Church & Dwight Co., Inc. (CHD)
Q1 FY08 Earnings Call
May 6, 2008, 11:30 AM ET
James R. Craigie - Chairman and Chief Executive Officer
Matthew T. Farrell - EVP and CFO
William Schmitz - Deutsche Bank
Bill Chappell - SunTrust Robinson Humphrey
Connie Maneaty - BMO Capital Markets Corp.
Jason Gere - Wachovia Capital Markets, LLC
Joe Altobello - Oppenheimer
Alice Longley - Buckingham Research Group
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I would now like to introduce your host for today's call Mr. Jim Craigie, Chairman and Chief Executive Officer at Church & Dwight. Please go ahead, sir.
James R. Craigie
Good morning, everyone. It's always a pleasure to talk to you, particularly when we have good results to report. I will start out by giving you a brief summary of the first quarter results. I will then turn the call over to Matt Farrell, our Chief Financial Officer. Matt will provide you with the financial details of the first quarter results. When Matt is finished, I will provide some information on the factors driving our key business units. And finally, I will provide earnings guidance before we open the call to field questions from you.
Overall, we are very pleased with our first quarter business results. Reported net sales were up 7.5% versus year ago. Organic net sales, which exclude the positive impact of foreign exchange, were up 6% versus year ago. The strong organic net sales growth reflected solid gains in all three of our reported business units. These gains were driven by an improved pipeline of new products, increased marketing spending, excellent sales execution and cost-justified pricing actions on approximately 20% of the company's product portfolio.
On top of our strong organic sales growth, we delivered solid gross margin expansion despite significantly higher commodity and energy costs. Our gross margin was up 160 basis points from year ago to 40.5% of net sales for the quarter. Approximately 100 basis points of the 150 basis point improvement was driven by favorable timing issues and as such some of these costs will shift to future quarters of 2008. Matt will provide further details on this issue.
However, even if you exclude these timing issues, we still expanded gross margins by 60 basis points in the face of significantly higher margin costs. This reflects an extra ordinary focus on reducing cost that actually began back in 2006 when commodity costs started to skyrocket. This effort enabled Church & Dwight to maintain a flat gross margin in 2007 versus 2006, but we were not happy with that result since it fell short of our corporate objective to deliver our 100 basis point of gross margin improvement annually. As a result, we've stepped up our attack on cost savings starting in 2007 to make sure that we deliver the 100 basis point improvement in gross margin in 2008. Our Q1 results on gross margin are in line with our expectations to deliver that objective in total 2008.
Finally, our earnings per share increased 23% over the year-ago quarter to $0.81 per share. These excellent results have given us a strong start to what we expect will be another year of record sales, profits and earnings per share in 2008. I will provide more detail on our business unit results and my outlook for the year in a few minutes.
I'll now turn the call over to Matt who will provide you with greater details on the financial results for the first quarter.
Matthew T. Farrell
Okay. Thank you, Jim and good morning, everybody. As Jim just mentioned, first-quarter EPS was $0.81 per share compared with $0.66 in 2007. The strong sales performance and gross margin expansion were the drivers of our first quarter earnings results. The revenues were up 7.5% of which 1.5% was primarily currency. So 6% was organic growth. Of the 6% growth, approximately 3% was due to volume and another 3% is attributed to price and mix.
Now let's briefly review the segments starting with Domestic. The Domestic business had a strong quarter. Revenues were up 3.5% and this was lead by cat litter, Arm & Hammer liquid laundry, First Response, Arm & Hammer powdered laundry, Xtra liquid laundry and Arm & Hammer Dental Care. We also successfully raised prices in February for condoms and baking soda. And new product launches also contributed to the revenue growth.
International posted 5% organic growth, as this segment performed well in many countries. The specialty products business had an exceptional quarter as we can see in the release due to the strong demand coupled with a price increase for our dairy products and higher volumes in pricing in the specialty chemical side of the business. Specialty Products enjoyed higher year-over-year prices in Q1 for most its products.
With respect to gross margin, our first quarter gross margin was 40.5%. That's a 160 basis points expansion versus last year. We'd like to remind everyone that we have four levers that contribute to our gross margin expansion and they are cost reduction programs, pricing, OGI manufacturing synergies and of course the benefits of concentrated liquid laundry.