James R. Craigie - Executive Chairman, Chief Executive Officer and Member of Executive Committee Matthew Thomas Farrell - Chief Financial Officer and Executive Vice President of Finance.

Jason English - Goldman Sachs Group Inc., Research Division Stephen Powers - UBS Investment Bank, Research Division Nik Modi - RBC Capital Markets, LLC, Research Division Kevin M. Grundy - Jefferies LLC, Research Division Jon Andersen - William Blair & Company L.L.C., Research Division Joseph Altobello - Oppenheimer & Co.

Inc., Research Division Olivia Tong - BofA Merrill Lynch, Research Division Alice Beebe Longley - The Buckingham Research Group Incorporated William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division Christopher Ferrara - Wells Fargo Securities, LLC, Research Division Jason M.

Gere - KeyBanc Capital Markets Inc., Research Division William Schmitz - Deutsche Bank AG, Research Division.

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Second Quarter 2014 Earnings Conference Call. Before we begin, I've been asked to remind you that on this call the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts.

These statements are subject to risks and uncertainties and other factors that are described in detail in the company's SEC filings. I would now like to introduce your host for today's call, Mr. Jim Craigie, Chairman and Chief Executive Officer of Church & Dwight. Please go ahead, sir..

Good morning, everyone. It's always a pleasure to talk to you, particularly when we have good results to report. I'll start off this call by providing you with my perspective on our second quarter business results, which you've read about in our press release 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 and to discuss our earnings guidance for the year. We'll then open the call to field questions from you.

Let me start off by saying that I'm very proud of my company for the second quarter business results that we achieved. Despite headwinds from continued weak U.S. consumer demand and a highly competitive environment, the Church & Dwight team delivered solid business results in line with our 2014 plan.

As you know, our 2014 plan is driven by our balanced portfolio of value and premium products, the launch of innovative new products, aggressive productivity programs and best-in-class management of overhead costs and cash flow. As you've heard from many of our CPG competitors, consumer demand is very weak.

We are facing the same tough business environment, as consumption was flat or down in 8 of our 13 categories. While we have taken actions to remain price competitive, we believe that innovation is the key to delivering strong sales and earnings growth in the long term.

Despite the tough business environment, our goal in 2014 is to not only deliver our aggressive business targets, but to drive share growth across all of our major categories via innovative new products. Innovation has been the key to our past success, as shown by the fact that over 32% of our sales in 2013 came from new products launched since 2007.

As promised, we launched a record number of innovative new products in 2014 across every one of our major categories and 3 new categories.

This represents the first time in our company's history that we launched a great new product in every one of our major categories in the same year and the first time that we launched into more than one new category in 1 year.

In the first quarter of 2014, our sales force did an incredible job in gaining incremental distribution from retailers in every category. Gaining incremental distribution is the first key step to driving future sales and profit growth. So we got off to a great start.

In the second quarter, our goal was to initiate strong consumer demand for the new products via increased marketing support. We also met this goal, as we achieved record quarterly share results on 3 of our 4 mega brands and share gains on 3 of our 5 other major brands. These 9 brands represent over 80% of our sales and profit.

While there's still a half-year to go, we are right on track to deliver our aggressive EPS target of 7% to 9% growth despite the difficult headwinds, which are driving many of our competitors to forecast lower earnings growth. I'll now turn the call over to Matt, to give you some specific details on our second quarter business results..

an impairment charge that you read about in last year's 10-K, that we don't expect to repeat; we have some litigation costs in the prior year quarter that we also don't expect to repeat; and of course, lower shares.

The balance of the year-over-year EPS increase in Q4, about 10% growth, comes from the base business and greater traction from new products that we launched earlier in the year.

So to summarize the full year, for those of you who are working on your models, we're expecting 3% organic sales; gross margin contraction of 75 basis points, obviously influenced by slotting and couponing, behind the new products; and if you work your way down the P&L, we expect marketing as a percentage of sales to be flat year-over-year, to be around 12.5%, and now expect SG&A to be down 125 basis points.

And all that would get us to the midpoint of the 7% to 9% EPS range, and the 50 basis points expansion of operating margin. Back to you, Jim..

premium laundry detergent; bleach alternatives and automatic dishwashing detergents. Overall, this strategy is off to a great start, as assumption of the total OxiClean brand in the second quarter was up 35% versus year ago. This included strong results on every form of the brand.

The core OxiClean laundry additive product achieved a record quarterly share of 45.5%, which is bigger than the next 4 competitors combined. The new OxiClean premium laundry detergent achieved a 1.0 dollar share in the liquid laundry detergent category, after just 4 months in distribution.

A 1.0 dollar share may not seem much to you, but keep in mind that the liquid laundry detergent category is a $6 billion category, and P&G's famous Cheer brand is only a 1.0 share after 768 months in market.

And most importantly, our consumer research reveals that the sale of our new OxiClean premium liquid laundry detergent brand is over 80% incremental to our other liquid laundry detergents. Our new OxiClean auto dish detergent achieved a 1.6% dollar share in the second quarter, is on track to become the #3 player in this category by year end.

And our new OxiClean bleach alternative, called White Revive, achieved a 2.2% dollar share in the second quarter. Distribution of this product was almost entirely incremental, as we were able to get it placed in the bleach section versus the laundry detergent section, where the core OxiClean laundry additive product is located.

