes coming out there, new ORAJEL cold sore medication coming out there, we've been doing a very well that once I talked you about the ARM & HAMMER version for sensitive skin and so we love the folks at there, people love to hear new news, and helps drive the business more than focusing on the base brands. Obviously new news has great halo effect. So it will be a lot on the new products and we shift to maybe a little bit over the personal care side to help that business more, so but in general I told you be neighborhood of 14% on that revenue in the fourth quarter spend on marketing, which will be our highest quarter of the year and help us activity with great momentum.

William Chappell – Suntrust Robinson Humphrey

Okay. And then just kind of switch into the 2013 since commodities should be at least flat to a tail wind would you see the same thing in terms of ad and promo with the election here behind us and lower ad rates or I mean how are you looking at that and some operating leverage to the business?

James R. Craigie

Bill, the upfront buying good games. So there is no leverage in terms of buying media that’s the networks are very successful in leveraging increases next year. So again I think (indiscernible) earlier to stick in the range of 12.5% for advertisement sort that revenue going forward. We feel very comfortable there and then we sometimes you guys criticizes for marketing the quarter. We enter the quarter looking that we have to say and then we watch closely were competitors have to say and what they do. And we adjust as we go in the quarter, we leave about 25% or more of media flexible and if we see competitive activity we pour down the defend and if we don’t see it we sometime fourth or next quarter when we expect we might see it.

So we’re very flexible and how we manage to add and again the bottom line is share growth we had a four biggest brands that we share this quarter several had record shares, so we feel quite happy with the marketing expenses this quarter even though was somewhat less than year ago.

William Chappell – Suntrust Robinson Humphrey

Okay. And then last one on Avid maybe I missed it but you see what you found and I guess in the past two months to turn the business from slightly dilutive to mutual and are there any other one time charges that will occur in 2013 or its most of that happening in the December quarter?

James R. Craigie

Now the difference with Avid simply is that we’re in November now and before we’re in August. So we able to – little bit of conservative just within the number Bill so we left itself with little bit of room.

William Chappell – Suntrust Robinson Humphrey

So was it operationally found or just lower financing?

James R. Craigie

Well financing did helpless when we got some three of the member, remember that’s only a quarter, so that wouldn’t be a big swinger. I would say just more we have not we own the business we got a better hand along on with the quarter for again its going to be.

William Chappell – Suntrust Robinson Humphrey

Okay. And then other charges should largely be this quarter/?

James R. Craigie

Yeah most of them will be. I didn’t say my remarks earlier that we do expect about a penny or less of transition expenses next year and has baked into our thinking already.

William Chappell – Suntrust Robinson Humphrey

Okay, great. Thank you.

Operator

Your next question comes from the line of Chris Ferrara from Bank of America.

James R. Craigie

Hey, Chris.

Christopher Ferrara – Bank of America/Merrill Lynch

Hey, how are you?

James R. Craigie

Good.

Christopher Ferrara – Bank of America/Merrill Lynch

I guess for clarification real quick, so the 45% Q4 gross margin that is not a reported number that excludes Avid, but the EPS number of the $0.55 that does include Avid, is that right?

Matthew T. Farrell

Yeah, it's correct.

Christopher Ferrara – Bank of America/Merrill Lynch

Okay, okay. And then I guess, if you look at the nature of those charges that you just detail right, I mean what’s one-time and what's ongoing, I guess it looks like out of those $0.06 to $0.07 of those are going to hit Q4 and be one-time, and I'm curious is that right or wrong? And then I guess as it reflects on your 2013 EPS growth rate, I mean it looks like that's given – just the elimination of those charges has given you a few percentage points of growth. So I guess is that right and that just leads you more flexibilities, how you're thinking about it?

Matthew T. Farrell

Yeah, just to recap what we said with the charges in the fourth quarter that are one-time so you had have transaction costs of $4.5 million now you have transition of $1 and then step up of $7, it was the amortization I mentioned before does keep going on. So the $4.5 million and one is $5.5, $7, $12.5 right, so it's about $0.06 of charges in the fourth quarter. But remember what we say also next year is that we are taking up the spend from 6% of marketing to in excess of 10%, 400 basis points on $300 million business another $12 million in marketing expand year-over-year, so there are a lot of moving parts Chris, but I that helps you?

Christopher Ferrara – Bank of America/Merrill Lynch

Yeah, that does. Thanks. And I guess last quarter, and again I think the advertizing I think again right, but I just want to get a perspective on, I guess last quarter you said that the back half of this year would be about 14% of sales, now obviously Q3 came in short of that, Q4 is going to be 14%, but what drives the change and why overall will the back half have less in advertising. Is it this mixed shift that you are talking about, and I guess how do you feel about your share boys in light of that?

