Church & Dwight (CHD) Q1 Earnings & Revenues Beat Estimates

Church & Dwight Company, Inc. (NYSE:CHD) posted better-than-expected results in the first quarter of 2017, wherein both earnings and revenues beat the Zacks Consensus Estimate.

Adjusted earnings (excluding charges related to the sale of the Brazilian Specialty Products business completed in March and including the positive impact from adopting the new stock option accounting standard) of 52 cents per share beat the Zacks Consensus Estimate of 46 cents by 13%. In fact, earnings outpaced the Zacks Consensus Estimates in 10 out of the past 13 quarters, including the current one.

Adjusted earnings increased 20.9% from the year-ago results and also exceeded the management’s range of 1–2% growth, boosted by higher sales and improved margins.

Notably, Church & Dwight’ shares have also been rising on a year-to-date basis. The stock has increased 14.5% on a year-to-date basis in comparison to the Zacks categorized Consumer Staple sector, which gained 6.5%. The sector is part of the bottom 38% of the Zacks Classified sectors (10 out of the 16).

Quarter in Detail

The company reported sales of $877.2 million in the first quarter. Sales marginally beat the Zacks Consensus Estimate of $870 million by 0.8% and was up 3.3% from the prior-year quarter. In fact, sales outpaced the Zacks Consensus Estimates in 12 out of the past 14 quarters, including the current one.

Organic sales increased 2.3% from the prior-year quarter, exceeding the company’s range of 1 –2% as higher volumes of 2.7% were offset by adverse impact of pricing and product mix, which reduced sales by 0.4%. While organic sales increased 2.6% in Global Consumer Products business (Consumer Domestic and Consumer International), it declined 0.3% in Specialty Products business. Organic growth in the first quarter was weaker than last year’s growth of 5.2%.

Adjusted gross margin expanded 110 basis points in the first quarter, driven by productivity initiatives and the impact of a higher margin acquired business, offset by higher input costs. Operating margin increased 170 basis points in the quarter.

Segment Details

Consumer Domestic: Segment net sales increased 1.8% to $659.7 million, while organic sales inched up 0.8% primarily driven by 1.1% higher volume growth, partially offset by a dip of 0.3% attributable to product mix and pricing.

ARM & HAMMER liquid and unit dose laundry detergents, BATISTE dry shampoo, ARM & HAMMER baking soda, ARM & HAMMER cat litter led to the increase but were negatively impacted by declines in TROJAN condoms and XTRA laundry detergent.

Consumer International: Segment net sales grew 12.3% to $143.1 million. Organic sales increased 11.8% on 13.2% higher volume of partially offset by unfavorable product mix and pricing, which led to a 1.4% decline. BATISTE, FEMFRESH and OXICLEAN in the export business and ARM & HAMMER liquid laundry detergent and ARM & HAMMER cat litter in Canada contributed to the increase.

Specialty Products: The segment sales showed a slight increase of 0.8% to $74.4 million. Organic sales however dipped 0.3% due to lower volumes in the specialty chemical sector of the business. Encouragingly, the animal productivity business improved in both price and volume on higher demand from the U.S. dairy industry as milk prices and dairy farm profitability appear to have stabilized.

Acquisition of Agro BioSciences

The company acquired Agro BioSciences, Inc. for $75 million on May 1. Agro BioSciences is an innovator and leader in developing custom probiotic products for poultry, cattle and swine. This business complements the company’s animal productivity business. The acquisition is expected to be neutral to EPS in 2017 due to transition costs. In 2018, the company expects the acquisition to be accretive to EPS.

Sale of Brazilian Chemical Business

In March, the company completed the sale of its chemical business in Brazil for $4.5 million in order to focus on its Brazilian consumer business.

Other Financial Update

Church & Dwight ended the quarter with cash and cash equivalents of $139.5 million, long-term debt of $692.9 million, and total shareholders’ equity of $1,936 million.

In the first quarter, the company generated cash flow from operations of $131.5 million and incurred capital expenditure of $2.8 million. Additionally, the company’s total free cash flow for the quarter totaled $128.7 million. For 2017, management expects adjusted free cash flow to exceed adjusted net income. The company expects to generate over $1.8 billion in free cash flow over the next three years.

Guidance for 2017

Church & Dwight remains optimistic about its future performance on the back of a stable portfolio of value and premium products, launch of new and innovative products, aggressive productivity programs and tight management of overhead expenses, along with robust sales and earnings growth. However, it also expects a competitive environment in 2017 due to new product introductions by competitors and persistent pricing pressure. The company expects rising commodity costs and foreign currency headwinds to prevail in 2017.

The company expects reported and organic sales growth of approximately 3% for 2017 driven by innovations. Further, it anticipates gross margin expansion of 40 bps year over year (expected 60 bps year over year earlier), despite rising commodity costs and currency headwinds. Also, operating margin is estimated to improve nearly 40 bps, on adjustment for pension settlement cost and Brazil charges.

Considering all these factors, management now envisions adjusted earnings per share in 2017 to grow by 8.5%, compared with 7% expected earlier. Excluding negative currency impact of 1%, the company forecasts adjusted earnings to grow 9.5% for 2017.

Second Quarter Outlook

For the second quarter, the company expects reported and organic sales growth of approximately 1 to 2%. While gross margin for the first half is expected to be flat, adjusted earnings are expected to increase approximately 5%.

Zacks Rank & Key Picks

Church & Dwight currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the consumer staple sector include Constellation Brands, Inc. (NYSE:STZ) , ConAgra Foods Inc. (NYSE:CAG) and Lamb Weston Holdings Inc. (NYSE:LW) . While Constellation Brands sports a Zacks Rank #1 (Strong Buy) and has a long-term earnings growth of 17.8%, ConAgra and Lamb Weston carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

While ConAgra Foods has a long-term earnings growth rate of 8%, Lamb Weston has a long-term earnings growth rate of 4.2%.

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