As a result, sales of this product are over 70% incremental to the core OxiClean laundry additive franchise. The strong sales incrementality of these new products is critical to achieving sales growth. Our other mega brands also achieved strong results in the second quarter.

Our newest mega brand, the Avid gummy vitamin business, delivered double-digit consumption growth in the second quarter, behind expanded distribution, new products and increased marketing support. This double-digit growth occurred just by flat category growth, as a result of unfavorable publicity last year about the benefits of taking multivitamins.

The category trends are now headed in the positive direction and most importantly, the fast-growing gummy form of vitamins now represents 7% of the total vitamin category. That's more than twice what it was when we bought the business in 2012.

This still leaves over 93% of the $7 billion vitamin category to be conquered by encouraging consumers to switch from the swallowing tasteless hard pills to enjoying our delicious tasting gummy vitamins. We have the #1 gummy brand for both kids and adults, and Church & Dwight was 1 of only 2 vitamin brands to grow share in the second quarter.

These strong results to date put us on track to deliver our double-digit sales growth outlook of the year, despite lower-than-expected category growth and increased gummy competition.

On our TROJAN mega brand, we achieved a record quarterly share in the sexual health category, driven by record quarterly sales of condoms and continued growth of our new lubricant line that was launched in 2013. On the largest part of our sexual health business, our TROJAN condom business, we matched its highest ever quarterly market share at 76.0%.

And this momentum has continued in the third quarter, as I just learned yesterday that the TROJAN condom business achieved an all-time record monthly share of 76.8% in the month of July. Our biggest mega brand, ARM & HAMMER, held its share in the second quarter, despite some fierce price competition.

In the laundry category, the ARM & HAMMER liquid laundry detergent brand grew its share. This share growth represented the 18th consecutive quarter that the ARM & HAMMER Liquid Laundry Detergent brand has posted year-on-year share growth.

It strengthened the brand's #1 position in the value segment and it enabled the ARM & HAMMER brand to pass the ALL brand to become the #3 brand in the total liquid laundry detergent category. While these are very positive results to the ARM & HAMMER brand, the real star of the ARM & HAMMER mega brand portfolio was our cat litter business.

Our premium price cat litter, called ARM & HAMMER Clump & Seal, has been a huge hit with the consumers, as reflected in both our brand share results and its positive impact on category growth.

Our second quarter consumption for our ARM & HAMMER cat litter business increased by over 20%, and our share grew 2.8 points to a record quarterly share of 23.3%. These great share results strengthen our position as the number 2 brand in the category.

Just as important, our new Clump & Seal product has been a major contributor to driving cat litter category sales growth of over 7% in the second quarter, the strongest growth in any of our 13 categories and excellent growth for any CPG category.

This exemplifies our belief that innovation is the key anecdote driving improved value creation for our consumers, our customers and our shareholders. Unfortunately, some of our competitors have not invested in developing new products and instead, have increased their trade and coupon spending to defend their brands.

This happened particularly in the laundry detergent category. In case you do not know, Church & Dwight is the only competitor to grow share in the laundry detergent category every year for the past 5 years. We are now the #2 player in this category, and 1 out of every 4 wash loads is done with a Church & Dwight laundry detergent.

The growth of our laundry detergent business has been driven by our value pricing, great new products, increased distribution and higher marketing spending.

As I stated earlier, our largest laundry detergent brand, ARM & HAMMER, has posted year-on-year share growth for 18 consecutive quarters, including share growth in the first and second quarters of 2014.

Our OxiClean laundry additives brand has posted year-on-year share growth for 11 consecutive quarters and achieved a record quarterly share of 45.5% in the second quarter. In 2014, we launched innovative new products on our ARM & HAMMER laundry detergent brand.

And to continue our remarkable record of share growth, we extended the OxiClean brand into the laundry detergent category, with solid initial results, as I mentioned earlier. Unfortunately, several competitors who have not invested in innovative new products began lowering their prices starting the third quarter of 2013.

We held off from responding in the back half of 2013 because our laundry brands continue to deliver sales and share growth driven by our product innovations. In the first quarter of 2014, the competitors added unprecedented levels of coupon support on top of the lower price points.

Again, we held our ground, in the hopes that our new product innovations, which are being launched at the end of the first quarter, would offset these pricing actions.

The competitors kept up their higher trade spending and coupon support in the second quarter, and it began to clearly impact the sales of our laundry brands despite the launch of our new products.

So starting in the month of June, we took actions designed to restore our price competitiveness and drive increased trial behind our great new laundry detergent products. I will not divulge or answer any questions concerning the specifics of what we have done, for competitive reasons.

I will just tell you that these actions drove a significant improvement in our sales and our share results starting in June and we've seen continued sales and share momentum in July. In fact, our laundry detergent business achieved a record high share in the month of July.

So I'm confident that our actions should enable us to deliver the laundry and business results that we need to deliver our 2014 annual sales and EPS commitments. I'll finish off our portion of the call today with a few words on our outlook for the year.

As I stated in the press release, we are reaffirming our 2014 guidance of organic sales growth of approximately 3% and earnings growth target of 7% to 9%.

This will be driven by our balanced portfolio of value and premium products, the launch of innovative new products across every one of our major categories and 3 new categories, aggressive productivity programs and tight management of overhead costs.