James R. Craigie

Chris, we feel very best, you made a great point that we feel very good about our share boys. That how we judge things so along, as I told you, we just we shifted somebody from Q3 to Q4 the year is going to come out around 12.5%. So we feel very good, we are in our comfort zone, our share boys is very strong in the categories, we’re growing our share on all of our big business, so that’s how we judge it, and we just stay flexible audit, and we are not using it to make earnings, we’re just doing what’s right competitively, and keeping drive [part] on our banks, I guess the competitors explode with anything in a quarter where we got money that we didn’t use in prior quarter. So it’s just a judgment thing we do I think very well, and if the shares were going down you could beat us up, but our shares are growing hitting record shares, so I think we’re doing great.

Christopher Ferrara – Bank of America/Merrill Lynch

So you are saying nothing change in your business that would have caused you back half advertising guidance to move lower?

James R. Craigie

No.

Christopher Ferrara – Bank of America/Merrill Lynch

Okay. Thanks guys.

James R. Craigie

All right.

Operator

Your next question comes from the line of Leigh Ferst from Wellington Shields.

Matthew T. Farrell

Good morning.

James R. Craigie

Hey, Leigh.

Leigh Ferst – Wellington Shields & Co Llc

Good morning. Thank you for the comments on Sandy and for keeping some schedule with your earnings release, it seems a bit unfashionable, but you did mentioned that your outlook excludes any impact. Can you tell us about how you are thinking about the potential impact other than negative?

Matthew T. Farrell

Yeah, Leigh, we are not able to determine any impact at this time that we’ll have in the sales, but we said in the team, they got – the dot does not include EPS impact. While three of our plants were within the pass of the storm, we had a plant Virginia, a plant New Jersey, and a plant Pennsylvania.

The great news is none of them suffered any structural damage and only one plant that one at New Jersey is out of power as we speak still, but we expect that part of restore by the middle of this week, the great news two is we haven’t up finish those inventory at that plant, and need shipments from now, but there could be some disruption coming weeks depending on the condition of actually suppliers to that plant.

But again it's just been a week, we don't know at this time for storm will have any impact in Q4 business results that's for us, I would tell you too there are many retail stores, hundreds and hundreds of retail stores were shut down all of last week due to lack of power that will obviously have some impact in consumption, and it's very highly populated area of America. So that would be some what common to all CPG companies, we are little more Eastern skewed in our business, but it's just way to really just what’s going on as far as the impact in the business.

Leigh Ferst – Wellington Shields & Co Llc

Thank you. And can you tell us what kind of distribution you've gone for Tooth Tunes?

James R. Craigie

Great. We don't give a number like that. It's been very good distribution, you’ll see very good display support out of retailers, it's just really, we are very, very happy with it and initial consumption and sales have been add or above what we expected.

Leigh Ferst – Wellington Shields & Co Llc

And you're still expecting that to be a big item for holiday sales?

James R. Craigie

I think it will be a huge item for holiday sales.

Leigh Ferst – Wellington Shields & Co Llc

Okay, thank you.

James R. Craigie

Thank you.

Operator

Your next question comes from the line of with Nik Modi from UBS.

James R. Craigie

Hello Nick.

Matthew T. Farrell

You got power in your house in Princeton, Nick.

Nik Modi – UBS

I’m good, I'm good. We only (inaudible) for a day, but we're back and running.

Matthew T. Farrell

We’re going to (inaudible) to stay and we okay and fine.

Nik Modi – UBS

The good thing is I’m fallen up, I can actually live there. So that's good.

The question I have is on Avid, you talk about the adult opportunity and I was wondered if you could just give some more perspective on that now that you’ve been kind of running the business for few months the opportunity how can you address that opportunity in more meaningful fashion, I mean is there a trial sampling type of initiative, we can do in kind of – if there is what type of conversion do you typically see in those types of initiatives?

James R. Craigie

We’ll take the first opportunity is a lot of distribution opportunities out there in the adult side, which we plan to both increase the amount of distribution in current accounts and open up new accounts out there. So that will be the first big wave coming through, we told we're going to increase marketing support, a big part of marketing is sampling, the people who we bought this business from (inaudible) quite conclusively that in store sampling is very powerful vehicle, we'll be doing a lot of that out there, because when you take this product I guarantee you with awesome, I seriously get every morning and so treat actually put these gummy vitamins in my mouth and eat them as like candy and sort of swallow hard pill in there, and I think is people actually experienced that especially adults I think that will be switching in droves over to the gummy vitamins which has same efficacy as hard pills. So distribution increased sampling, increased marketing support, and we have some new products coming out over the course of next 24 months which I think it will be very appealing in the consumers.

