Colgate-Palmolive (NYSE:CL) will announce its Q1 earnings Thursday. The company suffered with weakening of volumes in first half of 2011, even though it avoided raising prices despite significant input cost pressure. Business conditions improved in the latter half of the year with healthy volume growth, helped by Sanex acquisition and margins improved with higher pricing. Nonetheless, the high cost environment took a tool on its gross margins for the year. This quarter we will watch out for pricing and margin trends as the company continues to focus on expanding market share through volume growth in a high-cost environment. Colgate competes with other leading personal care companies such as Procter & Gamble (NYSE:PG), Unilever (NYSE:UL) and Kimberly-Clark (NYSE:KMB).
Volume Growth Picked Up In Second Half of 2011
After the weak volume growth during the first two quarters of 2011 even as prices were falling, Colgate-Palmolive’s performance picked up in with a stronger volume growth of 4-5% during the later half of the year. The core oral care category continued to perform well and increased its market share from from 25% in 2010 to 26% last year. The volumes also benefited from the 2011- acquired European premium toiletries brand Sanex that added 2% to volume growth, offset by the divestiture of its laundry detergent brands in Colombia. The Sanex acquisition and exit from the laundry business is part of its strategy to focus on its higher-margin oral care, personal care and pet nutrition businesses.
Margins Under Pressure
The company continued to struggle with high input inflation in 2011, with some moderation in the latter half of the year. Competitive activity also left less room for higher pricing measures, particularly during the first half of the year. The company ended 2011 with a 180 bps decline in gross profit margin, compared to 2010, reflecting significant increases in raw and packaging material costs worldwide, offset by cost savings and some pricing in the later half of the year. However, lower SG&A costs helped Oral Care EBITDA margins to improve to 28.4% in 2011 from 28% in 2010.
Since much of Colgate’s future growth is expected to be volume-driven, the company is likely avoid higher pricing to defend market share as far as possible, especially in the emerging markets. With the focus on volume growth, there is likely to be a continued downward pressure on margins, particularly if the input costs don’t ease.
We value Colgate-Palmolive with a $98 Trefis price estimate of its stock, almost in line with the current market price.