Our 7% to 9% earnings growth target is in the upper quartile of EPS growth target ranges in the CPG industry, consistent with our historical performance. And we believe that we can deliver that within that aggressive range despite the highly environment and weak U.S. consumer demand.

The majority of our annual earnings growth is planned to occur in the second half, since the first half includes a significant increase in slotting, couponing, trade promotions and incremental advertising support for our new product launches versus what we spent last year. In conclusion, 2014 is shaping up to be another very challenging year.

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 the management team that has the track record of knowing how to successfully leverage that portfolio to deliver consistently strong EPS growth.

Last, but not least, I want to assure that we are pursuing acquisitions, and we have over $2 billion of financial firepower to make them. As you know, we have a great track record of making highly accretive acquisitions, because we are very selective about the types of businesses we acquire.

At the same time, we're also responsible to our shareholders so we will continue to be patient until we find the right deal that will pay dividend for many years to come. 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. Operator, please go ahead..

[Operator Instructions] Our first question comes from the line of Jason English from Goldman Sachs..

Two questions. First on the SG&A efficiency. It's certainly driving a fair amount of growth this year. The question is sustainability of that.

How much of the SG&A cuts are sort of transitory, whether they be incentive compensation, et cetera, that may need to be reloaded next year versus how much of it is enduring?.

Yes, Jason, it's too early to comment on incentive compensation, as far as saying how much of a benefit there may or may not be year-over-year. It's a whole function of our 4 metrics for the full year..

Can you comment on how much of this maybe enduring?.

Are you saying that next year, if we have a blowout year, will incentive comp be higher? Yes, it will be..

No, not incentive comp, just the rest of SG&A. I mean, you're -- it's tracking down year-on-year.

Should we expect -- if we were to forget about incentive compensation just the underlying components, does it bounce is back? I know you mentioned, the first quarter, you are lapping some acquisition-related expenditures, which presumably they've gone away unless there's another deal, they're not going to come back....

Right, exactly. That's right, yes. On the first quarter, SG&A was down 160 basis points, 40 basis points came from the fact that we didn't have the average transition costs year-over-year, right? So they're not going to be reloaded next year..

But Jason, we've done a lot in terms of IT systems to be able to keep overhead down. And we look at some organizational design things. So I would tell you the vast majority of SG&A savings is enduring..

Yes, Jason, what -- the way the model works for us is that SG&A needs to grow at a much slower rate than our top line growth rate. That way, we're going to get leverage on that line. And that, combined with acquisitions, has enabled us to drive that number down 300 basis points over a number of years..

Our next question comes from the line of Steve Powers from UBS..

I guess, can you guys just maybe expand a little bit further on what you saw in laundry during the course of Q2 and how it differed from your expectations coming in to the quarter? And then as you look forward over the course of Q3 and Q4, I guess, a little more details on what you expect to -- what kinds of sensitivities you had around competitive dynamics, retail responses over the balance -- on the balance of the year in that specific category?.

Yes, Steve, I mean, I can't speak for competition. I can just tell you about what happened is, as I said, we didn't start it. We don't like it. We prefer to grow through innovation. We've taken appropriate actions to deal with it. And I'm confident we'll deliver our 2014 EPS commitments despite it and exit the year with momentum..

Okay.

On -- as you -- I guess, as you think about -- this is shifting gears kind of entirely, but if you think about your M&A activity, can you talk about where you're just seeing the most flow of potential deals, setting aside the quality of those opportunities? I guess, are there certain categories where there's more flow, whether personal care, household or consumer health? Are the opportunities skewed to smaller standalone companies or....

Steve, let me save you a minute, the answer is no..

You're not going to do it? Okay, fine. And then I guess, lastly, on mega brand growth, looking into the out years.

From here, how much do you expect, roughly, growth to be driven by your base products -- base category presences today versus further horizontal expansion and into new adjacencies? Just kind of give us a rough feel of the balance that you have as a base case?.

Yes, it's a great question, Steve. Honestly, we don't have a spine of measure on that because we launch new products in the base, as well as launching into the new categories. The real key there is the efficiency of marketing spending. We just saw in OxiClean this year because we launched into 3 new categories, plus we had innovation on the base.

The whole businesses is up 35%, if you count all the sales against it. And it's just an efficient way to go-to-market because if we spend money on OxiClean laundry detergent or OxiClean dishwashing, it halos to the whole business.

So at this point in time, I can't honestly give you an answer to the fact that the difference between the new categories versus the base because it really depends on what we do in each of those categories going forward in that. But it's just -- the core is that we -- the 4 mega brands we have right now are about 60% of our revenues.

And we're spending about 75% of our marketing money against those 4 because you get the biggest bang for the buck. So you're going to see that overall, the 4 mega brands are going to be the biggest drivers of our future growth. I just can't tell you within the categories they cover what that will be..

Okay.

Is it just fair to say though that your R&D focus is spread -- is balanced between extension of the core versus exploration of new categories?.

Absolutely. Because the core -- still, the vast majority of those business is still the core..

Our next question comes from the line of Nik Modi from RBC Capital Markets..

I wanted to get your thoughts -- I mean, you've been kind of ahead of the curve and very accurate on your assessment of just generally what's been going on in the U.S. economy. And it just seems like the second quarter things really took a turn for the worse.