Nik Modi – UBS

Great, that's it from me.

Operator

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

James R. Craigie

You already have your turn Bill.

Bill Schmitz – Deutsche Bank Securities

Well you didn’t hear my first comment. I said it quantified lot of my returns this morning, but look. At the gross margin mix going forward, I mean the 5000 basis points is amazing, but lot of that sort of personal care driven so you broaden a lot of these personal care brands with sort of that gross margin up, so when you kind of look at it going forward, I think Avid was a little bit gross margin dilutive, but to me this is a temporary thing, because we haven't really, but kind of how do you get the sort of gross margin moving not necessarily to the next quarter or two, but maybe for the next three to five years.

Matthew T. Farrell

Bill the path was driven by the combination, yes there was acquisitions of higher margin brands, but yes there was also a lot of growth of the – the gross margin, the core business remember, we had compaction in the laundry a few years ago that’s awesome, we built a big new super plant Pennsylvania, we have a – this cost saving program in houses is fantastic. So but now in perspective though keep in mind we’re up around 44%, 45%.

The big guys in our category are up only in a high 40s and they have all premium high price brands out there so that’s why we know or we can do 100 basis points a year as we coming close, but it is the sealing out with some of the guys. But we feel very comfortable, we can get this business up to about 50% gross margin that the Avid thing will set us back slightly, but little bit of a drag, but you got future things, I would hope some time in the next year or two we’ll see another round of compaction on laundry, which I will not quantify, but was hugely impactful to us in the past it’s our biggest business and makes a lot of sense that to go do it. But we need the whole industry to do it, so I think we will get a 50% overtime through internal programs, and we got more restructure in doing some more plans will help out to.

Bill Schmitz – Deutsche Bank Securities

I got, and may be [understand the] answer deeply in the press release, but I know you look as you said that sales in Europe and Australia were strong and everyone else said disaster quarter in both those regions. So are you getting distribution there, I mean is there sort of like nation value category emerging that you guys are starting to participate in or was that just better growth of the base business?

Matthew T. Farrell

Yeah Bill, its Matt, just two things, it’s – NAIR is doing well, and BATISTE another brand we bought, BATISTE is doing very well both in the U.K. and in Australia.

Bill Schmitz – Deutsche Bank Securities

Got it, but there is not an opportunity to kind of ended that value share almost its struggling a little bit, I think it probably do pretty well.

Matthew T. Farrell

Are you referring to BATISTE?

Bill Schmitz – Deutsche Bank Securities

No, no, no I'm sort of household products side.

James R. Craigie

Remember, outside the U.S. we are largely a personal care.

Unidentified Analyst

Yeah, that's what I asked you, you haven't launched household products internationally or materially?

James R. Craigie

Canada we have.

Bill Schmitz – Deutsche Bank Securities

Got you. Thanks, let me jump back on guys.

James R. Craigie

Thank you.

Operator

Your next question comes from the line of John Faucher from JPMorgan.

John Faucher – JPMorgan

Guys, actually I’m fine, (inaudible) asking my question. So I'll just say that's it.

James R. Craigie

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Joe Lackey from Wells Fargo Securities.

Joe Lackey – Wells Fargo Securities

I guess kind of thinking about this since the Avid call, and speaking a long-term I guess looking at long-term EPS growth previously your [evergreen] target was always 10% to 12% to low double digits, and I guess it remains 10% to 12%, but I guess I know you'll get the one-time benefit of Avid and you’re projecting 13% to 15% next year, but you get the ongoing synergies going forward, and obviously that acquisition is accretive, why can’t the business grow 12% to 13%, 13% to 15% when you include Avid, I mean are you projecting a slowdown in the core business over the long-term?

Matthew T. Farrell

No, no. When we said, you may recall when put out the release in August that we were come 13% to 15% EPS growth for 2013 and we also said at the time in August that we projected total shareholder return of 10% to 12% going forward thereafter. Right, so now it's around 14%, 15%, 16%. So you're asking what number be higher, I think it's little bit earlier that to be taken that number up, I mean our algorithm is delivering a 10% to 12% TSR in 2014 and beyond is intact right now, so as far as taking it, we're going to talk about that again in the first week of February when we call 2013.

John Faucher – JPMorgan

Got you. Thank you.

Operator

There are no further questions at this time. I would now turn the call back over to the presenters for closing remarks.

James R. Craigie

Okay, I thank you all for tuning in this morning after very trying week last week. I just want to say we had a fantastic Q3, we're very thrilled with the results, and we told you all about the outlook for the rest of the year, 2013 is preliminary at this point, but we feel very strong about that. So I want to thank you all for taking the time to tune in hopefully you love our results. Thank you.

Operator

This does conclude today's conference call. You may now disconnect.

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