Colgate-Palmolive (NYSE:CL) announced its third quarter earnings on October 25. The oral care giant had a solid quarter with organic sales growth of 5%, although net sales fell 1% due to a strong dollar. Nevertheless, the company reported 1.7% growth in earnings driven by cost-saving initiatives and a 2% increase in overall pricing. In our analysis, Colgate’s oral care business accounts for just over 40% of its total value, and consequently, the strength from this segment in the latest quarter supported the solid earnings report.
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Oral, Personal and Home Care delivers strong growth despite European headwinds
The Oral, Personal and Home Care segment continued its robust performance with y-o-y organic sales growth of 5% driven by volume growth and price increases of 2.5% each. A strong dollar had an unfavorable impact of 6% though leading to a net sales decline of 1%.
The worst performing region for the segment was Europe/South Pacific where a combination of volume and price declines along with unfavorable currency movements resulted in net sales declining 11%. Volume gains in Australia were not enough to prevent a net decline due to volume declines in Western Europe.
However, this was more than offset by growth in other regions with Greater Asia/Africa being the strongest performer. The region saw an impressive 7.5% growth in volumes and a 4% increase in prices. Sales in the region increased 5% despite an unfavorable currency impact of 6.5%. Growth in the region was driven by countries including India, China and Russia.
Colgate expanded its dominance in India’s oral care market with year-to-date share gains of 250 basis points taking its market share in the region to over 53%. In China, the launch of innovative products such as Colgate Plax Fresh Tea and Colgate Plax Fruity Fresh have contributed to strong growth in the company’s share of the mouthwash market in the Greater Asia/Africa region. Year to date, its market share in the region’s mouthwash has increased 3% to 19.3%.
Colgate has a global market share of around 27% in Oral Care. We project this to increase going forward driven by continued growth in the emerging markets.
Cost savings drive margins as company initiates another restructuring program
Another important driver of value for the company is the continuing expansion of gross margins. Gross margins for the quarter stood at 58.6%, a strong increase of 180 basis points compared to the same quarter in the prior year. Gross margins have been boosted by higher pricing and cost-savings, and these have more than offset the impact of increased raw materials costs and unfavorable foreign currency movements.
The two components of the company’s cost-cutting program include the funding-the-growth initiatives, and the reduction of structural overheads through the implementation of shared services and the integration of local operations into regional hubs. Together, these two programs are expected to create annual cost savings of up to $700 million.
In addition to these initiatives, Colgate has announced a four-year restructuring plan this quarter which is expected to create annual savings in the range of $365-465 million by the fourth year of the program, with $30-50 million in cost savings this fiscal year. This will further boost core margin growth in the upcoming quarters. The company expects to spend up to $1.2 billion on the program, of which around $300 million will be expended this year.
We will be updating our $105 price estimate for Colgate-Palmolive based on the earnings release.