Note:More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: Flash Update: 4Q13 Earnings Release.
Prev. Ed.:Jun 20, 2013; 1Q13 Earnings Update.
Flash Update [Note: earnings update in progress; final report to follow]
On Feb 3, 2014, Church & Dwightposted4Q13 earnings per share of $0.65 that fell short of the Zacks Consensus Estimate by a couple of cents. However, the reported figure was 14.0% higher than $0.57 earned in the prior-year quarter.
For the full year, earnings came in at $2.79 per share, a penny short of the Zacks Consensus Estimate however, it rose 13.9% y/y.
The top line for Church & Dwight improved 1.6% to $822.6 million and marginally beat the Zacks Consensus Estimate of $822 million. Organic sales increased 2.3% (above management’s forecasted range of 1.5%–2%), driven by 5.2% growth in volume, partially offset by an adverse impact of 2.9% due to pricing.
For 2013, the top line came in at $3,194.3 million, up 9.3% y/y but marginally missed the Zacks Consensus Estimate of $3195.0 million.
Gross profit increased 3.7% y/y to $371.7 million. Moreover, gross margin expanded 90 basis points (bps) to 45.2%, attributed to productivity programs undertaken by management, partly offset by adverse price/mix. Notably, this was the sixth successive quarter of gross margin expansion.
Operating income rose 7.4% y/y to $144.6 million in the quarter. Moreover, operating margin expanded approximately 100 bps to 17.6%.
Segment Details
Consumer Domestic's net sales rose 2.2% y/y to $622.7 million, driven by a 6.4% increase in personal care products revenues to $268.4 million, partly offset by a 0.8% decline in household products revenues to $354.3 million.
Organic sales nudged up 2.9% in the quarter, due to a rise in sales of VITAFUSION, ARM & HAMMER liquid laundry detergents, L’IL CRITTER vitamins, TROJAN lubricants and OXICLEAN laundry additives. This was, however, partially offset by sluggish sales of XTRA liquid laundry detergent, ARM & HAMMER cat litter, ARM & HAMMER powdered laundry detergent and SPINBRUSH battery-powered toothbrushes.
Increase in sales marked a 6.6% improvement in volume, while product mix and pricing unfavorably impacted sales by 3.7%.
Consumer International's sales remained flat y/y at $136.3 million. Organic sales increased 0.3%, attributable to healthy sales in Canada Mexico, and Brazil. Volume fell marginally by 0.7% whereas favorable product mix and pricing impacted sales by 1.0%.
Specialty Products' sales decreased 0.6% to $63.6 million, while organic sales grew 0.7% in the said quarter. Volume growth of 4.5%, attributable to the animal nutrition business, was partly offset by unfavorable product pricing that adversely impacted sales by 3.8%.
Other Financial Details
Church & Dwight ended the quarter with cash and cash equivalents of $496.9 million, long-term debt of $649.5 million and shareholders’ equity of $2,300.0 million. Moreover, for 2013, it generated cash from operations of $499.6 million and incurred $67.1 million in capital expenditures.
On Jan 29, 2013, the company announced an 11% hike in its quarterly dividend to $0.31, payable on Mar 3, 2014 to stockholders of record at the close of business on Feb 18, 2014. This is the 18th year of a successive dividend hike. Over the last five years, company has increased its dividend by nearly 300%.
Also, the board of directors approved a new share repurchase program worth $500 million. The existing authorization was cancelled.
Outlook
Management expects innovative product launches and cost-cutting endeavors to boost bottom-line results further. The company anticipates earnings per share to be $2.96 to $3.07 for 2014, up 6-10% y/y.
The company noted that most of the earnings growth will be achieved in the second half of the year as the first half is likely to see a plethora of expenses related to product launches. Therefore, for the first quarter, the company expects organic sales of 1%, a decline of 100 bps in gross margin and earnings per share of $0.72 after factoring in a 50% hike in slotting and doubling of the couponing investment.
Church & Dwight forecasts organic sales to rise approximately 3.0% to 4.0% in 2014, Further, it expects gross margin to remain flat y/y in 2014 as productivity gains are neutralized by considerable investments made for new products and price competition in the laundry category.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON CHD.
Portfolio Manager Executive Summary[Note: only highlighted material has been changed]
Church & Dwight Co. Inc. (CHD or the Company) is a consumer products Company that offers a broad range of household and personal care products, most of which are No.1 in niche categories. The Company's major brand name is Arm & Hammer, under which it sells detergents, cat litter, baking soda, deodorizers, toothpaste, and antiperspirant. It also owns the Trojan, Nair, and First Response brands.
Growth drivers for CHD include market expansion, share gains, globalization, profitability improvements, mix shifts, and reinvestment of free cash flow.
