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Original Source: FD (FAIR DISCLOSURE) WIRE
. Bill Schmitz, Deutsche Bank, Analyst . Matthew Palazzolo, Prudential, Analyst . Dara Mohsenian, JPMorgan, Analyst . Alice Longley, Buckingham, Analyst . Joe Altobello, CIBC World Markets, Analyst . Jim Craigie, Church & Dwight, President and CEO . Zvi Eiref, Church & Dwight, CFO
CHD announced 2Q06 sales of $459m and EPS of $0.54. 1H06 sales were $901m, with EPS of $1.14. Raised 2006 EPS guidance to $1.95.
A. Key Data From Call 1. 1H06 sales = $901m. 2. 2Q06 sales = $459m.
3. 1H06 EPS = $1.14. 4. 2Q06 EPS = $0.54. 5. 1H06 GM = 39.3%.
6. 2Q06 GM = 40.3%. 7. 2006 EPS guidance = $1.95.
S1. Overview (J.C.) 1. 2Q06 Highlights: 1. Solid results despite significantly higher costs driven by higher oil and other commodity prices. 2. GM improvement was top corporate priority in 2006.
1. Oil costs increased dramatically in 2005, leading to around
300bp in higher costs. 2. Corporate GM declined to 36.6% in 4Q05, excluding one-time charges, largely due to higher commodity costs. 3. Co. increased prices, eliminated unprofitable trade
promotions, and reduced costs across entire supply chain.
1. Offset over 250bp of higher costs in 1H06 vs. 1H05. 2. Achieved 110bp increase in GM YTD, including 210 point [sic] increase in 2Q06 vs. 2Q05. 4. Key part of GM improvement was price increases implemented late in 1Q06. 1. To stick, had to temporarily reduce merchandising activity, particularly in liquid laundry detergent category. 2. As a result, organic growth reduced in 2Q06, primarily
driven by slower growth in liquid laundry business. 3. Rest of portfolio performed as expected, with continued solid organic growth in condoms, test kits, cat litter, and international, partially offset by expected softness in oral care, fabric softeners, and underarm deodorants. 4. Net effect was flat organic growth in 2Q06, below 3-4% organic growth delivered over past two years. 5. Had co. not reduced merchandising in liquid laundry detergent, organic revenue growth would have been more in line with historic trends. 5. Short-term tradeoff between GM and organic growth in best long-term interest of co. 1. Strong margin result enables co. to significantly increase marketing spending in future quarters to restore solid organic growth. 2. Strong GM result will enable co. to increase 2006 earnings forecast.
S2. 2Q06 Finances (Z.E.) 1. 2Q06 Results: 1. 2Q06 EPS was $0.54, $0.03 or 6% higher, and $0.05 or 10% higher excluding stock option expense. 2. 1H06 EPS were $1.14, $0.07, or 7% higher, and $0.11 or 10% higher excluding stock option expense. 3. Unusual items: 1. 400bp increase in 2006 tax rate, partly due to delay in approving 2006 tax bill affecting R&D credit. 2. Taking unusual factors into account, EPS increase over last year would have been more than 10%. 4. Price increase occurred in February for liquid laundry detergent, baking soda, and cat litter. 1. Due to promotional activity in 1Q06, received about half pricing benefit in 1Q06, and received full benefit in 2Q06. 2. Increased helped restore margin structure, but affected unit volume and slowed down overall sales growth rate. 3. Margin gain outweighed volume loss. 5. Completed integration of SpinBrush business, acquired October 2005, at end 1Q06. 1. Consolidated almost all SpinBrush sales in 2Q06. 2. Sales: 1. 2Q06 sales of $459m, 4% higher as reported, flat organically, excluding acquisition.
2. 1H06 sales were $901m, 4.5% higher as reported, up 1% organically. 1. 1H06 had one day less than last year, a 0.5% reduction in selling period. 3. Condoms, kits, pet care all did well in 2Q06 and YTD. 4. Arm & Hammer liquid brands had strong growth in 1Q06 and lower growth in 2Q06. 5. Toothpaste and antiperspirants were weaker vs. 2Q05 and YTD. 6. Flat 2Q06 organic sales performance vs. 4% organic growth in 1Q06 and 2Q05:
1. Price increase affected unit volume, especially for liquid laundry detergent. 1. Also minor effect on deodorizing business and almost no effect on pet care business. 7. Overall sales very close to expectation. 8. Merchandising Activity: 1. Trades pulled promotional activity into 1Q06 to take advantage of lower price points, and 1Q06 sales, particularly liquid laundry, were exceptionally strong. 2. Do not think merchandising activity had significant effect on trade inventories, but do think it resulted in consumer
"pantry loading." 3. April sales very weak, May sales quite strong. 9. Normal activity on promotional efficiency: 1. Working to eliminate low-margin promotions. 2. More activity in 2Q06 than normal, sales organization estimates co. eliminated events which occurred in 2005 accounting for at least 2% of 2Q05 sales. 10. 2Q06 GM increased to 40.3%, up 210bp vs. 2Q05 and 370bp
vs.4Q05, even after adjusting for unusual charges. 11. YTD GM is 39.3%, up 110bp. 12. At 40% margin, back to historic high point from mid-2004, before commodity cycle began. 1. Had to absorb about 500bp of commodity-based cost increases over two-year period. 1. Done through pricing, promotional efficiency, and cost-reduction programs. 2. Cost-reduction program in place for rest of 2006 and 2007. 3. P&L: 1. Spending slightly up 2Q06, flat YTD. 2. Had expected spending on new products to start earlier, but some copy work took longer than expected. 3. Spending to be significantly higher in 2H06, particularly in 3Q06.
4. SG&A spending, up $14m in 1H06: 1. Two-thirds from stock option expense, $4m, SpinBrush operating and amortization costs, and IR&D spending. 5. Operating profit was $66.7m, up 11% in 2Q06 and $139m YTD up 9% over …