Latin America Lifts Colgate-Palmolive’s Results, Eyes Further Expansion In Gross Margins

Colgate-Palmolive (NYSE:CL) marked a good start to fiscal year 2014 with 6.5% growth in organic sales as sales volumes increased 5% and pricing increased by 1.5%. While its close competitors Kimberly-Clark (NYSE:KMB) and Unilever (NYSE:UL) witnessed their net sales decline in Q1 due to unfavorable currency movements, the oral care giant’s net sales ended being flat compared to the year-ago period.

In the past several quarters, balancing the business mix between developed and emerging markets has helped Colgate achieve above market growth and experience only a moderate impact on net sales from currency devaluations in emerging markets. Price increases and cost savings have additionally allowed the company to offset currency translation losses, and thus maintain healthy gross margins. Colgate’s gross margin stood at 58.6% in the first quarter. The company is working toward expanding its margins by 75 to 125 basis points for the full year. It is willing to further increase prices to offset higher commodity costs and currency losses. ^[1]

We are in the process of updating our $59 price estimate for Colgate-Palmolive based on the recently announced results.

See our complete analysis of Colgate-Palmolive’s stock here

Latin America Continues To Lead Growth

Registering 11% year-on-year organic sales growth, Latin America (which generates over 25% of company net sales) led Colgate’s promising results in Q1. The company maintained its leadership position in toothpaste and toothbrushes in the region. It also continued to close the gap with its largest competitor in the mouthwash category on new Plax launches. Colgate’s toothpaste market share reached a record level of 71% in Brazil and stood over 70% in Mexico despite high promotional activity from competitors. Its market share of Brazilian bar soaps also increased to 26.5% owing to new product launches in the Palmolive and Protex lines. Broadly, the Latin American geography benefited from sustained innovation, new product launches and increased adoption of premium priced offerings by consumers. ^[1]

Colgate feels that innovation and new product launches are the keys to drive increases in market share and category growth. Therefore, the company has built a strong pipeline of product launches. Its Maximum Cavity Protection toothpaste with Neutrazucar, that was launched in Brazil in Q4, has already gained 3% share in the market. The company intends to build on the success of this toothpaste by launching it in other parts of the continent. Colgate will also launch products in the personal care category to drive growth. Some of the proposed launches include Protex Omega 3 bar soaps, liquid soaps and shower gels and Lady Speed Stick Aclarado. We believe that Colgate will continue to gain share in the Latin American market on the back of a robust pipeline of product launches. ^[1]

Results Confirm That Pet Nutrition Business Is Now Back On Track

Until Q1 2013, the Hill’s pet nutrition business (generates 13% of company net sales) had been underperforming relative to Colgate’s other divisions, mainly due to lower volume sales. The company managed to turnaround the business in Q2 2013 with strong innovation and effective communication with customers through a widespread marketing campaign. Organic sales from the pet nutrition business increased 5.5% year over year in Q2, much higher than the 0.5% growth achieved in Q1. The turnaround occurred a quarter ahead of schedule due to faster execution from the company’s retail partners, PETCO and PetSmart.

In the final quarter of 2013, Hill’s registered its strongest organic sales growth (7%) in five years. This was largely driven by the success of its Ideal Balance and Prescription Diet products. In Q1 too growth was strong at 5.5% due to the launch of new Ideal Balance dry variants for cats and dogs. Colgate plans to support its products this year by providing nutritional consulting to customers at superstores, by offering in-clinic communication, sampling programs, and coupons and by increasing its advertising spending. Although this will drive down Hill’s gross margins in the near term, we believe that such initiatives are necessary to drive long-term growth. ^[1]

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1. Colgate-Palmolive’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 25, 2014 [↩] [↩] [↩] [↩]