And I'm just wondering your thoughts, are you seeing something in terms of trips, because all center store items are really starting to suffer.

So I'm wondering if this reduced trip levels are impacting consumption? Just any perspective you might have on what could explain the step down from where we were even 3 and 6 months ago?.

Yes, Nik. I wish I knew more. I mean, all I can tell you top line, as I said, 8 of our 13 categories were flat or down in the second quarter. That's all -- it's honestly only a little worse than it's been in prior years. It's not like a major falling off the cliff. I don't have anything specific, I have no personal thoughts.

It's just the people just have less disposable income out there and they're having to make hard choices and having to stretch their product uses over time in that. And I just don't -- I don't see any improvement -- we're not counting on any improvement going forward.

That's why it's very important to us to put out products that offer a great product, but also great value. And that's what we're particularly known at -- known for. But I wish things are going to get better. I don't believe the headlines in USA Today talking about things looking brighter out there. We're going to continue to operate on.

We're plan for the worst and hope for the best..

And then the -- last question, is just on the July figures that you provided in the laundry category.

Have you seen any response from the competition in that regard? I mean, should we just expect them to kind of stay where they are? Or have you seen some response?.

Well, I will say Procter has stepped up the game out there, in terms of trading coupon support. I mean, just walk into a Walmart and look at their displays on that. So Procter has absolutely stepped up support.

Good news is the category actually showed some improvement because I think between us and Procter, stepping up support, people are trading back up to the better brands, and it'd be a better ring in the store. So despite the increased intensity out there, particularly from us and Procter, categories starting to move in a positive direction..

Our next question comes from the line of Kevin Grundy from Jefferies..

Matt, I want -- I thought your commentary that you don't plan on buying back any further shares for the balance of the year was curious, given your cash position.

Can you reconcile that a bit for us, particularly given the pullback in the stock and near-term M&A intentions?.

Well, I wouldn't comment on what our prospects are or events that might take place in M&A in the short term. Now we've -- this company has always been thoughtful about how it deploys its cash. So we don't necessarily go and take every dime and plow it into share purchases in order to get an EPS benefit.

Many have been in the camp of saying that the company is underlevered. And that is a great ability to buy back shares to reduce -- or to increase EPS. But of course, we think the highest and best use of the balance sheet is acquisition.

So this is something we visit every quarter as management and as a board and concluded that where we are, we're pretty happy with what we've done year-to-date. Obviously, it supports our ability to hit our 7% to 9% EPS growth number. So consequently, we're done for the year..

Okay. And Jim, can you, I guess, give us a little bit more detail -- this is with respect to unit dose, and specifically what impediments you guys are facing there? Because we're what, low double-digits, I think, is a percent of the category now for unit dose as a percent of laundry, and likely moving higher.

And you guys really aren't participating in a meaningful way.

So what are the impediments that you guys are facing? And do you plan on participating in a more meaningful way?.

Well, Kevin, I mean, unit dose is a great product, great innovation. Kudos to Procter that innovation is driving the category. We have participated. We had a product out there before Procter got out there. They've obviously been putting a lot of their marketing support behind it.

We decided to focus more in the liquid business, which is over 70% of the category. So we're out there. We've got a great product out there. We have more innovations coming along that product line. So the -- it's now about 11% to 12% of the total laundry business.

So like, again, we look at priorities and we put more of our energy behind the liquid side of the business, 70%, and we put a lot of energy behind launching OxiClean liquid laundry detergent. We also launched that, by the way, in a pod form. But the liquids remains the key focus right now. But I totally applaud Procter on the unit dose product.

Great new product. They're there. They have gotten higher than their fair share because they put the majority of their support behind it. But we're going to -- we're there and we're going to be there, and we hope to grow that business in the future..

Just one more for me, if I may. Jim, this is for you. Just with respect to the 3% to 4%, and this is long-term algorithm, and I'm not asking you guys to guide for next year. But it seems -- last year, you fell a little bit short.

This year, you'll be stretching probably to get to the lower end and you have specialty and cat litter and a big contribution from Avid, which are driving most of it.

In the absence of buying an asset that's accretive to your growth, does the long-term algorithm feel like it's more of a stretch in this environment?.

No, not at all. I mean, honestly I always want you guys -- well, think -- 2014 is really a year of investing for the future for us. But still, unlike other companies, they'd say invest, and they pull down their EPS. We're going to invest and still deliver a top quartile EPS growth.

Don't forget we put a lot of energy and a lot of cost into launching the record number of new products this year across all of our 9 brands. We've spent the marketing support behind it. So we expect that to pay off in the future. There's a lot investment there. And then, we have the pricing situation breakout in the laundry category.

That has partly dented at this year. I can't project what the future of that will be, but I don't believe that's going to continue forever. So I definitely feel the investment we made in new products this year -- the marketing -- we held our marketing. Other guys are cutting their marketing. That's going to pay off.

And so at the end of the day, you guys always pay us to find the levers to drive the bottom line earnings growth. We have the revenue levers one, we got gross margin, we got marketing, we got SG&A, we got cash flow, we got acquisitions. And you pay us to figure out what combination of those delivers in our top quartile growth.

