Virtus Diversified Income & Convertible Fund

First-quarter fiscal 2009 sales increased 2.8% reported and 9.5% organically, with pre-tax earnings from continuing operations excluding restructuring up 24.5% to nearly $61 million. Diluted EPS from continuing operations excluding restructuring and discrete tax items rose 24.2% to $0.41. U.S. sales increased 8% to $224 million; international sales decreased 5% reported, including nearly 24% negative currency impact. Gross profit margin declined 40 basis points versus last year, mainly because higher raw material costs reduced gross margins by approximately 250 basis points. For the full year, management expects mid-single-digit organic sales growth; first-half pre-tax results will be hurt by higher input costs and FX, and the effective tax rate for the remainder of the year is expected to be approximately 34%.

Jim Marino said the quarter showed strong momentum despite a very difficult economic backdrop, with share gains, better brand performance, and continued international expansion. He emphasized that TRESemmé and Nexxus remain the core growth engines, while Noxzema is being integrated and positioned for 2010. His tone was confident but cautious: he repeatedly noted that 2009 will be tough, that consumers are hard to predict, and that the company will keep investing in brands rather than cutting back for short-term margin relief.

Ralph Nicoletti highlighted several financial headwinds and offsets. Gross margin was down 40 basis points, with about 250 basis points of pressure from higher raw materials partially offset by manufacturing efficiencies and favorable mix. Net interest income was $1.3 million, down $1.8 million sequentially, and he said interest income will likely be lower for the rest of the year because of lower rates and lower cash after the Noxzema acquisition. He also said operating cash flow was negative $16.6 million, driven by a roughly $14 million Swedish tax payment and working-capital builds, while the company ended the quarter with more than $330 million in cash, no debt, and access to a $300 million revolver.

Analysts focused on pricing, de-stocking, FX, advertising, and the pace of new product rollouts. Management said retailers had not pushed back on the January price increase, that any pricing pressure would likely come from consumers, and that de-stocking was present but not significant overall, with more impact outside the U.S. On FX, Ralph Nicoletti said the weaker British pound has increased pre-tax pressure because the U.K. business has good margins, and that transaction gains helped this quarter but would likely be smaller going forward. They also said Nexxus is being rolled out in Canada now, Chile later in the year, and that U.S. planogram resets should largely be done by early April.