Analysts’ Opinions: 56.2% of the analysts in the Digest group covering the stock are neutral, while 43.8% are positive. None of the firms maintain a negative stance on the stock. Target prices provided by the analysts range from a low of $59.00 to a high of $72.00. The average is $65.33, implying a return of 6.7%.
Provided below is a summarized form of diverse brokerage viewpoints:
Neutral or equivalent outlook (9/16 firms or 56.2%): The brokerage firms remain optimistic about the Company's growth potential based on its continued emphasis on innovation and marketing investments, cost containment efforts along with its steady cash flow generation. Further, the firms believe that CHD’s strong sales and earnings per share growth are fueled by accretive acquisitions as well as defendable market shares of its core brands. However, the firms believe that the Company operates in a highly competitive environment, where competitors are striving hard to increase their market share through intense promotions. This is apprehended to weigh upon the Company’s profitability. Moreover, the firm believes that the shares of the Company are fairly valued at the current level.
Positive or equivalent outlook (7/16 firms or 43.8%): The bullish firms have faith in the Company’s ability to deliver sales and earnings per share growth, given its integration track record, price increases, and top-line momentum, which will be supported by its strong cash flow and its willingness to put that cash to work for accelerating earnings growth. In addition, the firms believe that the Company is well positioned with its value-oriented portfolio alongside its continued focus on faster-growing, and higher-margin businesses.
The firms believe that the Company's portfolio of value brands positions CHD well to benefit from a brand conscious consumer. Further, a robust new product pipeline and ample brand support has so far translated into increased distribution, leading to healthy sales growth in the coming years.
June 20, 2013
Overview [Note: only highlighted material has been changed]
N.J.-based Church & Dwight Co. Inc. engages in the development, manufacture, and marketing of various household, personal care, and specialty products in the United States. Its consumer products include baking soda-based products, refrigerator and freezer deodorizers, scratch-less cleaners and deodorizers for kitchen surfaces and cooking appliances, bath additives, dentifrices, cat litter deodorizers, and swimming pool pH stabilizers. The Company also provides personal care products, such as condoms, depilatories, lotions, creams, waxes, home pregnancy and ovulation test kits, antiperspirant, toothpastes, and battery-operated toothbrushes. Church & Dwight also sells various personal care products in international markets, including France, the United Kingdom, Canada, Mexico, Australia, Spain, and Brazil. Further, it produces sodium bicarbonate and other specialty inorganic chemicals for use in industrial, institutional, medical, and food applications, and also sells a range of animal nutrition and specialty cleaning products. The Company sells its products to consumers through supermarkets, mass merchandisers, and drugstores.
The analysts identified the following factors for evaluating the investment merits of CHD:
Key Positive Arguments / Key Negative Arguments- Introduction of New Products: Church & Dwighthas new products planned for launch across several categories, of which the health category has the highest potential for growth and margin expansion.
- Cost Savings: The Company has improved its purchasing initiatives, supply consolidation, reformulation, and packaging. It reduced its stock keeping unit (SKU) count, and improved its efficiency on product promotions.
- Powerful Brands:Church & Dwight has a portfolio of well-known brands, some of which have served consumers for a century.
- Strong Balance Sheet: The Company has a flexible balance sheet and its order of priority for free cash flow usage is: (1) acquisitions, (2) new product development, (3) capital expenditure, (4) debt reduction, and (5) returning cash to shareholders.
- International Expansion: Church & Dwight generates minor amount of sales outside the US, thus it has international expansion opportunity and lower currency exposure.
- Commodity Prices:Church & Dwight’s production costs could be impacted by fluctuations in commodity prices.
- Increasing Competition: Some analysts believe CHD needs to focus on its oral care business, where competitors have been gaining share with intense advertising and ‘first-to-market’ innovation. It is also facing increasing competition from large companies.
- Acquisitions: Church & Dwight’s acquisition strategy opens the Company to integration, execution, and other acquisition-related risks.
- Private Label: Retailers are moving to private label products owing to their higher margins, which might become a threat to the Company.
- Consumer Spending: A decline in consumer spending due to the difficult economic environment will weigh upon the profits of the Company.
The Company’s website is and its fiscal year ends on Dec 31.
June 20, 2013
Long-Term Growth [Note: only highlighted material has been changed]
Church & Dwight reiterated its key strategic priorities including: improving brand positioning, new product development, global expansion, cutting costs and expanding gross margin, and acquisitions. The Company also outlined its long-term growth model, reiterating its healthy organic sales growth outlook. The Company expects to achieve its long-term gross margin target via organic means as well as acquisitions. Its organic means include focus on cost cutting and pricing to offset the commodity cost increases, controlled trade spending, SKU reductions, and investment behind efficient manufacturing.
