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Church & Dwight Counts On Line Extensions To Drive 2011 Growth

This article was originally published in The Tan Sheet

Executive Summary

Church & Dwight looks to line extensions for brands including First Response pregnancy tests and Trojan condoms to help offset possible losses in the oral care segment caused by competitors' pricing war.

Church & Dwight looks to line extensions for brands including First Response pregnancy tests and Trojan condoms to help offset possible losses in the oral care segment caused by competitors' pricing war.

During the firm's fiscal 2010 fourth-quarter earnings call Feb. 8, CEO James Craigie said Colgate-Palmolive and Procter & Gamble "seem to be at war in oral care right now around the world."

"We're just seeing, I think, ridiculous-type pricing" driven through coupons and marketing, he said.

The pricing war by "the two big guys" threatens sales of C&D's Arm & Hammer toothpastes, a premium line with prices similar to Colgate products and P&G's Crest line, the CEO added.

Princeton, N.J.-based C&D does not expect the premium brand price wars to affect its Aim oral care line, a budget brand.

"I have a hard time thinking Crest and Colgate are going to get to [budget pricing] consistently. If they do, it would be trouble," Craigie said.

For the 52 weeks ended Jan. 23, Crest products were the top-three selling toothpastes and Colgate products were Nos. 4 and 5, according to SymphonyIRI Group data. The figures cover supermarkets, drugstores and mass market retailers but exclude Walmart, club stores and convenience stores.

The average price of toothpaste was $2.83 per unit, according to the Chicago-based firm's data. Although the average is up 4 cents from a year ago, prices for four of the five top-selling brands are down slightly.

The average price of the top-selling toothpaste, Crest Whitening Plus Scope, was down 3 cents to $2.81, and No. 2 Crest's price was down 10 cents to $2.31. The average price of No. 3, Crest Pro Health, was up 10 cents to $3.52.

The average price of No. 4 Colgate Total was down 2 cents to $2.81 and the price of Colgate was down 4 cents to $1.96, SymphonyIRI data show.

Arm & Hammer Advance White was the only C&D brand among the top 20, at No. 15 with 1.83% market share. The product's average price was $3.69, well above the average but down 4 cents over the past year.

C&D is no stranger to price wars across the personal and household care product segments where it competes. The latest came in 2010 in the laundry detergent space.

"We don't like to start price wars, but once they start, we know how to fight them," Craigie said. "This time we're not going to get caught off guard."

C&D will have to be on guard to continue growing sales, Deutsche Bank analysts say in a same-day note.

The firm "has been resilient in the face of strong competition and distribution losses," but "after years of outperformance, an encore is getting tough as competition further intensifies and consumers remain cautious."

Power Brand Line Extensions Coming

Craigie touted product launches and line extensions in the company's eight power brands coming this year.

For its Trojan condom line, which Craigie says has "been another huge success story for us," the firm plans a product combining aspects of the brand's two recent extensions, the Ecstasy and Fire & Ice products (Also see "Simply Saline Acquisition Globalizes Church & Dwight's Nasal Hygiene Reach" - Pink Sheet, 17 May, 2010.).

"It isn't brain surgery," Craigie said. "If Ecstasy was a great success and that was about a shape, and Fire & Ice was a great success and that was about lubricant, let's put them together."

Craigie also touted a First Response ovulation kit that will offer the "first unmistakable yes/no" among at-home tests, a natural product in the Orajel oral pain relief line and two new Nair depilatories, a cooling gel and honey wax.

In the Spinbrush electric toothbrush line, the company will add a boys' version of the MyWays product, currently marketed to girls. MyWays packages include stickers for decorating the devices.

A glow-in-the-dark Spinbrush will mark the company's entry into the tween market for oral care products. It follows P&G's launch of a complete line of oral-care products for tweens (Also see "P&G Targets Tweens In "The Battle To Brush" With New Oral-Care Line" - Pink Sheet, 13 Sep, 2010.).

The firm looks to boost Spinbrush sales because the line's sales have been "soft" Craigie said, adding that with a high price tag, sales suffer in a tight economy.

Sales Down For Quarter, Up For Full Year

In a same-day release, C&D said fourth-quarter net sales slipped 2.1% to $656.9 million. The firm noted the year-ago quarter was six days longer.

Personal care products posted $177.2 million in sales for the October-December period, down 5.7% from a year ago. Domestic consumer sales were down 4.3% to $472.6 million, but international consumer sales rose 7.2% to $120 million.

Among C&D's power brands, Trojan and Orajel posted market share losses of 1.1 and 3.1 share points, respectively. Nair, Spinbrush and First Response all grew in market share in the quarter.

Chief Financial Officer Matt Farrell said the loss in Orajel share is not troubling because it came at the hands of growing private label, which C&D manufactures.

Craigie added he is not concerned at the loss in condom market shares because the firm already holds such a wide share. It faces increased competition in the category after Reckitt Benckiser purchased Durex maker SSL in July (Also see "C&D Bullish On Trojan Business As More U.S. Condom Competition Looms" - Pink Sheet, 9 Aug, 2010.).

For fiscal 2010, the company posted sales of $2.59 billion, a 2.7% increase. Net sales in the personal care product category were $678.7 million, a 1% decrease from 2009.

Domestic consumer sales inched up 0.2% to $1.89 billion, while international consumer sales rose 12.8% to $440 million.

For the year, Spinbrush, Trojan, Nair and Orajel each posted market share gains under 1 share point, and First Response rose 1.3 share points.

C&D On The Hunt

Market analysts noticed that the firm's dividend increased 100% for the quarter – from 17 cents to 34 cents on an annualized basis.

"We believe the increase could be a sign that the company is having a hard time finding accretive deals to execute," analysts from UBS said in a same-day note. They add C&D likely is seeking properties with annual sales north of $20 million.

Craigie said C&D's standards for deals it will consider include a No. 1 or 2 share brand, high growth outlook, light assets and a "sustainable competitive advantage."

The list of criteria "knocks out probably 75% of the acquisition candidates that come across our desk," the CEO added.

He said in the weak economy companies pare down operations, focus on key brands and spin off others.

Craigie said although the firm is considering deals overseas, "our greatest strength is the Americas." He also considers many of the recent deals in India and other developing countries overvalued. The price tags are "out of this world," he said, adding he is not sure the purchasers will recoup the prices paid.

C&D is open to being acquired "any day," but the company is not aggressively pursuing that option, Craigie said. "I have to do what's right for the company. [But] at our share price, that's going to be very hard."

By Carolyn B. Phenicie

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