And we've always found a way to do that. We've quadrupled our share over the 10 years. Nobody gave us a pass last year, when our Specialty Products division tanked, but we covered that and still delivered double the EPS growth. And this year, we're having a little bit of problem with the domestic side, with the pricing of laundry.

But we're taking care of that and going forward. So just trust us, that we'll always going to find a way to deliver top quartile EPS growth. We've done it in the past. We're going to do it in the future..

Our next question comes from the line of Jon Andersen from William Blair..

Just wanted to ask about your newest mega brand, Avid. You mentioned, Jim, double-digit consumption growth and a flat category.

Can you talk a little bit more about what's driving that? And where you stand in terms of distribution expansion on the base business? And then kind of where you are in terms of ACV and the new enhanced offerings? And then you also said that you have seen some improvement in the underlying category.

What are you seeing there? And what's driving that?.

Yes. I think -- it was late last year, a report came out that kind of dinged the benefits from taking multivitamins. And it actually drove a category that have consistently grown high-single-digits or low-double-digits, set it back and it actually declined for a quarter or 2. Now it's coming back. Second quarter was flat.

We expect the category to start growing again in the third and fourth quarter. So we heard this -- we talked to many people in the vitamin business where we bought this business. And they expect -- they said to expect these things to happen as reports come out, as they do in many, many food categories in there.

So that was unfortunate, but it wasn't a surprise and it doesn't worry us at that all. And like I said, it's gone from being negative in the first quarter to neutral in the second quarter, and we see every sign it will go positive in third and fourth quarters.

Distribution, we've gained a lot since we bought this business because, quite honestly, we have a much bigger sales force than the prior owner did. And our sales is doing a job in getting distribution of the current products out there. We still have room to grow on that in, and we're still cracking distribution voids every day.

And I don't have an exact number on the ACV, but it's -- we're -- we still have many opportunities. Just clarify too, the real growth opportunity is in adult vitamins. We bought a business that already -- in the kids side of the business, over 50% of the category was already gummies. So we love to grow that even more, but it was already high.

When we bought the business, the adult side was only about 3% of the total adult business. Now the great news is the adult business is about $6.5 billion category, versus kids, it's like $300 million. So that's actually great. So with $6.5 billion, only 3% is adult gummies. That's already more than double that.

But still, over 90% of the adult vitamins to capture as we trade people up. And I have yet to find 1 person, 1 adult who I've got to try the gummy vitamins who isn't blown away by how great it tastes and wants to convert right away.

And we're just doing a great job of launching all sorts of new vitamins, and there's lots of opportunities for new types of vitamins going forward that our team is working hard on. So if I sound excited about this business, I am.

This is one that's going to be -- it's going to -- it's already a great acquisition for us, and it's got such massive potential going forward, that we just salivate at looking at the opportunities on the vitamin business..

Our next question comes from the line of Joseph Altobello from Oppenheimer..

I just want to start out with the share buyback discussion. Because if you look at 2Q, I guess, your stock was somewhere between $68 and $70. And you bought back $175 million, like you said you would. And with stock here at 64 and change, I was curious what your thought process is to buying back more stock.

Why stop at $435 million? Why not, given the pullback, be more aggressive here?.

Yes, Joe, this is Matt. So we're -- we don't conduct ourselves as opportunistic buyers as moving in and out of the market depending on what the share price is.

We're more deliberate about if we want to deploy a certain amount of cash and buy back shares and that's why we avail ourselves on accelerated stock repurchase, which as you know, once you make a decision, you get 90% of the shares upfront and you're done. So it's -- we don't look at it as we're running a trading desk.

And as I said, we're far more interested in deploying the cash for acquisitions. That's the highest and best use of the capital..

Okay.

So since you're not buying back anymore stock, should we read into that in terms of the health of the M&A market?.

Joe -- your weight still down, Joe?.

Yes, yes it is..

Go out for a run please..

All right, last question for you. The guidance for this year, Matt, you did a good job of explaining the drivers in 4Q on the bottom line. But if you look at the top line, the organic growth number for 4Q, if you do 3% in the third quarter is going to be somewhere north of 4.

So can you help us understand why you're going to see that step up in the fourth quarter on the organic growth side?.

Well, as far as the fourth quarter goes, as we move through the year, there's less and less slotting, less and less couponing to simulate trial. The trial is -- pardon me, coupons are netted in the net sales number. And we're expecting the traction of our new products to really accelerate, as we move from the Q3 into Q4..

Our next question comes from the line of Olivia Tong from Bank of America..

Just following up on a previous question. Jim, you guys have had a really good history of delivering on EPS goals. But when all your competitors are spending more, macros are worse and your peers are targeting lower outlooks, as you mentioned.

Why is 7% to 9% still the right target range? And are you leaving yourself enough flexibility to respond in case -- in case stuff happens?.

Well, I'll first answer that because we're better managers in business than they are. But stepping beyond that, no, I would -- hey, look, if I felt we couldn't get there in a quality way, I would lower my call. But I feel we can get there in a quality way. Again, Matt mentioned earlier, our marketing spending is going to be flat on the year.

I think that's going to be better than other folks. We already saw the upfront buy in the TV industry, announcement that some of our major players have cut back on their TV spending going forward next year. We're, at least, keeping it flat.

So again, we look at share of voice, which is how much of the advertising spending in the category you have, and we see us as having at least this -- our fair share or more to help grow our shares. And second quarter was great.

