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Church & Dwight: Conference Notes

September 12, 2011 | About:
The Science of Hitting

The Science of Hitting

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Church & Dwight (CHD), a consumer products company founded in 1846 with Arm & Hammer baking soda, presented at the Barclay’s Back to School Conference last Wednesday. I wrote an article about the company last month when they reported second quarter earnings; here’s a quick refresher of some of the key takeaways from Q2:

Net sales in the second quarter were roughly $675 million, a 5.3% increase from the same period last year. Organic sales, which exclude the impact of currency and discontinued/acquired businesses, were 3.3% higher from Q2 2010, meeting management’s expectation of 3-4% and improving from weak Q1 2011 results of 1% organic sales growth.

Consumer Domestic sales increased 3.6% year over year to $482.3 million, driven by 5.6% sales growth in the Household Products segment of Consumer Domestics.

Consumer International sales were $126.0 million, a $13.9 million increase or 12.4% above the prior year second quarter sales (3.1% increase on currency neutral basis)

The company paid a dividend of $0.17 in the quarter, a significant increase from the $0.07 payout in the same period last year. In addition, the Company’s Board authorized an open-ended repurchase program for up to $300 million of the Company’s common stock, which was surprising considering they have not repurchased shares since 2000; management said this would not affect their ability to participate in future acquisitions, saying “this is just an opportunity to buy back some shares because we have so much damn cash.”

Net income for the quarter was $82.6 million or $0.57 per share, compared to Q2 2010 reported net income of $74.3 million or $0.51 per share (12% increase in EPS).

Management maintained their guidance for full year EPS of $2.17-$2.20, a 10-11% increase over 2010 (excludes a one-time pension item in 2010 for comparability).

Since that time (roughly one month), the stock is up right around 2%, compared to an equal sized decline for both the S&P500 and the DJIA. Presenting at the conference were CEO Jim Craigie and CFO Matt Farrell; here are the things from the conference I found interesting:

Product split at the company is roughly 60% household products and 40% personal care. The company has roughly $2.6 billion in annual sales, with 75% ($1.9 billion) coming from domestic markets, 15-20% ($400 million) coming from international markets (compared to 2% in 2001), and the remainder (around $300 million) coming from a segment called SPD, for the Specialty Products Division.

Total shareholder return is what management has their sights set on, and they have done a fantastic job delivering in that arena over the past decade; not only is the stock up 26% through the first eight months of 2011, but through the end of 2010, CHD accumulated 3-year, 5-year, and 10-year (annualized) returns of 9.3%, 16.7%, and 17.6%, outpacing rivals (such as PG, CLX, CL, ENR, etc) and the major indices.

This has been driven by strong operating results (for example, a consistent rise in gross margins to 44.7% in 2010 compared to 29.1% in 2001); as noted by CEO Jim Craigie, “We are the only CPG company, to our knowledge, that is in the 10 for 10 club, meaning we delivered 10 straight years of 10% plus EPS growth; again, I don’t think any other company has done that in our industry.” He believes that a big portion of their success is that they have a “recession-resistant portfolio,” with 40% of their product portfolio covering the “value” end of the market (compared to 60% for “premium”).

An example they shared is in liquid laundry detergent, their biggest business on the value side; by their calculation, they hold two brands that sell for 40% and 26% of Tide’s cost per load in Arm & Hammer and XTRA, respectively. Simply enough, “When you are in a recessionary economy, the business is just flowing to us; it was flowing us to before because of the value, it is flowing to us now, and it will continue to do so in the future.”

Despite having 80-plus brands in the product portfolio, Church & Dwight has eight “power brands” that account for 80% of sales and profits and all of which are category leaders; they are Arm & Hammer, OxiClean, Trojan, Spinbrush, Orajel, First Response, Nair and XTRA. With these brands, new products are driving 50% of organic growth, spotlighting the importance of both strong innovation and marketing behind new products; as a result, in the past four years, these eight brands (on an individual basis) have grown faster than their respective categories in 26 out of 32 (8 brands x 4 years) measurement periods.

More on OxiClean: the brand was purchased in 2006, and at the time held a 27% market share in the laundry additive business. In the three and a half years after (before competitors stepped in), CHD increased their share to nearly 40% of the market by launching innovative products (like liquids, sprays, etc) and increasing marketing (by 400% from 2006). In 2009, Procter & Gamble said enough, and entered the category via Tide Stain Release. As Mr. Craigie puts it, “we just didn’t sit back and take it on the chin; we launched a whole new lineup of products out there…” While P&G did grab share (up 7.1% to 17.5% of the market), most of it came from other competitors in the market; at the end of the 2010, Church & Dwight’s share of the category stood at 38.8%, down slightly more than 1% from 2009, but still two times as large as PG’s share.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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