切遲杜威 (CHD) 2002 Q3 法說會逐字稿

Good morning. My name is Samantha. And I will be your conference facilitator today. At this time, I would like to welcome everyone to the third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1, on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. Bob Davies, Chairman and CEO. Mr. Davies, you may begin.

Robert A. Davies, III: Thank you very much, Samantha. Welcome and greetings to all of you. We are pleased to report solid achievements toward our objective going forward, which is 5% or more organic top-line growth and 12-and-a-half to 15 percent growth in earnings per share.

I would say that there are three highlights to the quarter. The first one is earnings. And at $1.24 for the nine months, we are 23%, as reported, ahead of year-ago, 17% when various adjustments are made, and well on track for the $1.58 to the $1.60, which is 15% ahead of year-ago, that we announced early in the year.

And further to earnings, as we discussed in August where I gave you a complete report on the status of our assimilation work of the two major ‘01 acquisitions, USAD and Carter Wallace, I'm now happy to report that we have completely finalized our assimilation of those two acquisitions, save just one topic, which is the sale of the now mothballed cranberry facility.

Thus, the 42 cents in this quarter demonstrates the accretive power of the two acquisitions in view of, first of all, the fact that most of the Carter Wallace manufacturing synergies are not in the results, even though they were achieved physically, due to the fact that we were still selling through the older, higher-cost inventories, and b), as promised, we have begun to step up our growth activity with advertising and R&D in the quarter up 30%, roughly, roundly, each.

So we are very much on track, and pleased with the progress of our earnings.

The second highlight is organic sales growth. As reported in the release, our Church & Dwight sales growth on an organic basis is up 3% in the quarter. However, within that number are some very positive developments in our base personal care brands. And it's our base personal care brands that have been dragging down our organic growth rate. And Brad Casper, who is with us today, is going to update you on those shortly with some beginnings of some positive news. In addition, we continued to see strong growth in our Armkel unit, domestically, although sales are flat in the quarter versus year-ago. That is totally driven by the large buy-in year-ago that Carter Wallace took just prior to the 9/28 close of the business.

In fact, our retail consumption numbers in the quarter are a positive 9.3% and have been positive all year long. Year-to-date that number is 8.9%, and we'll see the return of those sales coming in the fourth quarter, which I'll talk about toward the end of the call.

Also, our international Armkel numbers were quite decent. The numbers in a constant dollar basis, and using organic sales, are up 5.3%. The as reported number is more like positive 11%. So we continue to see progress with our organic sales growth.

The third highlight is new products and major line extensions, and as I've said to you several times, with the assimilation now behind us, we are turning huge amounts of attention back to internal growth, something that Church & Dwight has done quite well over the years, as has Carter. Carter Products. The domestic unit that we purchased from Carter Wallace. And we've made some real progress in several areas. I'm going to give you some more insight into the progress itself at the end of the call, and that will be preparatory for a major presentation on this subject at a meeting we will hold for the fourth-quarter results in February in New York City. With that, I will turn the call over to Zvi. Zvi?

Thank you, Bob, and good morning. I have some comments on the key numbers from this morning's press release, beginning with the income statement.

Third-quarter sales of $263.8 million are up 10.7% over last year. Consumer products are up 11.2%. And specialty products are up 7.9%. Organic growth, excluding acquisitions and disposals, is 3%. The way we look at it, which is to add Church & Dwight and affiliates -- because this is the business we manage -- the sales are up 54% to $383 million. There is a sales analysis by product line in the release. The third-quarter sales pattern is similar to what we have seen earlier in the year. Deodorizers and cleaners, laundry, and specialty products, excluding acquisitions and disposals, are up in mid-single organic terms. Personal care is up primarily due to the Arrid acquisition, slightly down in organic terms, but the deficit from last year is actually narrower in the quarter than earlier in the year. Again, in organic terms. Our small international business, excluding arm kill, is down by a relatively high percentage. That's because we are reorganizing it. Cancelling existing distributor arrangements and moving business to distributor arrangements to Armkel some countries and to strategic distributors in other countries, and we expect it to emerge much stronger in the second half of next year.

Moving to earnings, net income was up $2.3 million, or 15.3%, to 17.6 million. EPS was up 5 cents, or 13.5%, to 42 cents. There are some unusual items in the quarter which are described in the release. We think they wash out. Last year's EPS should be adjusted by 2 cents to account for the elimination of goodwill amortization. This leaves adjusted EPS up 3 cents or 8%. On the other hand, as we pointed out in the release, we did cancel advertising last year of between 9/11 and late September, which didn't have much effect on sales, but probably boosted earnings by around 2 cents. So on that basis, you might say the underlying growth rate in earnings probably is around 5 cents, or 13 to 14%. Moving to the nine-month results, sales increased 12.1% to $779 million. Organic growth, excluding acquisitions and disposals, was up 3%. If you include unconsolidated affiliates, sales are up 55%, to a billion one thirty. Net income increased 25% to $51.1 million, and EPS increased 23% to $1.23, versus a dollar last year.