In order to boost growth, the analysts noted that the Company devotes a substantial amount of its resources and attention to product development, process technology, and basic research to introduce new and differentiated products. To increase its innovative capabilities, the Company also outsources contractors for general research and development in areas beyond its core regions of expertise.
Church & Dwight has substantial opportunity for international growth, according to the analysts. Management also stated that it has plans to capitalize on the international growth opportunities.
Moreover, the Company will reposition a part of its Green River Wyoming operations to Victorville, Calif.Exclusively, the cat litter manufacturing operations and the distribution center will be moved to the Calif. site. In addition, the Company plans to produce liquid laundry detergent products from there.
This strategy will facilitate gross margin expansion in the long run as it would reduce convolution in its supply chain system and helptrim down the production and distribution costs while being closer to hauling centers and the Company’s West Coast customers. Further, it will help escalate the liquid laundry and cat litter businesses of the Company by providing efficient production and distribution facility.
The Company acquired Avid Health, maker of gummy vitamins and supplements, which will expand the product categories of the Company and facilitate it to gain market share in one of the fastest growing segments of the vitamin/mineral/supplement (VMS) business.
June 20, 2013
Target Price/Valuation [Note: only highlighted material has been changed]
Rating DistributionPositive / 43.8%↓
Neutral / 56.2%↑
Negative / 0.0%
Avg. Target Price / $65.33↑
Maximum Target / $72.00↑
Minimum Target / $59.00↑
No. of Analysts with Target Price/Total / 12/16
Risks to target price include heightened competitive pressure from larger manufacturers, weakness in organic sales growth due to macro and/or shelf space pressure, and a larger-than-anticipated impact from the negative currency translation.
Recent Events[Note: only highlighted material has been changed]
OnMay 2, 2013, Church & Dwight posted 1Q13 earnings of $0.76 per share that surpassed the Zacks Consensus Estimate of $0.72 per share and increased 15.2% from $0.66 per share earned in the comparable prior-year quarter. The Company witnessed an improvement of 12.8% in its top line to $779.3 million and surpassed the Zacks Consensus Estimate of $777 million.
Revenue[Note: only highlighted material has been changed]
As per the Zacks Digest model, total revenue increased 12.8% to $779.2 million compared with $690.7 million in 1Q12.Organic sales increased 2%, reflecting 2.4% growth in volume, partially offset by negative impact of 0.4% due to pricing and adverse product mix.
The Company reports revenue under the following segments:
Total Consumer
Total Consumersegment consists of Consumer Domestic and Consumer International. Sales in this segment were up 14% y-o-yto $720.3 million in 1Q13compared with $632 million in 1Q12.
Consumer Domestic's net sales elevated 15.7% year over year to $591 million, driven by a 42.5% jump in personal care products revenues to $232.3 million coupled with 3.2% growth in household products revenues to $358.7 million.
Organic sales rose 1.4% during the quarter, reflecting higher sales of ARM & HAMMER liquid laundry detergents and unit dose laundry detergent. Moreover, higher sales of TROJAN products, OXICLEAN laundry additives and FIRST RESPONSE diagnostic kits boosted results. This was, however, partially offset by sluggish sales of KABOOM cleaners and ARM & HAMMER powdered laundry detergent.
Increase in sales representa 1.8% improvement in volume, while product mix and pricing unfavorably impacted sales by 0.4%.
Consumer International's sales increased 6.5% year over year to $129.3 million. Organic sales increased 5.2%, attributable to healthy sales in Australia, UK and Mexico. The rise in organic revenue reflected 6.2% growth in volume, while product mix and pricing unfavorably impacted sales by 1%.
Total Specialty
Specialty Products' sales increased marginally to $59 million. Moreover, organic sales inched up 0.8%.The increase reflected favorable contribution from product pricing of 1.2%, while volume decline of 0.4% partially offset the sales growth.
Provided below is a summary of revenue as per Zacks Digest:
Revenue ($M) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015ETotal Consumer / $632.0 / $745.8 / $720.3 / $719.5 / $2,667.0 / $2,987.1↓ / $3,125.5↓ / $3,365.0↓
Total Specialty / $58.7 / $64.0 / $59.0 / $69.3 / $254.9 / $259.5↓ / $265.6 ↓ / $276.0↓
Total Revenue / $690.7 / $809.8 / $779.2 / $788.9 / $2,921.9 / $3,247.2↓ / $3,391.0↓ / $3,641.0↓
Digest High / $691.0 / $810.0 / $779.3 / $791.8 / $2,922.0 / $3,277.0↓ / $3,461.0↓ / $3,641.0 ↓
Digest Low / $690.6 / $809.7 / $779.0 / $786.3 / $2,921.9 / $3,225.4↑ / $3,341.2↑ / $3,641.0
Y/Y Growth / 7.5% / 10.8% / 12.8% / 13.3% / 6.3% / 11.1%↓ / 4.4%↓ / 7.4%
Q/Q Growth / -5.5% / 11.7%
Outlook
Management stood by its earlier guidance and expects innovative product launches to continue boosting organic sales in 2013. The Company reiterated organic sales growth in the range of 3%–4%.