I think for those -- so rest of the year, I feel pretty confident that we're well-positioned on a marketing spending base to drive our brand. If I didn't, I would think about cutting back the EPS. But I really feel the combination of our programs, our new products and everything will deliver our numbers.

The June, July numbers were extremely encouraging to us. We banged record shares on 3 of our 4 mega brands in Q2. July is off to a great start. So I really feel good at this point. But it isn't like we just hold to a number, but I always wanted to do it in a quality way.

And I think right now, we'll deliver those results with 7% to 9% earnings growth and exit the year with momentum. I've never wanted -- we've had consistent growth. I will never over-deliver a year and then put the next year at risk. So I always want year-to-year-to-year growth. We've had that. We've had 10 great years.

I mean, you should know it pained me to not do a double-digit earnings EPS growth this year. I've had 10 straight years of running this company with double-digit EPS growth. So I had a cathartic experience only calling 7% to 9% growth.

So already in Jim Craigie's world, I pulled down the call from the past 10 years of history, but I still feel we can do that result, which is better than almost all my competitors, do it in a quality way and exit the year with momentum..

Got it. And then just following up on the top line. Matt, you mentioned that couponing should decline as the year progresses, traction of new products should accelerate.

So is this just a function of the fact that the comps are really particularly easy in the back half with price mix down pretty dramatically in the second half of '13? Or what -- I guess what gives you confidence that the couponing is going to decelerate as the year progresses? Or in the -- by Q4?.

Well, the couponing -- remember, we have so many new products that are launching this year. And with new products, you're going to use coupons to simulate trial. You want people to try your new products. So once you start getting a trial and get repeat purchases, the coupons are going to start peeling back.

That's why, as you move through the year, we're expecting we're going to have less in the fourth quarter, certainly in the third and then the second. And so kind of -- and we expect volumes to be better, as we move through the year for the consumer. They got -- we're better in Q2 than Q1, Q3 would be better than Q2, et cetera..

So even with competition getting quite a bit more difficult, you still feel pretty confident about your ability to accelerate the volume expansion in the back half of this year?.

Yes. As Jim said, we think the combination of the media spend and the trade programs that we have in place are going to drive the volumes in the second half..

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

My question is really a follow-up to a couple of the others and including that one. I think to get to your guidance of gross margins being down 75 basis points for the year, they have to be down a lot less than the third quarter and the fourth quarter. So I mean, you've now guided to gross margins down 150 basis points in the third quarter.

Why don't you have to keep up the pressure on gross margins? You just explained less slotting. But there's other promotions that hurt gross margins.

Why does that 150 basis point gross margin hit in the third quarter not have to be the same in the fourth quarter?.

Well, a part of it is going to be mix year-over-year, Alice. So it's product mix and business mix. The Specialty Products business continues to perform year-over-year. And their gross margin have been up quite a bit. Actually, in the second quarter and year-over-year, we can expect that to continue as we get into the fourth quarter.

And volumes drive a lot of variable margin, right? So if you have high variable margin on your volumes, it's going to have a -- variable margins are, of course, are higher than your gross margins is going to influence the fourth quarter.

And again, as I said before, the trial couponing is -- are also part of the gross margin drag, and there'll be less of that in the fourth quarter..

Alice, to Matt's point, we have some businesses like Nair that are very seasonal in the summer. And there's quite a bit of spending behind them. They're very off-season in the fourth quarter..

Also true for SpinBrush, is also seasonal....

SpinBrush -- and conversely, we have very high margin businesses like TROJAN, which is -- has a big fourth quarter around the holidays and that. So it is a good case of product mix helping to drive that with some higher-margin products having a very strong -- traditionally strong fourth quarter and some of the higher trade businesses don't..

Okay. And here you have this huge hike in marketing in the second quarter and yet your sales are disappointing.

So I mean, you don't think the category is becoming commoditized more than before?.

No, I think -- Alice, again, we would've had a much stronger organic growth in the second quarter if we had addressed the trade issue earlier. Because once we then have the marketing and we took care of the trade issue on the laundry business, month of June was excellent and now month of July is even better.

So I think you've got to understand that the marketing spending was worthwhile in creating awareness out there. And most of our other businesses was fine. The laundry business dragged us down a little bit in Q2 in the first 2 months because we had the pricing issues on the laundry business, which we fixed starting in June..

Our next question comes from the line of Bill Chappell from SunTrust..

Going back to the laundry side. Can you maybe help us understand what's going on with XTRA? Because I guess it seems like most of the price wars have been kind of the mid-tier and even with simply coming down to the mid-tiers? And I would think that XTRA is so far down on the price chain that it wouldn't be as affected.

Are you seeing consumers kind of trade up with the other discounts? Or is there something else going on and is that continuing into this quarter?.

No, Bill, I wish what you said was true. XTRA has been hurt the most of our 2 brands because we don't advertise it. And some of the competitors have been so aggressive on their pricing, one in particular has been doing buy 1 get 2 frees, that it actually had more impact on XTRA than it had on ARM & HAMMER.

So it's been just mainly the dealing with the fact that some of the competition at the lower end has -- XTRA doesn't have as many protections to it that the ARM & HAMMER brand does. There's more advertising, more new product news on ARM & HAMMER. And XTRA took some of the brunt. But we've taken actions to fix that.