We're adjusting this year's EPS up by 1 cent, relating to Armkel accounting charge. We are adjusting last year's by 6 cents relating to a plant shutdown, and the change in goodwill amortization. This results in an increase of 18 cents, or 17%, from $1.06 last year to $1.24 this year on the adjusted basis.

Now, let's take a look at margins. The best way to do that is to look at the trend line from the fourth quarter last year, which is the first quarter we had Arrid and Lambert Kay in the business, to the third quarter of this year. The gross margin fourth-quarter last year was 27.8%. It moved to 28.5 in Q1, 29.4 in Q2, 30.8 in Q3 or 30.1% if you adjust for a change in promotion reserves. So this is an increase of over 200 basis points in the gross margin. This includes virtually all the USAD manufacturing and distribution synergies except for our warehousing gain we expect in the middle of next year, but it only includes a fraction of the Carter Wallace cost of goods synergies because though we closed cranberry, the Carter Wallace plant, mid-year, we still are working with the old cranberry product costs in the third quarter and also had some decommissioning costs going through P&L in the quarter.

As the gross margin went up by over 200 basis points, marketing spending also went up from 7.4%, Q4 last year, to 8.6% Q4 of this year, and income from operations went up from 9.1% to 10.7%. So the business model is working out. We're getting the gross margin improvement we talked about and we're moving some of that improvement into higher marketing and R&D, and the rest is flowing into higher operating margin.

Now, let's look at the balance sheet and cash flow. The main measure of performance we use is net debt. That is, total debt less cash. At 9/30, at September 30th this year, net debt was 325, down $55 million from the position a year ago. We reduced inventories and receivables by over $20 million in that period. But we also incurred capital spending at an unusually high level for us. It was well over $40 million. And we also completed a small $8 million acquisition in the first quarter. So the $55 million debt reduction is a good measure of operating cash flow so far. And based on that-- the improvement in our cash position during the quarter, we prepaid $20 million of our term loans, $410 million in term loans. And we expect to make another prepayment in the fourth quarter.

Now, let's turn to our affiliate, Armkel, which is a 50-50 venture with a private equity firm, [kelso]. For the quarter, net income was $9.3 million, and sales were $110 million. An increase of 5% over last year. This includes a translation gain on the international business. That's about half the gain. On the other hand, last year, which was Carter Wallace's last quarter, we believe they pulled in over $4 million in sales into the Q3 of 2001, and since that quarter, we've also given up about a million dollars worth of low-margin distributor business abroad. So the underlying sales gain, without those unusual events, would have been probably in the high single area. And we expect to see that kind of improvement in the fourth quarter.

For nine months, Armkel's net income was 25.2 or or $33 million adjusted for first-quarter acquisition-related accounting charge of $8 million.

Sales were $322.6 million. I don't think a comparison with last year is all that meaningful because, first of all, the way Carter Wallace skewed sales into the second and third Quarters. And secondly, because of the new financial structure. What I would say is the results are right on our plan for the business. Let's look at Armkel's balance sheet. Net debt when the company started operations last year in September was $395 million. Net debt this year was $6 million higher, at $401 million. During this period, the company paid over $50 million in severance, transition, and transaction costs. So the fact that borrowings only increased by $6 million speaks to good operating cash flow for the business.

We estimate there's about $15 million of onetime costs still left ahead of us, which includes severance, remaining severance, and carrying costs for the cranberry facility until it's sold, which may take some time in this real estate market. Almost half of the remaining liability is in Q4. So Armkel should be in the position to start de-leveraging early in 2002.

So to sum up, let me go back to the key numbers. Q3 EPS, 42 cents, up 5 cents or 13.5% as reported, or 3 cents or 8% as adjusted. To remind you last year's third quarter had no advertising spend for the period after 9/11 so the underlying improvement could well be 5 cents. Margins are moving in a positive direction and we expect a further improvement in gross margins in the fourth quarter. On the balance sheet side, we're beginning to de-leverage Church & Dwight, and on current trends we should be in a position to start de-leveraging Armkel early next year, if we so decide. Now, back to Bob.

