This summary is based on the second quarter fiscal 2008 earnings call conducted by Church & Dwight Co., Inc. (CHD) on August 4, 2008.
Management:
CEO: James Craigie
CFO: Matt Farrelll
Key Investors Issues
- EPS were 66 cents per share compared to 59 cents per share last year.
- Net income was $45.8 million, an increase of 12% over last year’s $40.5 million a year ago..
- Net sales increased 8.7% to $594 million.
Second Quarter Highlights
Net income was $45.8 million or 66 cents per share, an increase of 7 cents per share or 12% over last year’s $40.5 million or 59 cents per share.
Net sales increased 8.7% to $594 million.
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Organic net sales increased by approximately 8%, which excludes the positive impact of foreign exchange offset by other minor items.
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Consumer Domestic sales were $411.6 million, a $28.3 million or 7.4% increase over the prior year second quarter sales. Sales of Xtra liquid laundry detergent, Arm & Hammer liquid laundry detergent, First Response pregnancy test kits, Arm & Hammer powder laundry detergent, and Arm & Hammer Super Scoop cat litter were all higher than last year’s second quarter. Consumer Domestic sales also benefited from February price increases on condoms and baking soda and May price increases on Arm & Hammer powder laundry detergent and Nice’n Fluffy liquid fabric softener.
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Consumer International sales of $112.8 million increased $11 million or 11% over the prior year second quarter sales, of which 8% was due to foreign exchange, with the balance primarily due to higher sales in a number of countries.
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Specialty Products sales increased $8.3 million or 13% to $69.6 million due to higher pricing and volumes in the animal nutrition and specialty chemicals businesses.
Gross margin increased 110 basis points to 40.8% compared to 39.7% in the same quarter last year.
- The increase in gross margin includes the benefits of pricing actions, cost reduction programs, liquid laundry detergent concentration, and manufacturing synergies relating to the businesses acquired from Orange Glo International, Inc. in 2006, partially offset by higher commodity costs.
- Marketing expense was $79.2 million, a $13.1 million increase over the prior year’s second quarter. The increased marketing spending was focused on the company’s largest brands: Arm & Hammer, Trojan, OxiClean and First Response. Marketing expense as a percentage of net sales increased 120 basis points to 13.3% in the quarter compared to 12.1% in last year’s second quarter.
- Selling, general, and administrative expense was $81.4 million, a $7.4 million increase over the prior year’s second quarter. SG&A expense as a percentage of net sales was 13.7%, 20 basis points higher than last year’s second quarter. The increase in SG&A expense is attributed to foreign exchange, research & development spending to support new products and information systems costs.
- Operating income increased 7% to $81.9 million compared to $76.6 million in the prior year’s second quarter driven by higher sales and gross profit, partially offset by higher marketing and SG&A expenses. Operating margin was 13.8% compared to 14% in the prior year’s second quarter.
- Other expense decreased to $8.6 million, compared to $12.2 million in the prior year’s second quarter, primarily due to lower net interest expense.
- The effective tax rate in was 39.3% compared to 38.7% in the prior year’s second quarter. The current quarter and prior year’s quarter both were impacted by an increase in tax liabilities. The tax rate for the current quarter was also negatively impacted by the expiration of the research tax credit which has not been reinstated by Congress for 2008. The effective tax rate for the full year is expected to be approximately 37%, excluding the impact of any research and development tax credit.
For the first six months of 2008, the company reported $130.3 million of net cash from operations compared to $75.1 million for the first six months of 2007.
- For the first six months of 2008, the company generated $113.7 million in free cash flow compared to $49.7 million in the prior year period. The increase in free cash flow is primarily related to improved working capital management and higher net income. Free cash flow is defined as net cash from operations less capital expenditures.
- At quarter-end, the company had net debt of $484 million (total debt of $740 million less cash of $256 million) compared to net debt at December 31, 2007 of $606 million (total debt of $856 million less cash of $250 million). The leverage ratio of total debt to Adjusted EBITDA (as defined in the company’s principal credit agreement) is 1.8 for the twelve months ended June 27, 2008.
- On July 11, 2008, the company announced that it will redeem the $100 million outstanding principal amount of its 5.25% Senior Convertible Debentures due 2033 on August 15, 2008 at 101.5% of the principal amount of the debentures, plus interest to the redemption date. In lieu of redemption, holders may elect to convert the debentures into shares of the company’s common stock at a conversion rate of 32.26 shares per $1,000 principal amount.
The company implemented price increases on its U.S. consumer products portfolio, effective February 1, 2008 for Trojan condoms and Arm & Hammer baking soda and May 12, 2008 for Arm & Hammer powder laundry detergent and Nice’n Fluffy liquid fabric softener.
- The Specialty Products business had previously raised prices on many of its products effective January 1, 2008. These announced pricing actions have affected approximately 30% of the company’s product portfolio, in terms of net sales.
- In July 2008, the company began shipping Arm & Hammer Essentials cleaners which is a new line of household cleaning products that combines powerful plant-based cleaners and environmentally sensible packaging to help consumers develop greener cleaning habits. The company estimates that when consumers use Arm & Hammer Essentials cleaners as designed, they will use approximately 70% less plastic and 60% less packaging than standard, pre-filled 32 oz. cleaners.
- The company substantially completed the third and final wave of shipments of concentrated liquid laundry detergent, and is encouraged by the response of consumers. The speed of conversion and initial sales reports for the company’s concentrated liquid laundry detergent brands are positive. The second wave began in January 2008 in the Midwest and Northwest U.S., and the final wave in the Eastern U.S. commenced in April.
The company completed its previously announced acquisition of the assets of the Del Pharmaceuticals, Inc. over-the-counter business from Coty Inc. on July 7, 2008, including the Orajel oral analgesic brand and other over-the-counter brands for $380 million in cash.