The Zacks Digest model forecasts revenue of $3,247.2 million for FY13, $3,391 million for FY14 and $3,641 million in FY15, representing y-o-y growth of 11.1% in FY13, 4.4% in FY14 and 7.4% in FY15.
Please refer to the separately published CHD spreadsheet for additional details and updated forecasts.
Margins[Note: only highlighted material has been changed]
According to the Zacks Digest model, gross profit increased 15.7% to $350.1 million compared with $302.5 million in the prior-year quarter. Moreover, gross margin expanded 110 basis points to 44.9%, reflecting higher sales volumes, productivity improvements programs and flat commodity prices.
Marketing expenseincreased to $78.9 million in 1Q13compared with $68 million in 1Q12, reflecting higher spending to support the company’s power brands. Marketing expenses,as a percentage of revenue,expanded approximately 30 bps y-o-y to 10.1%.
Selling, general, and administrative expense (SG&A) was $101.9 million in 1Q13compared with $91.8 million in 1Q12, reflecting increased costs related to acquisition and higher R&D expenses. SG&A expense, as a percentage of revenue, contracted20 bps y-o-y to 10.1% during the quarter.
Operating income escalated 18.6% year over year to 169.3 million during the quarter. Moreover, operating margin expanded approximately 100 basis points to 21.7%.
Provided below is a summary of margins as per Zacks Digest:
Margins ($M) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EGross Margin / 43.8% / 44.3% / 44.9% / 43.9% / 44.2% / 44.7% / 44.8%
Operating Margin / 20.7% / 16.6% / 21.7% / 17.1% / 18.7% / 19.4% / 20.5%
Pretax Margin / 20.7% / 16.1% / 20.9% / 18.6%
Net Margin / 13.9% / 10.0% / 13.8% / 10.6% / 12.0% / 12.2% / 13.0%
*Note: blank Cells indicate that brokers are not providing estimates
Outlook
Church & Dwight forecasts commodity prices to remain stable and expects gross margin to rise by 25 –50 basis points.
As per the Zacks Digest model, cost of goods sold is expected to increase at a slower rate than revenue in FY13 (11.1% versus 9.6%) and in FY14 (4.4% versus 2.7%).
The Zacks Digest model forecasts operating income of $629.7 million for FY13 and $696 million for FY14, representing y-o-y growth of 15.5% in FY13 and 10.5% in FY14.
Please refer to the separately published CHD spreadsheet for additional details and updated forecasts.
Earnings per Share[Note: only highlighted material has been changed]
As per the Zacks Digest model, Church & Dwight posted 1Q13 earnings of $0.76 a share, up 15.4% from $0.66 earned in the prior-year quarter. As per the Zacks Digest model, shares outstanding were 141.1 million in 1Q13, down 2.7% y-o-y.
Provided below is a summary of EPS as per Zacks Digest:
Margins ($M) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2012A / 2013E / 2014E / 2015EDigest High / $0.66 / $0.57 / $0.76 / $0.59 / $2.45 / $2.82↑ / $3.15 / $3.45 ↓
Digest Low / $0.66 / $0.57 / $0.76 / $0.59 / $2.45 / $2.80 / $3.10 / $3.45 ↓
Digest Average / $0.66 / $0.57 / $0.76 / $0.59 / $2.45 / $2.81↑ / $3.12 / $3.45↓
Y/Y Growth / 14.1% / 7.8% / 10.8% / 14.4%↑ / 8.6%↓
Q/Q Growth / 24.9% / -13.6%
Outlook
Management anticipates earnings per share to be $2.79 for 2013, up 14% year over year. For the second quarter, Church & Dwight expects organic sales growth of 3% to 4% and earnings per share of $0.58.
Please refer to the separately published CHD spreadsheet for additional details and updated forecasts.
June 20, 2013
Research Analyst / Vrishali BagreeCopy Editor / Ishani Mukherjee
Content Ed. / Sumit Singh
No. of brokers reported/Total brokers
Reason for Update / Flash
Lead Analyst/QCA / Sumit Singh
Zacks Investment ResearchPage 1