Robert A. Davies, III: Zvi, thank you very much. I'll make some commentary on the household brands and deodorizer brands and then Brad will talk about personal care brands.

As you've heard me say many times, the USAD acquisition was not only highly accretive financially, but also strategically beneficial. And you can see that in our numbers. As we look in the quarter, to our laundry brands, consumption is up 10.8% . Year-to-date that number is 10.9%. And that outpaces the category. The category is the liquid category. I'm talking about liquids here. The liquid category is up just marginally in the IRR reported channels, and is probably up four or five percent in all channels, and we are producing numbers at 2X that number. This is led by our Arm & Hammer brand of liquid, which is up a huge 27.5% in the quarter, and 23.5% year-to-date, and is the second fastest growing brand in the category, having -- in the quarter -- improved its share from a 4 5 to a -- no, a 4 four seven to a five six in the most current quarter. As to the powder category, the powder category continues its long decline. The IRI channels reported retail sales down around 12% for the quarter, and about 13% year-to-date. However, thankfully Church & Dwight's two powder brands are down less than half of that, driven by, particularly the strength, of Arm & Hammer powder, and so our share of market is also growing in this declining segment. If we were to combine all of our laundry brands, including our softeners, powder, liquid, and our sheets and our softeners, we would see that in the reported channels, the categories are down 3.6% in the quarter, and we're up 4.7%. In the year-to-date, almost the identical kinds of numbers.

Now, the reported channels at 3.6%, of course, omits Wal-Mart and the dollar store activity and the club stores, probably about flat, and we're up 4.7%.

So we're very pleased with the progress we've made in laundry, and we are particularly pleased with the strategic benefits that came with the USAD acquisition, which a) massively improved our cost structure and b) made us more important to the trade.

Moving to the important deodorizer segment, we continued to make tremendous progress with our brand. The scooping cat litter category grew in the reported channels 3.8% in the quarter, and we grew 16.6%, and now have a share of 17.1%. We are clearly the fastest-growing brand in the category. The year-to-date numbers are very similar. The category is up six nine and we're up 23.7%. It is now a little more than six months that Brad Casper has joined us from Procter & Gamble, and has taken the job of turning around Church & Dwight's 2 personal care brands as a major Task. He has also taken on all of the Carter brands domestically. And I think you can see from the report he's about to give you that we are beginning to make some progress with Brad at the helm. Brad?

Thank you, Bob, and good morning to all of you. As most of you know, our personal care portfolio, in fact, consists of two buckets. The first is the personal care division of Church & Dwight, which includes the anti-perspirant deoderant businesses of the farmer Carter Wallace company and the oral care and antiperspirant businesses under the Arm & Hammer trademark. The second bucket is Armkel and that contains the Trojan brand, Nair depilatories, First Response, and Answer Diagnostic Kits.

Let me begin with the Church & Dwight personal care business. As you can see from the press release exhibit, our personal care business is up quite handsomely versus 2001. In fact, about 77%. But of course this traces primarily to the acquisition of Arrid and Ladies Choice from Carter Wallace. If I exclude those from consideration for a moment, the previous two core businesses of this division, Arm & Hammer toothpaste and Arm & Hammer anti-perspirant deoderant, they demonstrated double digit unit sales growth in the third quarter and single digit sales dollar increases. Now, this is quite a change versus the first half of this fiscal where these same businesses had both unit and dollar declines versus year-ago.

Now, the anti-perspirant deoderant business has shown renewed vitality. As I mentioned in the previous call in July, we began to see a reversal of the steady decline in Arm & Hammer deodorant anti-perspirant behind the successful introduction earlier this year of Ultra-max. Ultra-max, you may recall, is the project that we affectionately refer to as "the yellow rocket." It has the vibrant yellow canisters, 36-hour time released baking soda deoderant protection, and male targeting, featuring Jason [Geombe] of the New York Yankees. Since the relaunch kicked into high gear in June, our unit sales volume has increased at retail by double-digit levels, while our retail consumption in dollars for all of accounts, including those below the radar, is up about 9%.

Now, as mentioned in the press release, we rolled back prices at the time of this launch to take the brand from its historic premium positioning to more of a parity pricing versus competition. So that accounts for some of the difference between unit and dollars. But net, we are encouraged by what we're seeing in the brand that we're building behind Ultra-max.

Now, on Arrid, the brand's long-term business decline moderated in the third quarter in IRI measured accounts and further improved in below the radar accounts, resulting in virtually flat consumer sales versus year-ago, and significantly higher than what we were able to achieve in the first half of the fiscal. Now, this is not cause for wild celebration, admittedly, but also it's an important signal that we're beginning to address the fundamental weaknesses of the brand. In fact, the 2003 plan for Arrid is shaping up nicely and contains the elements essential to sustained business improvement. That includes major conceptual and product news, break-through advertising, and investment levels of marketing support funded through cost savings. We'll spend more time discussing these plans in the February analysts' meeting.

