Church & Dwight (CHD) Updates View on Robust Q2 Earnings

Church & Dwight Company, Inc.CHD raised its 2018 outlook slightly, following a solid second-quarter show. During the quarter, both top and bottom lines grew year over year and surpassed the Zacks Consensus Estimate. This marked the company's seventh and fourth consecutive quarter of positive earnings and sales surprise, respectively.

Quarterly adjusted earnings of 49 cents per share surged 19.5% from adjusted earnings of 41 cents reported in the second quarter of 2017. Also, the bottom line topped the Zacks Consensus Estimate of 47 cents. Earnings were backed by higher sales and lower taxes. Incidentally, the effective tax rate in the quarter was 21.7%, down from 37.6% in the same period last year.

Church & Dwight Co., Inc. Price, Consensus and EPS Surprise

Church & Dwight Co., Inc. Price, Consensus and EPS Surprise | Church & Dwight Co., Inc. Quote

Quarter in Detail

The company reported net sales of $1,027.9 million that advanced 14.5% year over year and exceeded the Zacks Consensus Estimate of $1,004 million. Results were backed by continued category growth and healthy market share gains. Markedly, the company witnessed improvements in 11 out of 15 categories.

Organic sales rose 4.4%, which beat the company's guidance of 3%. The upside was backed by a 5.3% rise in global consumer products growth. This, in turn, was fueled by higher volumes (up 6.5%), somewhat negated by adverse product mix and pricing.

Gross margin contracted 140 basis points (bps) to 44.3% due to increased commodity and transportation expenses. Gross margin was also hurt to the tune of about 70 bps owing to impacts from a voluntary recall and an FDA authorized withdrawal, related to various oral care products.

Further, marketing costs increased 4.2% to $136.4 million, while as a percentage of sales, it fell 130 bps to 13.3%. The decline in marketing costs as a percentage of sales can be attributable to recent acquisitions that usually have a lower spend rate.

Adjusted SG&A costs (as a percentage of sales) escalated 110 bps due to buyouts, along with IT and R&D investment expenditure.

Segment Details

Consumer Domestic: Segment net sales were up 14.1% to $774.1 million, courtesy of gains from acquisitions, and higher household and personal care sales. Organic sales improved 5%, benefiting from a 6.2% increase in volume, partly negated by a 1.2% negative impact from price and product mix. Notably, 7 out of 11 power brands delivered solid growth.

ARM & HAMMER liquid and unit dose laundry detergent, BATISTE dry shampoo, VITAFUSION and L'IL CRITTERS gummy vitamins, XTRA laundry detergent, and VIVISCAL and TOPPIK hair care products were the main growth drivers.

Consumer International: Segment net sales soared 21.4% to $176.1 million, backed by recent acquisitions, broad-based sales growth for household and personal care products, and improvements in export business. Organic sales jumped 6.8%, driven by improved volumes (up 8.2%), partly countered by unfavorable price and product mix (down 1.4%).

OXICLEAN, BATISTE, and ARM & HAMMER liquid laundry detergent in the export business, ARM & HAMMER liquid laundry detergent and clumping cat litter, BATISTE in Canada, and OXICLEAN Ultra Gel and NAIR in Mexico provided an impetus to organic sales.

Specialty Products: Sales at this segment rose 4% to $77.7 million. Organic sales slipped 5.1%, on account of a 6.7% drop in volumes, somewhat cushioned by favorable pricing (up 1.6%), mainly in the bulk sodium bicarbonate business. Management stated that reduced milk prices have been leading to soft demand in the dairy industry.

Other Financial Updates

Church & Dwight ended the quarter with cash and cash equivalents of $89.3 million, long-term debt of $1,802.6 million and total shareholders' equity of $2,221.1 million.

In the first half of 2018, the company generated cash flow from operations of $322.7 million and incurred capital expenditure of $19.6 million.

In a separate release, the company announced a quarterly dividend of 21.75 cents per share, which is payable on Sep 4, 2018 to shareholders of record as on Aug 15.

Guidance for 2018

Innovations have been a key driver for Church & Dwight. As part of its long-term strategy to boost the top and bottom lines, the company announced several new product launches in various categories. Though management expects escalated logistic expenses and the aforementioned voluntary recall to weigh on gross margin, robust volume growth and market share gains are expected to counter the gross margin pressure as well as currency headwinds.

The company now expects 2018 reported sales growth to surpass the earlier projection of 9%. Organic sales are anticipated to rise 3.5% now, up from 3% expected earlier.

The company raised the lower end of its 2018 bottom-line view. Earnings per share is now expected to range between $2.26 and $2.28 compared to the prior estimate of $2.24-$2.28. The updated outlook reflects year-over-year bottom-line growth of 17-18%, while on a reported basis, earnings per share are expected to decline 21-22%.

Q3 Outlook

For the third quarter of 2018, management forecasts net sales to increase 5%, while organic sales are expected to increase roughly 3%.

Management projects earnings for third-quarter 2018 at 53 cents per share, reflecting year-over-year growth of 8% on an adjusted basis and 2% jump on a reported basis. This includes the impact from escalated marketing expenditure.

Church & Dwight carries a Zacks Rank #3 (Hold). The stock has gained 16.5% in the last three months, versus the industry 's growth of 10.1%.

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B&G Foods BGS , with a Zacks Rank #2, delivered positive earnings surprise in the last reported quarter and gained about 43% in the past three months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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