And I think you'll see improvement in XTRA results in the back half of the year..

Okay. And then switching to gross margin.

Would -- I mean, if you take out kind of the price war in liquid laundry, would you have seen gross margin improvement this year? And I guess I'm looking that in kind of the long-term algorithm of gross margin improvement every year and part of management's compensation, I mean do you -- are there plans in place or projects in place where we can get back on track assuming that the price war subsides at some point?.

Yes, Bill, when you think about new products, you -- there's so much couponing and slotting associated with that year-over-year so -- for trial, that, that depresses the gross margin of new products significantly. So that's -- in a year where you have lots of new products launches -- launching, you -- it's going to create pressure on gross margin.

So what happens is, you get to next year, right? So now you're established, let's say OxiClean. So OxiClean is going into 3 new categories, right, high-end laundry detergent, dish and bleach.

So next year, they're all established in those 3 categories, the slotting goes away, the couponing to stimulate trial peels off, and now the margins associated with those 3 products improved year-over-year..

Yes so Bill, we're always going a year of -- we're always going to launch a fair number of new products. 2014 was just an unprecedented number of new products. We will still have a great year of new products next year, but not what we have this year.

So as Matt saying, the spending against those will peel back and that will really help the gross margin in 2015 versus 2014..

Okay. And then last one for me.

Matt, just, since I am not as up-to-speed as you are on the cattle industry, would you expect Specialty to be up double-digits this year in terms of the top line?.

Yes. And it's -- by the way, it's dairy, Bill, as opposed to cattle..

Sorry, well I thought it was all connected, but yes.

On the dairy industry, would you expect -- I mean are we -- is 10% plus is at the right kind of number for this year?.

Yes, it is because if you'll -- in the first half alone, we've been -- we're up double-digit. First quarter, we were up 12% and second quarter up 22%..

Bill, the farmers -- the milk farmers love it when they have a situation where there's high milk prices that are still high and commodity cost -- it looks like it's going to be a record corn crop this year in the U.S., which should drive prices down.

So it's an ideal environment for the milk out there because the farmers are getting a great price for their products and the commodity -- the input costs going in the feed is going to be low..

And Bill, this is with respect to the Specialty Products business, just to remind everybody, it's sort of feast or famine with Specialty Products. And as Jim said, the last 2 years, 2012 and 2013, it's been a drag on our organic sales growth. 2011, you go back a few years, actually was a help to our total company organic sales growth.

So I know we have -- really would like it always to be tracking the same way as consumer. It doesn't. This year, it's a help. It's going to be double-digits top line..

Yes and the early outlook on milk prices for 2015 is still very good..

Our next question comes from the line of Chris Ferrara from Wells Fargo..

Guys, I wanted to go back to vitamins for a second. Look, 10% growth is 10% growth, right? But with the gummy category, I think you said doubling its share of total vitamins.

Are you getting as much of that incremental gummy piece that's growing as you would like? And if not, why? Like what has to change, if anything?.

Yes, good question Chris. I mean, there's definitely more gummy competition out there. We are getting what we expected to. Double-digit growth, I think, is fantastic. And actually, the competition to me is very good because some of the bigger brands like Centrum and One A Day have moved in to the category.

But that's great to me because, again, it's just telling consumers that gummy vitamins are just as good as hard pills. It's verifying the category. And again, it's still -- gummies are still less than 10% of the adult side. So I'll be very happy to take my fair share going forward of the 90% of the over $6 billion category that isn't gummy yet.

And now, when you got the biggest guys in the space telling everybody they're just as good, go buy them. And I will bring you in one day and I'll sit you side-by-side and have you taste them. And ours by far taste better than any of theirs because we own our own plant. We have some unique proprietary technology in doing that thing.

So there's just an advantage for us. But yeah, we've got new competition, but I look at that as a plus because, again, the biggest names in the industry have now verified that gummy vitamins are great and just as good as hard pills. And I can't imagine anybody who would still want to take a hard pill after eating a gummy vitamin..

And our next question comes from the line of Jason Gere from KeyBanc Capital Markets..

Two questions. I guess the first one, if we could talk about the personal care business outside of Avid. And I know some of the innovation sounds pretty strong. But if you strip out the Avid piece that grew, it looks like the sales were weaker there.

So can you talk about the innovation? And I know you're talking about June and July being a little bit stronger. Can you talk about maybe some of the promotional spending there and the results you're seeing? Because I know you've kind of laid out laundry a little bit and the reacceleration that you've seen.

But could you talk maybe about the personal care outside of Avid? That's the first question..

Yes, Jason. sure. No, it's actually a very good portfolio. I mean, I just got results in for the month of July and the Nair brand hit an all-time record high. I told you TROJAN brand is hitting all-time record highs out there. So it's very good. The one business, kits -- kits has got great -- the pregnancy kits has great innovations on it.

We're the first guys to the 6 day. There's a little bit of price competition there that's caused us to deal with on that side. But no, overall, still we have a brand called Batiste, which is largely an international business that's just locking out there, it's doing fantastic. We're expanding that in other countries around the world.

So overall, the personal care business has actually been quite strong for us, for the last couple of quarters out there. And actually, our toothpaste business is also very strong. We started a campaign this year with a great new product with Alison Sweeney from The Biggest Loser TV show.