In oral care, which you have heard me refer to as the most competitive battleground in personal care today, our toothpaste business has responded positively to better blocking and tackling. Beginning in June, and now continuing through October, the toothpaste unit and dollar sales volumes have modestly improved. In fact, we've posted five consecutive months of growth versus year-ago for the first time in several years. Now, this has been achieved in the absence of major product and marketing news, but we'll be discussing our plans for '03 in February, which includes some of both.

Overall -- now switching to Armkel -- the Armkel business, as Bob has said remains very healthy and growing. While the domestic sales in the third quarter were essentially flat versus year-ago, consumption across all channels for Armkel grew in the third quarter at 9.3%, or about three times faster than the category growth trends measured by IRI. If we do adjust for the estimated buy-in or loading that occurred year-ago prior to our acquisition, the third-quarter sales would have been up more like 7 to 8 percent. And this on the whole is in line with or slightly above the historic growth rates of these brands. Now, this growth was driven by three core franchises within Armkel. Trojan condoms, Nair depilatories, and First Response Diagnostic and feminine health kits.

Trojan continued to build on the strength we realized in the first half of the fiscal, with solid growth in the third quarter. Our consumption in the quarter, when factoring in below the radar accounts, including Wal-Mart, was up more than 7 percent, which was ahead of the category growth. New initiatives from the past 18 months, including Extended Pleasure, Magnum XL, and Her pleasure, are growing nicely, and we believe bringing more users into the category. We continue to view this whole category as an attractive growth opportunity because it is vitally important to global human health and safety and it is responsive to meaningful innovation that a brand like Trojan can uniquely create.

Our Nair business finished out the peak season with the same vitality that we discussed at the last call. Nair posted an increase of about 8% in IRI-measured retailers, and nearly double that when we factor in the strength of our business in dollar stores and Wal-Mart. Thus, we have maintained both volume and value leadership throughout the season and during the past year. Our feminine hygiene business, which primarily consists of First Response and Answer pregnancy and ovulation kits witnessed another strong quarter. The kit businesses posted an increase in consumption of 13% in all classes of trade, including Wal-Mart. And on First Response, in particular, our volume and value shares achieved all-time highs. And we are developing plans to further strengthen our core businesses in 2003.

Taken as a whole, then, I am feeling more confident about the personal care business today than six months ago. I believe we are putting together strategies and initiative programs that are capable of extending our leadership in several key categories in Armkel, while returning previously underperforming businesses in Church & Dwight to profitable growth. Now back to Bob.

Robert A. Davies, III: Brad, thank you very much. To wrap up, in summary, I have four basic things to say. First of all, our earnings guidance for the year continues to be $1.58 to $1.60. That's an adjusted number. The adjustment is one penny positive, and as Zvi has already given you the details of that. And therefore, our earnings guidance for the final quarter is 34 to 36 cents. And there is no adjustment to that. Second, you may ask, why is it that after three quarters of 40 cents-plus earnings, and now coming to the point in time where the full synergies of the two acquisitions are now affecting the P&L, are we dropping into the mid-30s in the finalquarter?

There are two answers to that. One is that there is some seasonality to our business, both on the Armkel side and on the Church & Dwight side. And the second is that we are taking a very deliberate, disciplined approach to how we operate the business. We've referred several times to the fact that we are engaged in picking up our top-line growth rate, and so you will see a further step-up well above year ago and well above the third quarter in marketing and new product development costs, preparatory to the early '03 launch of several new products and major line extensions. The third comment is that I do want to comment about sales in Q4 in two buckets. First of all, as to CHD sales, we have indicated that the CHD sales will be slightly below year-ago, as reported. This is totally related to the elimination of several fringe businesses that we acquired related to the two acquisitions. One of them is a candles and cleaners business we acquired from USAD and have since spun off. The second is a Lambert Kay pet hardware business, which was unprofitable, and we closed down. And the third is the several discontinuities in our export and international businesses, as we move those businesses into Carter international. So we will be taking a slight reduction in CHD sales due to these activities.

These discontinued activities are actually all beneficial to our profitability, but not, of course, to our sales.

Armkel will be -- will be a quite different story. Armkel will -- sales will be very strong. The underlying high single digit sales domestically and middle single digit internationally will continue to operate, but then we will also have the benefit of the reversal of the -- of the Carter buy-in in the third quarter last year, which depressed sales in the fourth quarter for us. We'll be looking at Armkel sales in the mid-teens, approximately, increase versus year-ago.

