Church & Dwight Co., Inc. (CHD) Q2 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Church & Dwight Second Quarter 2016 Earnings Conference Call. Before we begin, I have been asked to remind you that on this call, the company's management may make forward-looking statements regarding, among other things, the company's financial objectives and forecasts. These statements are subject to risk 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. Matt Farrell, Chief Executive Officer of Church & Dwight. Please go ahead, sir. Matthew T. Farrell - President & Chief Executive Officer: Good morning, everyone. Thanks for joining us for today. I'm going to start with a brief review of our second quarter results, which you read about in today's press release. I'll then say a few words about our categories before I turn the call over to Rick Dierker. Rick will comment on each of our businesses and review the outlook for Q3 and the full year. And when Rick is finished, I'll get back on and we'll open the call up for questions. So here are the highlights; Q2 was a terrific quarter for our company. We posted organic sales growth of 3.7% and 16.4% EPS growth, which is 17.8% EPS growth on a currency neutral basis. Category growth was broad-based, in that nine of our 15 categories grew in the quarter. From a market share perspective four of our 10 power brands grew share. Now I'll comment on a few of our categories; that would be laundry, litter, vitamins and dry shampoo. The laundry category continues to be healthy, growing 2.5% year-over-year. This is the fifth quarter in a row of laundry category growth. The value segment grew 4%, led by ARM & HAMMER, Simply Tide and Sun, mid and premium tier segments grew slower than the category. The Laundry category growth was driven by both the unit dose and liquid segments. Now I'll comment on our three laundry brands. ARM & HAMMER has been our big franchise in laundry for many years. ARM & HAMMER laundry share continued to grow this quarter, up 10 basis points. To illustrate the consistency of the brand, ARM & HAMMER liquid laundry has grown share year-over-year in 26 consecutive quarters. Our unit dose products are gaining traction. ARM & HAMMER unit dose in the quarter grew twice the unit dose category growth rate. Our growth was driven by our bi-layer and dual chamber innovations. Growth was equally driven by base and promoted volume signaling a healthy balance. These are encouraging signs and we are really pleased with the results. ARM & HAMMER unit dose grew 40 basis points to a 3% share in the quarter. Our XTRA brand lost share in the quarter as we continue to see deep competitive discounting. Similar to what we said in Q1, we expect XTRA net sales and profits to increase year-over-year for full-year 2016. OXI laundry share was down 10 basis points year-over-year as we, like others, felt the effect of Persil's promotional activity and increased distribution. As we have said before, we are committed to OXI laundry detergent and are in this for the long haul. As you know, Henkel has plans to acquire the Sun Products company, which owns all, Wisk and Snuggle brands and competes in private label. It's too early to know the impact on the category. There are two obvious schools of thought; we may experience a disciplined competitor who competes with innovation, or the laundry category could see even more discounting. We'll have to just wait and see. Regardless of what happens, we believe our brands are important to consumers. Consumer insights leading to the right products, at the right price point will be our formula for success. Moving on to stain fighters, OXICLEAN is the leading stain fighter in the additive category. This is the second consecutive quarter that OXICLEAN share hit a 48% share, growing 2% versus last year. Now I'm going to turn my comments to cat litter. The clumping litter segment is healthy with consumption growth of 4.5%. Q2 saw a significant increase in the amount sold on deal by competitors, notably Clorox and Tidy Cat. At the same time, our amount sold on deal was significantly lower than the prior year, resulting in a pullback in share. In the end, innovation carries the day, we are very pleased with the performance of our new premium priced CLUMP & SEAL MICROGUARD. And while we're on the topic of innovation, I would like to acknowledge that ARM & HAMMER CLUMP & SEAL litter received the prestigious 2016 Nielsen Innovation Award for food and household products. CLUMP & SEAL was selected from a field of 3,500 new product launches over a two year period. Innovation is the key to long-term organic growth and we continue to focus on litter innovation. Now, let's talk about vitamins. The overall VMS category continues to show steady growth, up 3%. The gummy segment of VMS grew at 15% in Q2. Let me break that down for you, the adult gummy segment grew 21%, while the kids gummy segment declined 4%. So vitamins is a good news story for us. Both VITAFUSION and little L'il Critters grew in the quarter. VITAFUSION adult gummy consumption grew 9% and L'il Critters children's gummy also recorded positive growth of 40 basis points. Most notable, our combined points of distribution for our vitamin business grew 5% year-on-year, reflecting continued distribution gains. Our strong quarter was the result of new item introductions, expanded distribution of existing SKUs and the quality issues that we experienced last year are behind us. In adult and children's gummy vitamins category, VITAFUSION and L'il Critters are the number one brands, with shares of 31% and 32% respectively. Adult gummies is where we are putting our focus. It is underdeveloped and will be the source of future growth for us. Remember when we bought the business, out of the entire adult VMS category, only 3% was in the gummy form. Today, it is 9%. The last category I want to address is dry shampoo. This category grew 28% in Q2 after growing 26% in Q1. The category in the U.S. is now nearly $100 million with the potential to be a $300 million category, if we match the historical category growth experienced in the UK where the product originated. BATISTE is the number one brand in the U.S. with a 22.3% share. BATISTE was the fastest growing brand in the category and BATISTE original dry shampoo is now the fastest turning SKU in the category. BATISTE global net sales will cross $100 million this year for us, making it the number one dry shampoo brand globally and the BATISTE brand is expected to be one of our fastest-growing brands in the future. Next up is Rick to give you details of our second quarter results and the outlook for Q3 and the full year. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Thank you, Matt, and good morning, everybody. I'll start with EPS. Second quarter reported EPS was $0.85 per share, compared to an adjusted $0.73 in 2015, up 16.4%. The $0.85 was better than our $0.79 outlook, largely due to our organic revenue beat and gross margin expansion beat. Netted in that $0.85 is a penny or a 1.4% drag from currency year-over-year. Reported revenues were up 3.6% to $877 million, organic sales were 3.7%, exceeding our Q2 outlook of approximately 2% to 3%. Our organic sales beat was driven by our Consumer business, both Domestic and International. This may surprise some of you who track our consumption reports every few weeks, the Nielsen and IRI numbers are a barometer of consumption growth, the difference is unmeasured channels. I want to remind everyone about our strength in club and the growing strength of our online business. For example, you read in the release that online sales for our vitamin business doubled. So third-party consumption reporting is directional but doesn't give the whole picture. Now, let's review the segments. Consumer Domestic's organic sales increased by 4.4% driven by VITAFUSION Gummy Vitamins, Batiste Dry Shampoo, OXICLEAN additives and partially offset by KABOOM cleaners. We continue to expect full-year organic sales to be approximately 3% for the Domestic business. International organic growth was up an impressive 7.4%, driven largely by higher sales in Australia, Mexico and Canada. We are raising our expectation for the full-year organic growth from approximately 5% to 6% to approximately 7% to 8% for the International business. For our Specialty Products division, organic sales were down 7.7%. Milk prices are still relatively low as there is an oversupply globally. And as a result, U.S. exports, which historically have been around 15% plus of U.S. production, are now around 10%. We are lowering our expectations for the full-year for the SPD division to be down 4% to 5%. We like this business but we do experience these cycles from time to time. Turning now to gross margin, our reported second quarter gross margin was 46.5%, a 250 basis point increase from a year ago, which was quite a bit better than we originally expected, largely due to continued improvements in vitamin manufacturing, greater distribution efficiencies and higher Personal Care sales. Since we spent quite a bit of time last quarter on gross margin, I'd like to breakout the detail now for the quarter improvement versus year ago. I will do the same thing for our full-year gross margin outlook in a few minutes. Q2 gross margin benefited from lower commodities worth 70 basis points. Productivity programs, lower manufacturing costs, which include the absence of vitamin startup cost, together is worth 130 basis points. Price volume mix is worth 60 basis points, as we had higher Personal Care organic sales, up almost 8% versus a year ago. And in general, we had a low level of promotion across the portfolio. Finally, we had 20 basis points from the higher margin acquired businesses offset by a 30 basis point drag from currency. Moving to marketing, we increased marketing spend by 3.8% year-over-year. Marketing as a percent of revenue was consistent with 2015 at 13.7%. SG&A as a percentage of net sales was 12.8%, an 80 basis point decrease from the prior year on a reported basis. Remember in 2015 we had a pension settlement charge of $8.9 million, so on an adjusted basis, SG&A was up 30 basis points, in line with our full year expectations. Now to operating profit, the reported operating margin for the quarter was 20%, which is 320 basis points higher than the prior year on a reported basis and 220 basis points better on an adjusted basis, largely driven by the gross margin improvement. Other expense was $6.8 million for the quarter. Next our income taxes, our effective rate for the quarter is 34.7%, we are raising our effective tax rate forecast for the full year to 35%, largely due to geographic mix. So there is a bigger drag from tax. Turning to cash, we had a strong cash flow quarter. So on a year-to-date basis, we have generated $297 million of cash from operations, which is a $48 million increase from the same period a year ago. So in conclusion, the second quarter highlights include 3.7% organic, 16.4% EPS growth, which again equate to a 17.8% currency neutral EPS growth. Turning to the third quarter outlook, we expect Q3 organic sales growth of approximately 1% to 2%, behind stronger promotions and slower growth for our International and SPD divisions. We expect marketing as a percentage of revenue to increase, both in dollars and as a percentage of sales, as we begin to spend back our gross margin expansion. We expect third quarter earnings per share of approximately $0.92, compared to $0.90 per share a year ago, or a 2% increase year-over-year, which reflects the step up in marketing, the higher promotional activities, slightly higher SG&A due to incentive comp and a higher tax rate. And now, turning to the full year. We continue to expect organic sales growth to be 3% to 4%, which has been increased from 3% when we started the year. We posted 4.4% organic growth in the first half. And in the second half, as we plan to spend back a bit more on promotional activities, it results in lower second half organic sales growth. We will likely end up in the middle of the range. In May, we called approximately 75 basis points of gross margin expansion. And we are pleased to say that we are raising our outlook to 110 basis points of expansion. We can attribute this increase to continued improvements in vitamin manufacturing, greater distribution efficiencies offset by incremental promotional activities. I'd like to break out the detail now for the full year gross margin outlook versus year ago. For the full year, gross margin benefits from lower commodities and that's worth 60 basis points. Productivity programs, lower manufacturing costs including the absence of vitamin startup costs is worth 50 basis points. Price volume mix is worth 10 basis points as we invest a bit more in higher promotions in the back half. And finally, we forecast 20 basis points from the higher margin acquired businesses offset by a 30 basis point drag from currency. We are increasing our full year marketing expectation by 10 basis points to 12.4%, as we spend back some of the gross margin beat. Moving to SG&A, adjusting for the 2015 pension settlement charge, we are now forecasted to increase by 40 basis points. We had previously called 25 basis points for the increase. The higher SG&A rate is due to significantly higher medical cost and higher incentive comp. So now we expect 60 basis points of operating margin expansion for the full year. Next is income tax. As I mentioned before, we now expect 35% for the full year, so it's about 30 basis points greater than our previous outlook. In terms of EPS, we dropped the low end of the range and are now targeting 8% to 9% of adjusted EPS growth, despite the incremental spending on marketing and promotion as well as the higher tax rate. We now expect $640 million of operating cash flow, which is $10 million better than our previous outlook of $630 million. We continue to expect $55 million of CapEx for the full year. This equates to $585 million of free cash flow, which represents 125%-plus of free cash flow conversion. Wrapping up, as you read in our earnings release today, we also announced a two-for-one stock split of our common stock. The split will increase our total shares outstanding from approximately 128.8 million to 257.6 million shares. Now, Matt and I will open it up for questions.

