Stronger Pricing Lifts Colgate Despite Softness In Latin America

Colgate-Palmolive delivered another round of earnings growth in Q4 2012, recording net income of $671 million, an increase of 6% over Q4 2011. Diluted earnings per share stood at $1.41, an increase of 8% over Q4 2011.  The quarter’s organic sales growth of 4% was somewhat below expectations, below the annual average and driven largely on price increases. However, the bottom-line picture was much brighter. The cost-saving initiatives led to a marked improvement in Colgate’s Q4 gross margins, resulting in a strong 2% increase in operating profit.

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Top Line Highlights: Spotlight On Oral Care Again,  Latin America Slows Down Sales, Europe Turns Into A Driver

The company’s Q4 organic sales growth of 4% is lower than the twelve-month average of 6%. Moreover, growth in the last quarter was largely based on stronger pricing, which contributed 2.5% to the increase in organic sales.

The relatively weak volumes growth in Q4 could largely be blamed on a surprisingly poor performance in Latin America, a Colgate-Palmolive stronghold with nearly 29% contribution to total revenues in 2012. Organic volumes in the region declined by 1% over the last quarter, compared to growth of over 5.5% during the preceding nine months. Most of the Q4 volume loss was driven by a sharp reduction in sales in Venezuela, where a devaluation of the local currency has been forcing US companies to hike up prices in order to avoid losses. A 5% average increase in pricing meant that organic sales in the region still managed to increase by 1.5% over Q4.

The situation in Europe was exactly the opposite. Following the nine months of top-line decline in the region, the company lowered its prices in the region by 1% in the fourth quarter. As a result, volumes grew in the last three months, driving organic sales upwards by 1.5%.  Oral care was again at the forefront of volume growth with the company cementing its share of the toothpaste market with gains led by Germany, Austria, Norway, Czech Republic, Serbia, Croatia and Bulgaria.

North America was another region where the company performed remarkably well. Colgate’s performance in the region was a good balance between volume gains (1.5%) and strong pricing (2.0%).  Oral care was again the key driver here with the company’s Optic White range of products driving Colgate’s market share in the US toothpaste market to 36%, a 1% improvement over last year.

Performance in the Asia/Africa region has remained strong over the entire 12-month period, with organic sales increasing by 10% last quarter. Colgate’s performance was particularly strong in oral care products in India, China, Hong Kong and Singapore.

The overall good performance over 2012, especially in the oral care segment, further validates our optimistic outlook for the company over the next few years.

Bottom Line Boost Helps Earnings

Colgate’s net earnings  recieved a major boost from its 2012 cost-saving initiatives . Despite a general increase in costs such as advertising, the restructuring programs helped Colgate achieve a marked reduction in cost of goods and services. As a result, gross profit margins were 58.4% in Q4 2012 compared to 57.4% in the year ago quarter.

We will soon update our $105 price estimate for Colgate-Palmolive based on the earnings release.

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