And actually I can show you statistics that we're the fastest-growing brand in the toothpaste category in the last -- or the first 6 months of this year based on our results. So I mean, again, we're small and percentage-wise, it's a number, but we're doing great. So I'm very happy with personal care.

And again, I go back to what I said to Alice before, so if it wasn't for some pricing issues in the laundry business, which we've now fixed, our organic growth would've been stronger in Q2.

But now we fixed that, so this portfolio is on the back half of the year, which makes us feel so confident about delivering the numbers that, again, that EPS number that most guys aren't even near calling, but we feel confident of doing it next to the New York momentum..

Okay.

So we should see those sales numbers as you report them, sequentially improve?.

Especially -- yes, well, especially in the laundry category. And the other categories should stay strong..

Okay, fine. And then I guess the last question, and I'm not sure if you were listening to the P&G call before yours....

Who?.

Yes, exactly. Well, it's interesting now because as they talk about focusing on the 70 or 80 core brands out there, obviously there's both an opportunity and a threat, I guess, to you guys a little bit more than before. The threat obviously, there's a greater focus on the laundry as one of the brands within that portfolio.

And then the opportunity is, as you're looking at M&A, here's like a new kind of source for maybe you to tap into. So I was just wondering if I can get your initial reaction or thoughts without making your blood boil..

Yes -- no, I didn't hear their exact comments. I can just tell you, I have the highest respect for Procter & Gamble. And I do that because they do focus on driving their businesses through innovation, and I 100% agree with that. So I don't think P&G could be any more of a threat to us than they are today.

They're already our biggest competitor in many categories. And -- but I like the way they compete, and I applaud that, and I want the competition to be the same way. As far as opportunity, hey, we always look at stuff. We bought the SpinBrush brand from them when they had to divest.

It was a Gillette acquisition has been -- it's a great brand for us and we -- we always look at everything. So if there was something in their portfolio they were divesting that was of interest, we'd take a look. But again, it has to be a strong brand. We have to believe it's something we can grow going forward, and we'll have to see it.

Again, I don't know what they're talking about exactly. I don't worry about them focusing more on their core business. I don't think they've had a lack of a focus on their core businesses. So I don't worry about increased threats from them because I always -- they're always #1 on my list when I think about who I need to worry about every day.

And I'm sure -- I might be #20 on their list, but I think we're growing..

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

What do you think the hangover is from all this laundry activity? Because if you look at the Nielsen data, like the baseline sales are way down. So clearly people are just buying because it's cheap. So [indiscernible] consumer service and stuff, you see this massive amount of pantry loading as well.

So I'm just wondering what you guys think about kind of what happens 6 months down the road when people have 47 years of laundry detergent in their pantry..

That would be bad news if that happened, Bill. I haven't seen any evidence of the pantry loading. In fact, as I said before, I just saw the month of July results come in and I was actually quite happy. I mean, the category is going back north again towards a positive direction.

So despite the increased price competition out there, so that was good to me. I -- I'm not -- I hear the issue. I -- we think about it. I haven't seen it yet. And I hope the category sooner rather than later gets back to being driven by innovation. So we'll see, consumers are getting a great deal right now with laundry detergent.

But we'll see going forward. I have not seen evidence of the pantry loading. We watch our inventory situation versus consumption very carefully, and it's not showing any evidence of people loading up at this point..

Good. Okay. And then is that going to change broadly across the industry to couponing? Because if I wanted to, I can go on the Internet right now and get a free bottle of the [indiscernible] detergent. I can get free Tide.

I mean, I've never seen it like this, just the pace of some of the couponing activity, and I was always under the assumption that couponing is dead. And I know it's not great for brand equity over time.

So how do you guys think about that and how long do you think it's going to last?.

Yes, I tend to agree with you Bill. I mean, couponing has been up for a couple of years now. I mean, it's been up. We just -- I mean, we mentioned in laundry, it just seemed to pick up especially early this year from our -- some of our competitors in those category. I'm a big believer with you. We have a philosophy.

We largely like to use couponing just for trial of new products and then not after that. However, we've seen our competitors now start to subsidize price, which to me -- if you put that on top of high trade deals, it's just ridiculous to us. But I can't control what they do. So we're making sure we're competitive out there.

And I think some of them someday are going to study what's happening to them, and they're going to realize they are over-subsidizing consumers. And to your point, I think destroying brand equity when they start to get people thinking of only buying on deals.

So again, I can only take care of Church & Dwight here, and we're being prudent on what we do to drive our business. And the results in the last 2 months, especially in laundry, are very encouraging to us..

Got you.

and then just lastly, is there any update on the whole next wave of compaction thing that Walmart has mandated for 2018, I guess?.

Bill, I'll just say it's on the table for discussion. And beyond that, as far as timetables of what it is, I can't comment anymore at this point in time. Okay. Everybody, you've exhausted us. It's been a great morning. Very happy with our call today. I appreciate the time.

I know you got a very busy day today between -- most of you are probably were on call with Procter this morning, you've got us, and there's like one other competitor following us here. So anyways, I'm thrilled with our second quarter results. Very optimistic about the back half of the year. And I just appreciate the time you took today.

If you have any questions or follow-ups, please give us a call. We'll do our best to answer them. Otherwise, thank you very much. Bye-bye..

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day..