Thank you. Our first question is from Kevin Grundy with Jefferies. Your line is open.

Hey, good morning, guys. Matthew T. Farrell - President & Chief Executive Officer: Hi, Kevin.

Matt, I wanted to start, or Rick as well for that matter, on the guidance. So, organic sales stays the same, gross margins a bit better. But, Matt, it seems like but – and then advertising and marketing moves up more modestly, so it seems like you're probably leaning a bit harder on trade spend and coupon with some of this gross margin upside relative to taking up advertising and marketing. Is that correct? I just wanted to get some additional thoughts on how you're sort of balancing the trade spend in advertising and marketing? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Matt and I can both answer that. But, Kevin, from a financial perspective, I'd say it's pretty broad based. We have higher promotional spending. Yes, we also have higher advertising. So, I think it's a combination. And, that's kind of the – again, broad-based across advertising and promotional spending. Matthew T. Farrell - President & Chief Executive Officer: Yeah. Hey, Kevin, just to give you maybe a little more color. In my remarks, I said, hey, there's a lot of discounting going on in laundry and litter. And litter for example, we actually pulled back on trade promotions year-over-year in Q2 while at the same time, if you looked at Tidy Cat or Fresh Step they were up significantly in Q2. And even in laundry, the amount sold on deal for ARM & HAMMER was actually lower year-over-year in Q2, whereas if you looked at Tide, Simply Tide or Sun or especially Purex, are way up in the amount sold on deal year-over-year. So, every quarter is different. So you got to react to what's going in the marketplace and as I said, we're – we want to stay behind OXICLEAN, OXICLEAN laundry so, we're in it for long-haul there. And here and there in some other categories there's some competitive moves that we need to react to. So, fortunately, we have the financial flexibility in order to do that and as you know, we got a big portfolio of brands. So, we're in a position where we need some help, we're going to put the help there.

Okay. All right. That makes sense. Rick, I wanted to come back to, you touched on it a little bit, some of the non-scanned channel growth versus the scanned or tracked channel growth and so, you are up about 0.5 point in the Nielsen data for the second quarter. That implies very strong double-digit growth in non-tracked, just using sort of back of the napkin sort of math based on reasonable assumptions for channel mix. So, can you guys help me a bit, what is online now as a percent of sales and understanding that club is not in the Nielsen data as well, but curious what that number is, if you care to share it, what are your market shares look like online versus non-tracked? Procter talks about having higher market share in the online channel relative to more traditional mass channels. And then Matt, maybe touch on a little bit as this continues to evolve and the consumer continues to move online, talk about the implications a bit for your business from a – even broadly, margin perspective, seemingly less trade spend at this point et cetera? Thank you. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Sure. So, Kevin, just to touch briefly, we don't really go into the detail of our online sales. We've said historically, it's 1% to 3% of sales, just like any other CPG company, that's true, I'd say it's fast growing. From a market share perspective, we don't really comment on that either. What I will do for you though is help you with the tracked versus not-tracked and there is two or three drivers on that disconnect. For example, there's probably around 200 basis points from club and online, plus the fact that BATISTE isn't really tracked in Nielsen data from the reports you guys get. There is also a disconnect when you don't spend on promotion. So for example XTRA, consumption is down 6%, our net sales is essentially flat because we're not spending as deeper on promotion, same thing with Spinbrush, which we talked about before as well, we're up 10% consumption, net sales were up 15%. So when you're trying to bridge consumption all the way back to organic, those are a couple of the reasons why and I'll turn it back over to Matt for online. Matthew T. Farrell - President & Chief Executive Officer: Yeah. So, just broadly as Rick said, that most consumer products companies have sales between 1% and 3% online and online is actually not as clear as you might think in order to determine shares, because you got Amazon, walmart.com, target.com, there is lots of places where we want our product to be available and the whole game is, you want your product to be ubiquitous, right, it needs to be wherever a consumer wants to find it. So we're looking at this as just another class of trade. We have a convergence going on between research and advertising, right? So a lot of the research now, a lot of consumer behavior research is digital, it's online. At the same time a lot of the advertising is online. So we understand that, so we're weaving both our advertising and our research efforts together as a result. It's the early innings for everybody and everybody has got to look at do we have the right pack sizes for online. You're going to have different packs online than you have in the store just to take the weight out. We always look at change as our friend, because we're a small company. So we think that we can react to change a lot faster than other companies. So we're kind of looking forward to competing online.

Okay. Thank you, guys. Congrats on the quarter. Matthew T. Farrell - President & Chief Executive Officer: Thanks, Kevin.

