On Tuesday, leading consumer products company, Church & Dwight Co. Inc. (CHD) posted better-than-expected second-quarter 2012 results. The company’s quarterly earnings of 56 cents a share came a penny ahead of the Zacks Consensus Estimate and increased 5.7% from 53 cents (adjusted for a one-time tax benefit) earned in the prior-year quarter. However, including one time items, earnings inched down 1.8%.
The company’s top line increased 3.2% to $696.4 million for the reported quarter, reflecting a 3.7% rise in organic sales. The increase in organic sales represents a 6.3% growth in volume, partially offset by a negative effect of 2.6% through pricing and product mix. However, the reported revenue missed the Zacks Consensus Revenue Estimate of $702 million.
Segment & Margin Details
Consumer Domestic‘s net sales increased 5.0% to $506.5 million, driven by increases in household products, which marked an increase of 10.5% in revenue to $346.2 million, partially offset by 5.1% fall in personal care products to $160.3 million.
On an organic basis, sales also grew 5.0% during the quarter, reflecting higher sales of ARM & HAMMER liquid laundry detergents. Moreover, higher sales of XTRA liquid laundry detergent, ARM & HAMMER cat litter, and ARM & HAMMER CRYSTAL BURST power pack laundry detergent boosted sales. This was, however, partially offset by sluggish sales of ARM & HAMMER SPINBRUSH battery-operated toothbrushes, ORAJEL oral analgesic products and TROJAN condoms.
Increases in organic growth represent an 8.6% improvement in volume, while product mix and pricing unfavorably impacted sales by 3.6%.
Consumer International‘s sales decreased 3.7% year over year to $121.3 million. On an organic basis, sales fell 2.7% attributable to poor sales in Europe, primarily in UK and France. The fall in organic revenue was contributed by a 2.4% dip in volume coupled with a decrease of 0.3% in unfavorable product mix and pricing.
Specialty Products’ sales increased 3.0% year over year to $68.6 million. Moreover, on an organic basis, sales jumped 6.3%, reflecting 5.6% expansion in volume coupled with increase of 0.7% due to favorable product pricing. The positive impact on pricing was a result of recovery of input costs through customers.
Gross profit increased 4.9% to $303.0 million compared with $300.0 million in the prior- year quarter. However, gross margin contracted 100 basis points to 43.5%, reflecting adverse product mix mainly due to a rise in sales of lower margin consumer domestic household products, coupled with a decline in high margin products. Even though the commodity costs were higher in the quarter, the increase was more than offset by operating efficiency and cost reductions.
Operating income increased 3.9% year over year to 122.4 million in the quarter under review. Moreover, operating margin expanded 10 basis points to 17.6% during the quarter, reflecting an 80 basis-point decline in SG&A as a percentage of net sales.
Other Financial Details
Church & Dwight, which faces stiff competition from Clorox Corporation (CLX), ended the quarter with cash and cash equivalents of $184.2 million, long-term debt of $249.8 million and shareholders’ equity of $3,116.3 million.
During the quarter, the company bought back 2.2 million shares amounting $110 million, bringing the total to 4.1 million shares worth of $200 million for the first six months of 2012. The company does not expect any further share repurchases for the rest of the fiscal year.
Moreover, the company generated operating cash flow of $189.2 million, reflecting an increase of 10.2% year over year during the six-month period ended on June 30, 2012, and incurred $40.0 million in capital expenditures.
Guidance
Despite continued macro-economic headwinds, Church & Dwight retained its fiscal 2012 outlook.
The company expects innovative new product launches to continue boosting organic sales in the third quarter, and anticipates organic growth to be at the higher end of the projected rate of 3% – 4% in fiscal 2012.
Church & Dwight forecasts cost savings programs to offset the increases in commodity prices and expects gross margin to increase at the lower end of its targeted 25 – 50 basis points rise in fiscal 2012.
Benefiting from solid organic sales, management anticipates earnings per share to be 58 cents in the third quarter, reflecting an increase of 7.4% from the prior-year quarter earnings of 54 cents. Moreover, Church & Dwight stood by its earlier forecast and expects earnings to be in the range of $2.41 – $2.43 per share in fiscal 2012, indicating an increase of 9% – 10%, excluding charges of 9 cents related to deferred tax valuation in 2011.
Church & Dwight maintains a Zacks #3 Rank, which translates into a short-term Hold rating and correlates with our long-term ‘Neutral’ recommendation.
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