The final comment I have is that we are very pleased with the progress we have made with new products and major line extensions. I don't wish to give great specifics on this because in each case, I'm going to talk in general terms. I'm talking about brands that we are currently presenting to the trade, but have not actually begun to ship. Therefore, we are planning on taking you through these new items in greater detail at our February meeting which will be in New York City. But these new items include, for early '03 launches, a major toothpaste line extension referred to by Brad, which I would capture under the heading "back to basics," the continued expansion of our Arm & Hammer Ultra-max personal deodorant advertised by Jason [Geombe], and we'll be moving into the second six months of its expansion as we go into the new year. The growth of this brand began only midway through the current year. A new line of Arrid products is being introduced and will be presented at the January meeting. Also, a new laundry product. There are two very interesting additions to the condom line, to the Trojan condom line for next year, particularly unique one. We will be announcing a new personal care brand, and probably will be announcing a new household cleaning and deodorizer brand. A fair amount of activity.

We will present all of these to you at the February New York City meeting, and we hope to see as many of you there as is possible. With that, we will turn the conference over to the Q&A section.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1, on your telephone keypad at this time. We'll pause for just a moment to compile the Q&A roster. Your first question is from Alice Longley with CSFB.

Hi. Good morning.

Hi, Alice. Good morning.

Okay. My first set of questions here are on sales. In 4Q, if you were to take out the divestitures you're talking about and also the disruptions from exports, how much would your Church & Dwight sales be up or down or whatever?

Robert A. Davies, III: I think we'd see a continuation of the current pattern.

So something like 3%?

Robert A. Davies, III: I don't have the exact number in front of me, but it would be something like that.

So you're comfortable-- all right. And in the 3Q, your organic sales growth of 3% was helped by the reversal of a reserve by 2-and-a-half million dollars, is that correct? Is that how much boosted --

Actually -- no. We took that -- we removed that in calculating the --

Oh, you removed that in calculating the organic growth?

Yeah. We made it apples to apples.

Aha. Okay. I don't think that was that clear. So sales were up 3% organically. Even adjusted for that?

Right.

And sales should be up about 3% in the fourth quarter as well to make that clear? I think that's what's bothering people.

I say I don't have the exact number for the fourth quarter but about the same.

And your laundry shipments will be up in that neighborhood somewhere, you think?

Robert A. Davies, III: Yes, it will be a fairly strong quarter for laundry.

Okay. Within your marketing, I'm a little confused. The marketing line itself, I think, was you up 14% but you said advertising was up 30. So what's in marketing? It's advertising plus what else?

Well, the marketing line post-the new accounting rules, as you know, is all the promotion is above the line.

Yeah.

I'm sorry. All the price promotion. What you have in there is things like samples, sales materials, PR, market research, professional programs, and of course advertising. Advertising being the largest single component. That's what 30% --

Robert A. Davies, III: And the delivery cost of coupons.

I'm sorry. I should have mentioned that. Delivery cost of coupons.

And in the fourth quarter, the $30.3 million you reported in the third quarter for marketing is going to go up to what in the fourth?

The 30.3 is actually SG&A. Is that --

Oh, wait, wait, wait. I'm miss reading. The 22.8, excuse me, of the third quarter goes up to what for marketing in the fourth?

Well, all we prefer to say at this point is it will go up relative to last year significantly.

Oh, but I also thought you said it's up versus the third quarter. Is that not right.

Robert A. Davies, III: I did say that. And it is.

And it is. So maybe 23, 24, something like that?

Robert A. Davies, III: I don't have the number.

I don't think we can comment on that, Alice.

Okay. And let's just look a little bit at next year. I'm sure you don't want to say too much, where do you think gross margins go, and what are you comfortable with for organic growth for next year?

Robert A. Davies, III: Well, margins are going to go up quite a bit at the gross line, Alice, and --

How much? What do you think gross margins can do?

Robert A. Davies, III: Zvi, you want to comment or --

Well, I justices don't think we can be that specific here. We are looking for a meaningful increase in gross margin because the -- as the Carter Wallace integration benefits kick in, a lot of it will be in the fourth quarter. The rest will be in the first quarter. We should see a meaningful improvement in gross margin.

But you don't want to quantify that yet?

No.

Do you think in February you'll give us some quantification that have?

Well, you'll see the fourth quarter and that will give you a better base, I think. Fourth quarter and the first quarter, you'll see almost all the integration benefits coming through in gross margin.