Our next question is from Bill Schmitz with Deutsche Bank. Your line is open.

Hey, guys. Good morning. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Hey, Bill.

Hey. The organic growth guidance for the third quarter, was there a timing shift in shipments at all or is it merely a function of higher promotional spending which is going to take the gross to net down? Because the comp's much easier in the third quarter than the second quarter obviously. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. I think it's a couple things. I mean, what you're getting to is also just deceleration from first half to second half. But the incremental promotional spending, right, that's one. We're up against higher comps for vitamin, like for example our Personal Care growth was up big in Q2, up 8% organically. And for vitamins we were cutting a year ago in Q2 and that kind of lessened as we got in the back half. And then, category comps for laundry for example are up a little bit in the back half, and then International growth, the first half was at 10% and the full year is at 7% to 8%. So that implies a second half of 4% to 5%. So all those reasons are why we're decelerating a little bit. But, I'd say that's – our original outlook was 3%, we always thought it would be, we raised that at the beginning of the year to 3% to 4%. And we always knew it was going to be a little bit lumpy.

Okay. Yeah, I mean, but how about the comps being harder in this quarter than they are for next quarter. I mean, because all that stuff is good, but like in aggregate the comp's like 200 basis points easier than the comp in the second quarter. You know what I mean? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. Well, I mean, the other comment I'd make is the laundry category – going back to the category dynamics for a second, if you go back to 2015, the laundry category was actually down in Q1, right. And in 2016, the laundry category was up in Q1. So on a stacked basis that was around 5%. In Q2, it's around 4%. But then, when you look out, the laundry category actually had 2% to 3%, almost 4% growth in the back half of the year in 2015. So, part of it is, like I said before, Household comparisons for laundry and then Personal Care, really vitamins going from Q2 to the back half is a more difficult comp.

Okay. And then, just directionally, is it fair to think that like the Personal Care business has 20 gross margin points higher than the Household business. Is that a safe assumption, as I try to calculate the mix impact of the business shift? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. We've said that publicly before. We said Personal Care margins are about 2000 basis points better than Household.

Okay. Got you. And I'm kind of surprised that the mix benefit wasn't more though, given like the lower promotions in the lowest margin categories like XTRA and cat litter? Richard A. Dierker - Chief Financial Officer & Executive Vice President: We were very pleased with 250 basis points of expansion.

So, was I. Okay. That's all I got. Thank you, guys.

Our next question is from Bill Chappell with SunTrust. Your line is open.

Thanks. Good morning. Matthew T. Farrell - President & Chief Executive Officer: Hey, Bill.

Hey, just wanted to clarify. As I look forward, as you're spending back in some of these brands, has that always kind of been in the plan of hey, we just kind of get to midyear and look to redeploy in certain areas? And then specifically, is what you're seeing in liquid laundry in terms of the price competition or some of the rollbacks what you expected or has competition heated up a little bit? Matthew T. Farrell - President & Chief Executive Officer: I don't know if it's – I'd say competition has heated up because the amount sold on deal. It's certainly higher than it was year-over-year. Sequentially it's probably consistent with the first quarter. The way we run the business, Bill, is we put a range out there, 7% to 9%. So we're pretty much targeting the midpoint of a range generally. We get a great first half, so we say, hey, we don't see our way to 7%. So we're going to say – so we're going to take the bottom in the range off so we'll call 8% to 9%. And we don't try to hit the home run in any one year. We're always thinking about the next year. So we want to make sure we're positioned well going into next year. So to the extent we have the dough, we're going to spend it back. And this has been a perennial move on the part of Church & Dwight.

No. I appreciate that. I think I have a pretty decent handle on the trends. But I was trying to kind of more understand as you look to the back half, I understand the strategy of spending back. But, is there an incremental need to spend back in liquid laundry and/or cat litter versus what kind of you originally expected to start the year? Matthew T. Farrell - President & Chief Executive Officer: Yeah. Because we – I would say that because we pulled back as a percentage of sales on deal for litter in the second quarter. Actually that's something we would try to remedy in the back half. Because obviously we lost some share there. But we – share can be a saw tooth, it can go up and down. But I will say that it's definitely competitive in litter. You have both Tidy Cat and Clorox spending a lot of dough promoting their products. So obviously we have to react to that. But laundry is our biggest category and that's one we're also have to react. XTRA continues to lose share, we're managing that for profit. But there is a line that we won't cross. So we have to make sure we shore that up in the second half.

Okay. And then just switching, Rick, I think you talked about the Nielsen IRI doesn't track your stuff perfectly, I mean, I understand that especially coming from vitamins, which kind of were – the business was built out of club and mass, but can you talk about other wins or other kind of growth you're seeing outside of vitamins in the club channel or the online channel and where you feel pretty good about? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. I mean other online brand that's very strong is TROJAN for example. That helped lead to the Personal Care organic growth in Q2. Across the board, oral care has been pretty strong as well and that's happening in club, online. Those are two examples, but again it's – we don't get all riled up about the tracked versus non-tracked, it's – a piece of it is, although the whole concept of promotional volume and not chasing that promotional volume, that causes a little bit of a disconnect between organic and consumption. Matthew T. Farrell - President & Chief Executive Officer: Yeah. And, Bill, as you know, Personal Care products lend themselves more to online sales than the heavy litter and detergent products.

Yeah. Absolutely. Thanks so much. Matthew T. Farrell - President & Chief Executive Officer: Okay.

Our next question is from Caroline Levy with CLSA. Your line is open.

