The purpose of this write-up is to pitch Church and Dwight (CHD) as a LONG.
Church and Dwight is a consumer staples company founded in 1846 and made up of several (13 total) well-known brands including: Oxi Clean, Arm & Hammer, Trojan Condoms, Waterpik, vitafusion, and 1st Response pregnancy tests. CHD reported relatively mixed results and is currently trading at ~$80 per share - down 17% from a previous high about six months ago and only up about 7% since COVID-19 began.
The Company was initially a beneficiary from COVID as consumers stockpiled home essentials and cleaning supplies in April and May, causing revenue growth to bump into the low-teens, compared to ~5% growth the year prior. This positive development was offset by increased transport costs and raw materials cost which dropped gross margins ~300 bps in Q3/Q4 2020. Management feels they've learned how to be more efficient and expect gross margins to trend back toward historicals in 2021.
The thesis is relatively simple:
87% of CHD's sales come via in-store purchases, which means it should be a beneficiary of re-opening
According to Nielsen data, the company has taken share in key growth areas such as vitamin gummies (industry growing 58% due to increased usage of health gummies by adults - a trend management thinks may continue) and laundry (Arm&Hammer/Oxiclean growth as people worry about COVID exposure)
International exposure in key markets means solid growth from marcoeconomic factors for the next few years
The company has historically been leveraged due to acquisitions and has been deleveraging from 2.6x debt/EBITDA in 2017 (driven by $1B waterpik acquisition) down to 2012-16 levels of 1.3x and I expect M&A given this team's successful track record
Capex has trended ~2% for the past five years but this year the plan is for 3.5% - signaling increased investment in capacity
Relatively safe place to put money in what is an obviously frothy market (hello 100x revenue multiples!)
Overview of the business
CHD touts an evergreen model of 3% organic sales (2% in the US, 6% in International, and 5% in Specialty products), 25bps gross margin expansion, marketing expense as a percentage of sales flat, 25bps of SG&A leverage, 50bps operating margin expansion, and 8% EPS growth (10 year avg. organic sales have registered 4.1% growth and 11% EPS growth) and management seems very committed to this growth model going forward.
The business is split between household (46%), personal care (48%), and specialty products (6%). 77% of revenue comes from US Consumers while 17% comes from international and the rest from specialty products.
The business has excellent working capital dynamics, driven by upfront payment ahead of delivery. As CFO Rick Dierker discussed on the latest investor presentation: "We have a long track record of free cash flow conversion. 122% over the time period. We had 125% in 2020. How do we do that? Well, we have great working capital management. We've moved from 52 days down to 16 days is the outlook for 2021. And if you strip out the Chinese supply chains that we have for WATERPIK and FLAWLESS, those numbers were actually closer to 5 days as we approach 0 working capital."
US Consumer
The US consumer division ($3.8B, 14% YoY growth) revenue growth has been driven by its core products of Arm & Hammer baking soda and laundry detergent, Oxiclean stain remover, and vitafusion gummies. Other personal care categories like contraceptives, razor trimmers, deodorant, and toothpaste are down 5%+. Oral treatments and power toothbrushes (typically dentist led sale of waterpik) are up 10%+. Management expects a rightsizing of the business units in 2021 - increased dentist visits and in-person gathering increases waterpik and trojan/first-response sales while baking soda, cold, gummies, and teeth retreat back to normal levels.
It remains to be seen how a vaccinated population operates en-masse but I personally think (with no data) that we will see increased travel/in-person gathering once people are vaccinated
International
International Sales are ~$830M (17% of revenues in 2020) and come from Global Markets Group (130 market via distributors - 34%), Canada (29%), Europe (23%), Australia (8%) and Mexico (6%). While many of its brands like Trojan, Arm&Hammer, and Oxiclean are well known in international markets, more recent acquisitions Waterpik and Flawless are less well-known, offering opportunity to grow if marketing can be done successfully.
GMG (which is heavily weighted toward personal care) grew 19% YoY with strong performance in Asia, the Middle East, and Latin America despite a COVID market that lowered demand for personal care products.
Long-time EVP of the International Consumer Products division, Stevven Cugine is retiring and the company is promoting Barry Bruno, a former J&J executive who's been with CHD for seven years to take the role.
Continued Asian expansion is the plan, with the company recently launching offices and hiring staff in Shanghai, Singapore, and Mumbai to help drive growth in the new markets.
The business has hisorically grown international ~9% and though the guide is for 6% as part of the evergreen model, there is no reason they shouldn't grow faster, especially with boots on the ground in the complicated international markets
Speciality
Speciality products are a ~$300M business consisted of Animal Dairy (49%), Animal Non-dairy (18%), and Speciality Chemical (33%). These are a mix of pre-biotic and pro-biotic nutritional supplements given mainly to cattle, swine and poultry and all on the Arm&Hammer brand. The dairy industry tends to be cyclical so usage will probably drop off in the coming years but non-dairy, which was <1.0% in 2015, is now ~30% and expected to grow in 2021.
The Speciality products business has always been sort of an after-thought around the Arm&Hammer brand - not sure what management's plan is for it going forward.
The move into other animals is clearly a positive sign (given dairy industry cyclicality), and management has mentioned international is pretty underpenetrated so there may be minor upside there.
M&A
M&A is a hallmark for the Company. Here is a list of some of the more famous acquisitions and prices paid:
Zicam (2020)- leading provider of zinc cold supplements for $530M
Flawless (2019) - DIY makeup/beauty for $900M
Waterpik (2017) - electric power flosser for $1B
Vitafusion (2012) - #1 adult vitamin gummy provider for $650M
Others include: Trojan, 1st Reponse, and Nair (2001), Oxi Clean (2006), Orajel (2008), Batiste (2011)
CFO Rick Dierker has been at the Company since 2008 and has overseen the Waterpik, Flawless, and Zicam acquisitions. This is a muscle they clearly have flexed in the past and given the strong revenue growth of the company and cash generation, they may be able to flex again.
Acquisitions tend to be done using debt and the business has been deleveraging from a high of 2.6x Total Debt / Bank EBITDA in 2017 (driven by the Waterpik acquisition) to an expected 1.3x in 2021.
There is clearly a gestation period post-acquisition as brands grow nationally and internationally. Waterpik, Flawless, and Zicam provide decent long-term runway and should benefit from the company's increased push into international markets
Valuation
CHD may not be a value stock as it currently trades 22x uFCF - roughly in line with others in the industry like Colgate-Palmolive and Proctor and Gamble
Why not CL, P&G, CLX, or others?
Risks
How does a vaccinated population act?
Gummies don't "stick" post vaccinations and sales drop significantly
In-person gatherings remain low - lowering need for Trojan/1st Response
87% of sales in-person is actually fine and are temporarily inflated due to increased grocery usage by consumers (rather than eating out)