Church & Dwight Co., Inc. (CHD)
Q3 2008 Earnings Call Transcript
November 4, 2008 10:00 a.m. ET

Executives

Jim Craigie - Chairman and Chief Executive Officer
Matt Farrelll – Chief Financial Officer

Analysts

Alice Longley - Buckingham Research
Douglas Lane - Jefferies & Company
William Chappell - Suntrust
William Schmitz - Deutsche Bank Securities
Mili Seoni – JP Morgan
Connie Maneaty - BMO Capital Markets
Joseph Altobello - Oppenheimer
Nik Modi - UBS
Jason Gere – Wachovia Capital Markets
Andrew Sawyer - Goldman Sachs

Presentation

Operator

Good morning ladies and gentlemen, and welcome to the Church & Dwight Third Quarter 2008 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 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.

Jim Craigie – Chairman and Chief Executive Officer

Thank you, Chantal and good morning to everyone. It''s always a pleasure to talk to you particularly when we have good results to report. I''ll begin this call by providing my perspective on our excellent third quarter, which you''ve read about in the press release issued this morning. Let me start off by saying that I''m very proud of my company for both the quality and magnitude of our results particularly in this recessionary worldwide business environment. Our business results reflect an organization that is highly motivated and firing on all cylinders. Our new product pipeline and increased marketing spending is driving strong organic growth despite softening consumer demand.

Our business teams and supply chain organization are working closely together to deliver exceptional growth margin expansion despite the volatility in commodity prices. Everyone is continuing to keep a tight ground on overhead costs. This is proven by the fact that we have the same number of employees today as we had four years ago despite a 50% increase in sales during that time. We are squeezing every dollar out of our working capital to drive a significant increase in cash flow. That increased cash flow and strong balance sheet is also enabling us to smartly invest in our future through accretive bolt-on acquisitions and building new plants to further lower our cost structure and strengthen our competitive advantage. While we are feeling bullish about our company''s business momentum, we are very cognizant of the very tough business environment facing all companies these days. Consumer confidence is at a record low. Consumers are trading down and we believe that consumer spending is going to get worse before it gets better.

However, Church & Dwight had handled this crisis exceptionally well so far in 2008 as demonstrated by our strong organic revenue growth, our gross margin expansion and double-digit earnings per share increase. No other consumer packages company that I can think of is as well suited to handle a recession as Church & Dwight. We''ve achieved share gains in 2008 across almost everyone of our core category, including liquid and powdered laundry detergent, laundry additives, cat litter, battery-powered toothbrushes, depilatories, diagnostic kits, and condoms and we face less of a threat of consumer trading down because over 30% of our domestic portfolio consists of value-oriented products. Finally, we have a superb plan in place to continue to deliver on our goal of growing gross margin by at least 100 basis points per year. We promised that result for 2008 at a time when oil was less than $100 per barrel. We delivered against that goal in the first nine months of 2008 with a gross margin gain of 130 basis points despite oil rising as high as $140 per barrel. We will continue to deliver against that objective.

You may wonder how Church & Dwight can still do this when most other consumer packages companies are showing gross margin decline. The answer is that Church & Dwight has four key factors driving gross margin. The first two are common to other consumer packages companies in that we have all taken pricing. In Church & Dwight case, we have priced over 50% of our revenue base in 2008 and I assume the other CPG companies have been cutting their overhead costs wherever possible. On top of these two common industry factors, Church & Dwight has two unique factors. First, the compaction of liquid laundry detergent product which started in September of 2007 and finished its national rollout in June of 2008 has generated significant cost savings that have more than offset the cost increases in this commodity sensitive business. Second, we had $10 million of manufacturing cost synergies starting last October for the integration of the acquired OGI brands primarily Oxi Clean into our manufacturing facility. Not only did we have these four factors driving gross margin expansion, but when commodity prices started to rise dramatically in early 2008, we exceeded our assumptions on all four factors through an extraordinary effort by the whole Church & Dwight organization. In this regard, we took more pricing than originally forecasted.

We achieved more cost savings than expected, the liquid laundry detergent conversion went better than expected, and we exceeded the cost savings on the manufacturing synergies, on the integration of the OGI acquisition. When you combined this incredible effort on cost savings with the great pipeline of new products, increased marketing spending, tight overhead controls, and squeezing working capital, you get the high quality business results achieved by Church & Dwight so far in 2008, organic revenue growth of 4% in Q3, and 6% year-to-date, gross margin expansion of 100 basis points in Q3, and 130 points year-to-date excluding the new plant charges. Earnings per share growth of 6% in Q3 and 10% year-to-date excluding the one-timers and free cash flow increase of 15% in Q3 and 61% year-to-date excluding capital expense for the new plant.

These results are not surprising to us as we expect to continue to deliver solid organic revenue growth of 3% to 4% and gross margin expansion of at least 100 basis points annually. I will provide more detail in my outlook to the year in a few minutes.

I will now turn the call over to Matt Farrell, our Chief Financial Officer, who''ll provide you with greater insights on the financial results for the third quarter and year-to-date.

Matt Farrell – Chief Financial Officer

Thank you, Jim. Good morning everybody. I''m going to start with EPS. Our reported third quarter EPS was $0.69 per share, compared with $0.75 in 2007. The current year quarter included a $0.04 charge for restructuring costs related to the closing of our North Brunswick complex which we''ll be closing in the fourth quarter of 2009. It''s also noteworthy that last year''s third quarter results benefited by approximately $0.04 of earnings from a property sale in Canada and also $0.02 of tax benefits. So, if you exclude these items, EPS was up about 6% from a year ago and a strong sales performance and gross margin expansion that Jim referred to was the drivers of the third quarter earnings results. One other thing, in our press release, we noted that we sold our business in Spain for a small net gain. The transaction created a low effective tax rate but it had a little effect on EPS since it was offset by the pre-tax loss on the sale which is included in SG&A. You''ll see both of those numbers in the release.

Our revenues now, revenues were up approximately 9% of which about 1% was due to currency and 4% due to the sales of products acquired from the Del acquisition. So .the organic growth for the quarter was 4% and of the 4% organic growth, the majority is due to price mix as opposed to volume. So, now let''s go through the segments. The domestic business had a strong quarter. Revenues were up about 9.7%, 5% of which was from the Del brands. The organic growth was driven by XTRA liquid laundry, Arm & Hammer® liquid laundry, Oxi Clean powder, Arm & Hammer Powdered Laundry, Arm & Hammer Dental Care and Arm & Hammer Super Scoop cat litter and about half of the domestic organic growth came from volume and the balance from price mix.

We successfully raised prices earlier in the year you''ll remember for Arm & Hammer Powdered Laundry Detergent, Trojan, and baking soda. New product launches also contributed to domestic revenue growth year-over-year.