Thanks so much. Just if you could talk a little more in detail on the share movement. So I know you've touched on some of this already, but I guess six of 10 categories, you didn't gain share, which is unusual. Were some of those flat, and then what are the plans across the board to turn those around for the things you haven't talked about yet? Matthew T. Farrell - President & Chief Executive Officer: Yeah. Okay. Well, the four that were up were OXI stain fighters, Nair, BATISTE and vitamins. So the other ones we might talk about, Spinbrush for example, that category, battery-operated toothbrushes, was up 9.5%. Our adult toothbrush was up 10% but kids was soft. So, sort of a balance there, it's where we fell back. XTRA, we talked about. Obviously deep discounting there, particularly on the part of Sun products and some Simply Tide as well. Orajel, the issue there was private label had a good quarter. Condoms, that kind of ebbs and flows, so we generally don't worry too much about the condom share because we have approximately 75% share in that category. FIRST RESPONSE through, there has been a lot of couponing and competition that we have to address. Some of that by the way for the earlier questions is pregnancy kits is also an area that we're putting some money behind in the second half because we lost some share as a result of competition in the second quarter. And the ARM & HAMMER brand in total all forms was down, driven by litter. It was down slightly, all forms about 10 basis points, but it was really litter that was the driver there. So, that's sort of the rundown on the 10 brands, Caroline.

Right. And does that – is that why you're getting more aggressive. Was that really driving the change, or is it simply you have the money to spend. Because, I mean, you generally love to claim that on almost all of your categories you're gaining share. So, is that the goal by year end? You want to up in all categories? Matthew T. Farrell - President & Chief Executive Officer: Yeah. No, it's – look, when we say four out of 10 it's not like we're unhappy. I don't think we've ever had a 10 out of a 10 quarter, I think six would be great, six out of 10. And if the rest were around flattish. So yeah, I mean, some of them are – there are clearly issues in each of those different brands, but we expect to remedy them in the third quarter and fourth quarter.

Great. And then could you just comment on the UK, which I think is your biggest international market, maybe Canada is. Sorry, but how are things there? Matthew T. Farrell - President & Chief Executive Officer: Yeah. So think of it, it's not just the UK. We have a European business that's our number one subsidiary followed by Canada, which is number two. Europe would encompass primarily the UK and France. And they've been doing fabulously behind BATISTE, certainly is their biggest brand. But they also have STERIMAR, which is a feminine hygiene brand and – or pardon me, Femfresh is a feminine hygiene brand, and then STERIMAR which is our nasal hygiene brand. So they've been doing extremely well.

Okay. Because you didn't call out the UK and you usually do, so I just thought that maybe there were some issues already showing up? Matthew T. Farrell - President & Chief Executive Officer: No, no, no. No issues, it's just that we have the league table. So the ones that are at the top of the league table in the quarter get to take a bow.

Great. And then lastly just on your margin profile online, is there any degradation of margin as you build up that business? Matthew T. Farrell - President & Chief Executive Officer: Actually some of the products that we sell online can be higher margin than they are in bricks-and-mortar. So it's a balance right now. We're pretty happy with the margins online. I think the heavier products like litter is where we'd be more pressed on margin. They would be lower than anything we would have in bricks-and-mortar. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah, but overall, even online, the Personal Care mix is slanted toward Personal Care, so that helps the margin as well. So we're happy with that.

Thanks a lot. Matthew T. Farrell - President & Chief Executive Officer: Okay, Caroline.

Our next question is from Joe Altobello with Raymond James. Your line is open. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Hey, guys. Good morning. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Good morning, Joe. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: I guess, I'll just pick up there on the gross margin guide and I apologize if I missed this, was mix the biggest driver of the upside to the full year? Richard A. Dierker - Chief Financial Officer & Executive Vice President: To the full year? I would probably say, partly mix but also because of the organic revenue growth on Personal Care. But I'd also say, we were pleasantly surprised as we turned the corner on our vitamin manufacturing and our vitamin distribution efficiencies. A year ago when we were cutting customers, the trucks were going out every day and they weren't always filled, because we wanted to get that next shipment to the retailer as soon as possible. When we look back this quarter for example, our fill rate's closer to 99%. So we're shipping out full truckloads again. So that's as an example of what's going on with gross margin. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. That's helpful. And then in terms of the third quarter, the organic up 1% to 2%. If you look at your volume growth the last few quarters, it's kind of averaged somewhere between 3% and 4%. So maybe if you could deconstruct for us what you're thinking in terms of volumes versus price mix in the third quarter, is it volumes up 2% to 3%, call it, maybe price mix down 1%? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. Joe, I think, you are very familiar with the story. And we've been a perennial volume company. I think this past quarter we had some positive price mix as well and that was because we had lower promotions. It was – but I'd say for the go-forward, it's typically always volume. So that's how I would look at it. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. Just one... Richard A. Dierker - Chief Financial Officer & Executive Vice President: And then as we're spending back a little bit incrementally on promotions or whatnot, it might be a flat to slightly negative drag for price. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. I just ask it because – and this has been brought up previously on this call, but if you look at the third quarter compare for volumes, it's fairly easy – much easier than the second quarter. So that's why I'm just trying to look at those two drivers. But on the SG&A upside, it sounds like it's more of the same what you guys talked about last quarter which is investments and things like sales and IT, et cetera? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. I mean, that's what the difference between our original outlook of minus 10 basis points to plus 25 basis points of spending and that was really the conversation last quarter for the full year. Now that incremental 15 basis points is higher medical cost. Just like many other companies we are self-insured and every now and then we have catastrophic events that we have to cover and then, plus higher incentive comp. Gross margin's doing really well. So, is cash flow and we feel good about the outlook. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Okay. Great. Thank you, guys.

