This summary is based on the third quarter fiscal 2008 earnings call conducted by Church & Dwight Co., Inc. (CHD) on November 4, 2008.
Management:
Chairman and CEO: Jim Craigie
CFO: Matt Farrelll
Key Investors Issues
- EPS were 69 cents per share compared to 75 cents per share a year ago.
- Profit declined $49 million from $51.7 million last year.
- Sales rose 9% to $630.7 million from $580.4 million a year ago.
Third Quarter Highlights
Net income was $49 million or 69 cents per share compared to last year’s reported net income of $51.7 million or 75 cents per share.
This year’s third quarter earnings were 73 cents per share, excluding the previously announced restructuring charges of 4 cents per share related to a plant closing in 2009. This year’s third quarter earnings also reflect the divestiture of a subsidiary in Spain which resulted in a $3.5 million pretax loss included in selling, general and administrative expenses, offset by a $4 million tax benefit related to the divestiture. Last year’s third quarter earnings of 75 cents per share included a gain on the sale of property 4 cents per share and a tax benefit related to the reduction of tax liabilities 2 cents per share.
- Net sales increased 8.7% to $630.7 million. Organic net sales increased by approximately 4%, which excludes the impact of foreign exchange and the impact of acquisitions and divestitures.
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Consumer Domestic sales were $444.7 million, a $39.4 million or 9.7% increase over the prior year’s third quarter sales. The quarter includes sales for the recently acquired businesses from Coty. Sales of XTRA Liquid Laundry Detergent, ARM & HAMMER Liquid Laundry Detergent, OXICLEAN Powder, ARM & HAMMER Powder Laundry Detergent, ARM & HAMMER Dental Care Toothpaste and ARM & HAMMER Super ScoopCat Litter were all higher than last year’s third quarter. Sales of KABOOM bathroom cleaners were lower than last year’s third quarter.
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Consumer International sales were $112.6 million, a $4.6 million or 4.3% increase over the prior year’s third quarter sales. Excluding the impact of foreign currency changes, Consumer International sales were down due to higher sales in the prior year’s third quarter in advance of an announced price increase at a major European business.
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Specialty Products sales increased $6.3 million or 9.4% over the prior year’s third quarter sales to $73.4 million primarily due to higher pricing in the animal nutrition and specialty chemicals businesses. The quarterly sales growth of the Specialty Products division for the past four quarters has been bolstered by price surcharges that began in August 2007.
- Gross margin increased to 39.8% compared to 39.5% in the same quarter last year. Excluding the $4.3 million plant restructuring charge reflected in cost of sales, gross margin was 40.5%, which is a 100 basis points improvement from the prior year’s third quarter. The increase in gross margin reflects the impact of price increases, cost reduction programs, liquid laundry detergent concentration, the higher margins associated with the sales of products relating to the businesses acquired from Coty, and the completion of the manufacturing synergies relating to the businesses acquired from Orange Glo International, Inc. in 2006. These factors were partially offset by higher commodity costs and hedging losses due to declining diesel prices.
- Marketing expense was $79.7 million, a $10 million increase over the prior year’s third quarter. The increased marketing spending was focused on the brands acquired from Coty as well as ARM & HAMMER and OxiClean brands. Marketing expense as a percentage of net sales increased 60 basis points to 12.6% in the quarter compared to 12% in last year’s third quarter.
- Selling, general and administrative expense was $85.8 million, a $14.7 million increase over the prior year’s third quarter. SG&A expense as a percentage of net sales was 13.6%, 140 basis points higher than last year’s third quarter. This year’s third quarter included a $3.5 million loss related to the divestiture of a subsidiary in Spain. Excluding this loss, SG&A as a percentage of sales was 13.1%. Last year’s third quarter included a $3.3 million gain on a property sale. Excluding this gain, SG&A as percentage of sales was 12.8% last year. The remaining increase in SG&A expense is attributed to transition and amortization costs related to the Del acquisition, litigation costs and foreign currency translation.
