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Church & Dwight Fixed The Six, So What?

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In Church & Dwight’s (NYSE: CHD) third quarter conference call on Monday, Chairman and CEO Jim Craigie outlined six important business measures that indicate the company’s current and future success. Each one of these metrics saw improvement in the company’s third quarter report as Craigie started an initiative to “fix the six” earlier this year. Let’s take a closer look at the six, and see if Craigie’s confidence is founded.

For all of the highlights from Church & Dwight’s third quarter conference call, click here.

Organic Revenue Growth

Organic sales improved 4.6% in the third quarter over the same period a year ago. The driving factor behind this was excellent international growth of 6.7% bolstered by higher sales in Europe and Australia.

Chief consumer packaged goods company Procter & Gamble (NYSE: PG) does the majority of its business abroad. The international success of Church & Dwight, which only derives 20% of revenue from international business, is a good indicator that it is capable of competing with the market leader abroad.

The company’s consumer domestic businesses grew 4.8% in the quarter as the company saw increases in its Arm & Hammer, Trojan, Nair, and OxiClean product lines which more than made up for losses in its Answer and Arrid products. The improved dollar share of its four biggest brands is a sign that the company’s aggressive marketing expenditures are worth the price.

Profit Margin

I’m lumping number 2 and 5 together here – gross margin and operating margin. Church and Dwight reported a gross margin of 45.2% and an operating margin of 20% for the third quarter. Both of these numbers are improved from last year by 100 and 200 basis points respectively.

These numbers compare favorably to two of Church & Dwight’s biggest competitors – Procter & Gamble and Colgate-Palmolive (NYSE: CL).

<table> <tbody> <tr> <td rowspan="2"> <p><strong>Company</strong></p> </td> <td colspan="2"> <p><strong>Most Recent Quarter</strong></p> </td> <td colspan="2"> <p><strong>Most Recent Fiscal Year</strong></p> </td> </tr> <tr> <td> <p><em>Gross Margin</em></p> </td> <td> <p><em>Operating Margin</em></p> </td> <td> <p><em>Gross Margin</em></p> </td> <td> <p><em>Operating Margin</em></p> </td> </tr> <tr> <td> <p><strong>Church & Dwight</strong></p> </td> <td> <p>45.2%</p> </td> <td> <p>20.0%</p> </td> <td> <p>44.2%</p> </td> <td> <p>17.9%</p> </td> </tr> <tr> <td> <p><strong>Proctor & Gamble</strong></p> </td> <td> <p>50.1%</p> </td> <td> <p>19.1%</p> </td> <td> <p>49.3%</p> </td> <td> <p>15.9%</p> </td> </tr> <tr> <td> <p><strong>Colgate-Palmolive</strong></p> </td> <td> <p>58.4%</p> </td> <td> <p>23.7%</p> </td> <td> <p>57.3%</p> </td> <td> <p>23.0%</p> </td> </tr> </tbody> </table>

Church & Dwight’s margins are currently about middle of the pack on its margins overall. It still trails Colgate-Palmolive significantly in this category, but is about par with P&G. The company's improving operating margin is a great sign the company will continue to grow profits. The company’s focus on cutting down expenses and improving margins is evidenced in the fact that the company has the highest revenue per employee.

Market Share

Church & Dwight derives 80% of its revenue from its eight ‘power brands’ – Arm & Hammer, Trojan, OxiClean, Spinbrush, First Response, Nair, Orajel, and Xtra. Five of those brands saw a gain in market share in each of the first three quarters of this year.

Standout products that have significantly increased market share include Arm & Hammer cat litter products. The line saw a 2.4% share gain versus the third quarter last year, and is no firmly positioned as the number two cat litter brand. This in a segment the company entered just 14 years ago.

Trojan condoms took 76.6% of the market share, up 1 percentage point from last year. The company also has had success with the Trojan vibrator line with consumption gains up 25% from a year ago.

Enough dirty talk, I’ll clean things up here. The company launched a new OxiClean dishwasher additive this year, which has already captured 10% of the market in just 7 months. Additionally, its new line of toothbrushes aimed at children, ToothTunes, has seen strong sales since its launch in July.

Church & Dwight is not content with resting on its cash cows. It continues to fight for every percentage of market share in order to maintain dominance in those categories. Additionally, the company pushes for strong market share growth in new product launches and business segments.

Overhead

Church & Dwight’s recent push to control SG&A appears mildly successful. In the most recent quarter, the company lowered overhead costs by $1.9 million, 70 basis points as a percentage of revenue. The two biggest factors in the lower costs were lower legal costs and a timing shift from Q3 to Q4 in R&D expenses.   

For the full year, the company expects SG&A to about 13.2% of revenue, which is 20 basis points lower than last year. Church & Dwight’s ability to maintain SG&A costs low is paramount to its ability to compete. In comparison, Procter & Gamble and Colgate-Palmolive generally post SG&A around 31% and 34% respectively.

Earnings

The main reason any company does anything usually boils down to one thing - the bottom line. Craigie’s focus on the first five metrics will naturally drive earnings. Sure enough, with improvement in each of those measurements, the sixth metric, earnings, saw improvement as well.

Church & Dwight reported EPS of $0.66 in its third quarter, a 22% increase from the Q3 2011. Church & Dwight’s growth far outpaces its mature competition in P&G and Colgate-Palmolive, which increased earnings 3.9% and 1.7% year-over-year in this most recent quarter.

Continued focus on increasing market share, revenue, and margins, will continue to drive earnings growth higher. The company expects earnings to grow another 13% to 15% in 2013.

It certainly seems like Jim Craigie has every right to be excited about Church & Dwight’s future. His concentration on cutting company costs and increasing revenue, especially internationally, will innately lead to good earnings growth. The company’s margins and costs compare favorably to the competition, and its strong brand portfolio will help the company maintain solid earnings through this economic recovery.

 

 

 


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