Our next question is from Rupesh Parikh with Oppenheimer. Your line is open. Rupesh Parikh - Oppenheimer & Co., Inc. (Broker): Thank you for taking my question. I also wanted to go back to your guidance on gross margins for the 110 basis point improvement this year, the expectation. Just wanted to get a sense, as you look at that improvement, is there anything that you would consider unsustainable and I guess and potentially the new base of gross margins that you expect this year? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. I mean, the only thing – again, to break out the 110 basis points we said it was 60 basis points for commodities, 50 basis points for lower manufacturing cost, 10 basis points for price volume mix, 20 basis points from really the new acquisitions and the 30 basis points drag for FX. The commodity stuff, we are starting to lap. That really started a year ago in August. So, back half of 2015. So, that's not sustainable for our go forward future. So, that's always a risk. Lower manufacturing cost I think, we do a great job in this company with our productivity program and that's really – that leads into our kind of operating model. Price volume mix, so, typically we are a volume grower. We don't really take price in a lot of categories. Acquisitions, that's all dependent on what we do buy, typically we do recently have bought Personal Care type businesses with higher margins, and then of course the currency as we lap that drag, hopefully that will be a little bit more benign. So hopefully that gives you some color, Rupesh. Rupesh Parikh - Oppenheimer & Co., Inc. (Broker): Okay. Great. And if I can ask one more question. Just if you look at the overall environment out there, a number of retailers, especially on the grocery side, have missed their comp numbers this past quarter. Just wanted to get a sense of how you guys are thinking about the current environment out there? Matthew T. Farrell - President & Chief Executive Officer: Well, this is a question we get all the time, what's our perspective on the consumer? And I'm not going to tell you anything you haven't read in the Wall Street Journal. So we keep an eye on employment rates, median household income. You can see oil is going down again, it dipped below $40 this week. So obviously, that's good from a disposable income standpoint. But the issue is GDP. So GDP is, some of the banks are calling it 1.5% for the U.S. this year. So you don't have – and you don't have significant population growth. So everybody is struggling to find growth in the U.S. and oftentimes the suppliers, producers resort to price, if they don't have innovation. So that's sort of a – that's what we're looking at right now, Rupesh. Rupesh Parikh - Oppenheimer & Co., Inc. (Broker): Okay. Thank you for all the color. Matthew T. Farrell - President & Chief Executive Officer: Okay.

Our next question is from Lauren Lieberman with Barclays. Your line is open.

Great. Thanks, good morning. Matthew T. Farrell - President & Chief Executive Officer: Hey, Lauren. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Good morning.

Hey, I just had one last question on the promotional environment. So I guess, laundry more so than litter is probably a category where when commodity costs improve you've seen the environment flare up over time. So a couple of questions: one, would you say, there are other categories in your portfolio where you feel like they are more commodity sensitive vis-à-vis promotional activity and that sort of this change in environment maybe should have been anticipated or in your outlook to begin with. Luckily, you've got plenty of wiggle room to deal with it. And then secondly, same would be on litter, just the standpoint you knew that Clorox was launching, I would actually think that maybe it was intentional to step back, let them spend a bunch and then kind of when that quieted down to get more active. So it's just the pattern of promotional activity doesn't strike me as necessarily surprising in litter. And then just if laundry you think is more commodity related than anything else? Thanks. Matthew T. Farrell - President & Chief Executive Officer: Yeah. Hey, Lauren, did you say you were surprised by the promotional activity in litter?

No. I'm not actually at all. Matthew T. Farrell - President & Chief Executive Officer: Yeah.

Yeah. Matthew T. Farrell - President & Chief Executive Officer: Yeah. Okay. Because obviously we have Tidy Cat getting behind their light weight variants and Clorox has their litter with Febreze, so...

Yeah. Just thought you'd be tactical on your part. Like the other two have a lot of like noise, like let them promote their noise and then you'd kind of a take a break and then come back into the market? Matthew T. Farrell - President & Chief Executive Officer: Yeah. Exactly, so we had pulled back on amount sold on deal in the second quarter for litter, and we lost some share. Okay. That's fine. It's not like that we're surprised by that, but one quarter doesn't make a year. Your question is, if you think about our various categories, are there a lot of other categories that are sensitive to commodities? I would say, other than laundry, that's where all the questions go and why, because we're worried about surfactants and ethylene prices and resin, et cetera. If you think about all the commodities that we sweat – just going to run down them. So there is surfactants, which is derived from ethylene and then you have resin. Diesel, which is going to affect our transportation costs, but that affects everything. Latex for condoms, but that's actually a small part of the cost of goods sold. And then you have paper, so we have so many things that are packaged in paperboard. So, and then as you get a lot smaller after that, soda ash, which is pretty tepid right now and things like palm fatty acid distillate. So, we would say with the exception of laundry, there aren't a lot of categories that we'd say are going to be dramatically affected by commodities. Richard A. Dierker - Chief Financial Officer & Executive Vice President: And, Lauren, I would add two things. Number one; I wouldn't expect – our comments on promotional volume isn't really saying we're going to go spend a lot of money back in the laundry category to drive promotions. We're going to continue to support OXICLEAN laundry. Right now if you look at the data, our amount sold on deal just in total is lower than a year ago or right at levels of a year ago. So we're not throwing a whole ton of money back into across the brands. The other thing I would say is from a commodity perspective; commodities are starting to inch up. So, we've said previously in Q1 and Q2, for example, that resin was down 10%, surfactants were down 20% and that was true. The second half, we're starting to lap those comparisons. So resin will likely be closer to be flat and surfactants will probably be closer to up slightly, just for context.