- Operating income was $85.5 million compared to $88.6 million in the prior year. The third quarter operating income included a $4.3 million plant restructuring charge and a $3.5 million loss related to the divested subsidiary in Spain, while the prior year third quarter included a $3.3 million gain on a property sale. Excluding those items, operating income increased 9%.
Other expense increased to $13.4 million, compared to $11.2 million in the prior year’s third quarter, primarily due to $3 million of foreign exchange losses, partially offset by lower net interest expense.
- The effective tax rate was 34.4% compared to 34.7% in the prior year’s third quarter. This year’s tax rate included a tax benefit of $4 million related to the divestiture of the subsidiary in Spain. The current quarter tax benefit had a minimal impact on third quarter earnings per share, as it was offset by the related $3.5 million loss on the sale included in SG&A. Last year’s tax rate was favorably impacted by a reduction of tax liabilities. The tax rates for the current quarter and year-to-date were negatively impacted by the expiration of the research tax credit. The effective tax rate for the full year is expected to be approximately 36%, including the impact of the research tax credit which was recently reinstated by Congress.
- Capital expenditures were $27 million and included over $19 million related to the new facility in York County, Pennsylvania.
- At quarter-end, the company had net debt of $706 million (total debt of $882 million less cash of $176 million) compared to net debt at December 31, 2007 of $606 million (total debt of $856 million less cash of $250 million). Also at quarter-end, the company had $100 million available from its $115 million accounts receivable securitization facility and $95 million undrawn from its $100 million revolving credit facility. The leverage ratio of total debt to Adjusted EBITDA is higher than 2.0x for the twelve months ended September 26, 2008, which is at the lower end of the company’s publicly stated range of 2.0x to 3.0x.
- On August 15, 2008, the company redeemed the $99.9 million outstanding principal amount of its 5.25% Senior Convertible Debentures due 2033 at 101.5% of the principal amount of the debentures, plus interest to the redemption date. Holders of $99.9 million principal amount of the Debentures that were outstanding when the Debentures were called for redemption converted their Debentures into 3.2 million shares of company common stock.
The company announced several price increases including, ARM & HAMMER Liquid Laundry Detergent, XTRA Liquid Laundry Detergent, OxiClean Powder, SpinBrush, and ARM & HAMMER Dental Care.
These increases are scheduled to take effect in the fourth quarter of 2008. Earlier in the year, the Company implemented price increases for Trojan condoms, ARM & HAMMER Baking Soda, ARM & HAMMER Powder Laundry Detergent and Nice’n Fluffy Liquid Fabric Softener. In addition, the Specialty Products business had previously raised prices on many of its products effective January 1, 2008. In total, the announced price increases in 2008 have or will affect over 50% of the company’s product portfolio, in terms of net sales.
- The company completed the final wave of shipments of concentrated liquid laundry detergent and is encouraged by the response of consumers.
- The company completed its previously announced acquisition of the net assets of the Del Pharmaceuticals, Inc. over-the-counter businesses from Coty Inc. on July 7, 2008, including the Orajel oral analgesic brand and other over-the-counter brands for $380 million in cash. The purchase price was financed with a $250 million addition to the company’s bank credit facility and available cash. To date, the businesses are meeting or exceeding the company’s expectations. In the third quarter, as expected, the company incurred one-time integration costs and the amortization of the step-up of inventory to fair value as of the acquisition date. The acquisition is expected to have a positive impact on 2008 earnings and is expected to be accretive to earnings and generate free cash flow in 2009.
The company is progressing with its previously announced project to construct a new integrated laundry detergent manufacturing plant and distribution center in York County, Pennsylvania.
- The company expects to invest approximately $170 million in capital expenditures and cash transition expenses relating to the opening of the York County site and the related closing of the company’s North Brunswick, N.J. complex.
- The project resulted in charges in the third quarter of $4.3 million or 4 cents per share. The project charges are expected to be similar in the fourth quarter of 2008 and reduce 2009 earnings by approximately 24 cents per share. These charges relate primarily to accelerated depreciation of the North Brunswick complex, severance and other one-time costs associated with the closing of the operations.
- The company declared a quarterly dividend of 9 cents per share.
Year-to-Date Financial Highlights