Okay. That's great. Thank you so much. Matthew T. Farrell - President & Chief Executive Officer: Okay, Lauren.

Our next question is from Stephen Powers with UBS. Your line is open.

Great. Thank you. Hey, guys, I guess first, just one more cleanup if I could on the organic growth guidance for Q3.You got the increased promotional investment and I'm sure it's all to some extent conservative. But you call out in the release a more difficult year-over-year comparison in International specifically and again, my numbers could be incorrect. But it looks like both the one year and two year comps actually get sequentially easier in Q3 versus Q2. So can you just comment there, is there something that I'm missing or that you're specifically concerned about lapping? Richard A. Dierker - Chief Financial Officer & Executive Vice President: No, I think, you're exactly right, Steve. I think, our comment started off at a country or two, Australia for example, has a high comp and that evolved to a one-liner in the release. But International, as I said before, the first half was really 10% growth and so with the full year at 7% to 8% and that means the second half is going to be closer to 4% or 5%. That's really the context you should think of for the International growth for the year.

Okay. That's helpful. Thanks. And then, I guess more – kind of more broadly, I think, it was back at your Analyst Day in January, you spent some time talking about distribution wins that you've been making over the past three years, four years, five years. I just wonder if you could weigh in a little bit on how much of the strength you've seen in this year is aided by even more distribution wins. And I'm guessing it's pretty broad-based where you're seeing it, but just if you can comment on which businesses you're having – those wins are having the most impact. I'm assuming it's things like vitamins and BATISTE. But, again, some context there will be helpful? Thanks. Matthew T. Farrell - President & Chief Executive Officer: Yeah. No, there is no question, you hit the two that are leading the pack and one is vitamins, where as I said in my opening remarks that we have 5% increase in distribution which is pretty significant, because obviously that carries over into future quarters. And then BATISTE is just a craze. So it's getting more and more shelf space. And when you're the – there are more and more retailers becoming more interested in it. So, it seems like almost every quarter now, we're gaining more distribution and then that has a compounding effect. That's why we, although, it's a small brand, we continue to talk about it because it is influencing our numbers. So, you've hit on the two big ones there.

Okay. Thank you very much. Matthew T. Farrell - President & Chief Executive Officer: All right, Steve.

Our next question is from Jason English with Goldman Sachs. Your line is open. Jason English - Goldman Sachs & Co.: Hey. Good morning, folks. Thank you for the questions. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Hey, Jason. Matthew T. Farrell - President & Chief Executive Officer: Jason. Jason English - Goldman Sachs & Co.: Congratulations on a solid quarter and a good first half. Matthew T. Farrell - President & Chief Executive Officer: Hey, thanks. Thank you. Jason English - Goldman Sachs & Co.: A couple of clarifying questions. First, Rick, your comment on resin and surfactants, in terms of the trajectory in the back half of the year. Were you referring to sort of spot markets or the costs that you actually expect to roll through your P&L? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. Spot markets. Jason English - Goldman Sachs & Co.: And given your buy and I think you were a little bit long on hedges last year, which may have sort of prevented that roll through, is it fair to say that you're probably going to be more favorable than spot throughout the remainder of this year? Richard A. Dierker - Chief Financial Officer & Executive Vice President: I think we'll be more favorable than spot as we go into 2017. Jason English - Goldman Sachs & Co.: Got it. Okay. Okay. So, there is some carryover into next year. And then, back to the questions on the volume trajectory which we've – there has been a few, right? But you are suggesting that volume decelerates on both a stand-alone and two-year stack basis, particularly on two-year stack pretty substantially despite the incremental spend. So, implicitly you seem to be suggesting that you are not expecting a lot of volumetric response to the incremental promotional dollars you're putting into market. Is that a fair interpretation and, if so, why? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah, so a couple things. I think I went through the detail of why it's not just the incremental promotional spending. But up against some higher comps for vitamins and the category comps for laundry, for example, and the whole International strong growth but deceleration. We're spending quite a bit of money back on marketing and that's going to take some time to really pull through demand. On the incremental trade and really couponing spending, those investments are really to drive trial for new products. That's the crux of it. And so we want to get that repeat rate up. I think it's too early to call volume upside from driving trial, so that really – we're just early in the process, Jason, and we think that when we get back up to our competitors' levels of promotion and are just on par with what we had a year ago even, we think that'll be a nice momentum as we exit 2016. Matthew T. Farrell - President & Chief Executive Officer: Yeah. Just to add to that, Jason. If you went to first quarter 2015, the laundry category declined round numbers 1.5%, and then first quarter 2016 it was up 6.5%. So on a stack basis, I know a lot of people like to talk on a stack basis, you'd say laundry was up 5% on a two-year basis. And Q2, on a two-year basis stack, it was 4%. If you go to three and four last year, Q3 was 2.5% and Q4 was 3.5%. So that would suggest, you're going to see deceleration in laundry. If you're a believer in the stack theory and if we think it's going to be around 4% to 5%, we're seeing a deceleration in the laundry category on a year-over-year basis. So who knows that's just math. But it's something to think about. Jason English - Goldman Sachs & Co.: Are you a believer in the stack theory, when it comes to the laundry outlook? Matthew T. Farrell - President & Chief Executive Officer: No. I was introduced to it by the analysts. Jason English - Goldman Sachs & Co.: We like math. We like math. It's an easy calculation. Matthew T. Farrell - President & Chief Executive Officer: Yeah, well. When it's convenient, I think you like to talk about it. Jason English - Goldman Sachs & Co.: Fair, fair. All right. Thank you, guys. I'll pass it on. Matthew T. Farrell - President & Chief Executive Officer: Yeah, okay.

Our next question is from Jon Andersen with William Blair. Your line is open. Jon R. Andersen - William Blair & Co. LLC: Hey, good morning, guys. Thanks for the question. Could you just give us a bit of an update on your capacity utilization in vitamins. I know you've completed the capacity expansion, I think it was 75%, where you sit right now and really the idea here is the contribution margins out of this business, should we expect them to continue to improve as you fill out capacity going forward? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. So we've talked about capacity utilization in terms of vitamins a few times and we said when we made that investment. It was a 75% increase in capacity in round numbers. When we said that our business was around $300 million and that would take us up to around $525 million. So we have a lot of runway for capacity. We feel great about that. We've made some great strides from a manufacturing perspective. We touched on earlier and even on distribution related to vitamins as well. What was the second part of your question, Jon? Jon R. Andersen - William Blair & Co. LLC: Well, I guess just kind of where you sit today relative to the $525 million in capacity you have and give us some sense... Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah. Right. We're not going to give you where our sales are today, but we have plenty of room to run. Your other part of the question was contribution margin. Jon R. Andersen - William Blair & Co. LLC: Yeah. Richard A. Dierker - Chief Financial Officer & Executive Vice President: And I talked about that a little bit last quarter and I said, it's going to take us a few years to grow into those fixed overheads. And it really goes back to the fact that, you're right, we have to get some more revenue and more scale. But every quarter that goes by, we get better and better at manufacturing vitamins in Pennsylvania and our skill set just improves all the time. So it's within reach within a few years. So we feel great about that. Jon R. Andersen - William Blair & Co. LLC: That's helpful. I may have missed this, I apologize if I did, but there's been a lot of discussion around the Nielsen data versus your own shipments. And I understand that non-measured, club, online plays a role in that. In aggregate as you look at it, were your shipments in line with consumption growth? Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yes, absolutely. The other piece I've tried to explain once or twice, there is also a disconnect between when consumption is down and we don't promote in certain categories, our organic growth could be flat or up and so that's also a disconnect between shipments and organic growth. Jon R. Andersen - William Blair & Co. LLC: Okay. So, no disconnect here, no inventory building at retail, just some of these pieces which we can't see through Nielsen or IRI? Richard A. Dierker - Chief Financial Officer & Executive Vice President: That's right. Jon R. Andersen - William Blair & Co. LLC: Okay, last question for me is just as online continues to grow at a faster rate than the brick and mortar business, what are the implications for your margins if any or are you agnostic with respect to that? Thanks a lot. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Yeah, we touched on that a little bit earlier as well, we are pretty much agnostic. Because, while margins are tougher sometimes on the Household business. It's also slanted more towards the Personal Care type of portfolio that wants to go online. So, net-net when you blend those two together, we are pretty much agnostic. Jon R. Andersen - William Blair & Co. LLC: Thanks.

Our next question is from Mark Astrachan with Stifel. Your line is open. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Yeah, thanks and good morning, everybody. I wanted to ask on BATISTE. So roughly to the extent you can, what's the split between sales in the U.S. and international? And then, how do we think about it as a driver from an international standpoint? Is it fair to call it the majority of international growth or is it just not big enough? Matthew T. Farrell - President & Chief Executive Officer: Well, with respect to what our sales are by country, we wouldn't get into that. And one thing I would like to dispel is the belief that the BATISTE is the sole driver of the international business. ARM & HAMMER is growing quite a bit in Canada and Mexico and this is kind of anchored in the benefits of baking soda and that seems to be resonating with people both in developed and emerging markets. Femfresh is another one I talked about which is feminine hygiene. One interesting phenomenon you might be interested in is there's a lot of product being purchased in Australia and then shipped to China like shelves being swept, we're not the only ones that have benefited that from time-to-time. So, that can help, has helped Australia from here and there. STERIMAR is the other one I talked about, so that's a nasal hygiene product. Had fabulous growth in Mexico this year and France last year behind strong marketing and lots of new products that we bring out. So it's a nice balance between our export business and our country growth. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Great. And then, I realize it's early and I'm not going to explicitly ask about gross margins for next year, but maybe as we sort of think about modeling it, are there any one-off type things, benefits, headwinds that would roll-off next year that we should think about in modeling? Matthew T. Farrell - President & Chief Executive Officer: It's a little early, it's only August, but you may be familiar with our evergreen model. So every year we try to expand our operating margins 50 basis points and generally half of that that will come from SG&A and half of it from gross margin when we try to keep marketing pretty level and not save our way to prosperity by cutting our advertising. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Great. Thank you. Matthew T. Farrell - President & Chief Executive Officer: Okay. All right. There are no further questions. I want to thank you all dialing in today. We'll talk to you again at the end of October. Richard A. Dierker - Chief Financial Officer & Executive Vice President: Thank you.

Ladies and gentlemen, this does conclude the program and you may now disconnect. Everyone have a great day.