New Product Launches And Cost Savings Should Benefit Colgate’s H2’14 Results

Colgate-Palmolive (NYSE:CL) is one of the world’s largest consumer goods companies, operating in more than 200 countries. The company has a market capitalization of nearly $58 billion and annual revenues exceeding $17 billion in FY13. Colgate-Palmolive competes with other players like Unilever (NYSE:UL), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and L’Oréal (OTC:LRLCY) in the personal care segment.

The company operates its business in four major operating segments – oral care, personal care, home care and pet care. The oral care segment is by far the largest segment, accounting for nearly 46% of total revenues. Home care and personal care segments amount to approximately 21% and 20% respectively, while the pet care business accounts for the remaining 13% in revenues. The earnings before interest, taxes, depreciation and amortization (EBITDA) margin stood at about 26.2% in fiscal year 2013.

Below, we provide a brief overview of Colgate-Palmolive’s business. We have a $65 price estimate for Colgate-Palmolive’s stock, marginally ahead of its current market price.

See our full analysis for Colgate-Palmolive

New Product Launches in H2’14 Should Lift North America Market Share

In the recently concluded Q2’14, Colgate’s organic sales growth (net sales excluding the impact of acquisitions, disposals and changes in currency) in North America was modest. Volume growth in sales stood at 2.5% in Q2’14, compared to 6% in Q2’13, driven by the launch of its Colgate Total mouthwash. ^[1] Colgate witnessed market share gains in the North American market during the quarter, specifically in oral care products such as toothpaste. Additionally, the company has maintained its market position in product categories such as mouthwashes and fabric care products during the quarterly period.

Going forward, the company expects the launch of its latest toothpaste innovation in the U.S., Colgate Enamel Health Toothpaste, to further strengthen its market position. The enamel strengthening segment is the fastest growing segment in the toothpaste category, with 54% of consumers concerned about enamel. ^[1] The new product replenishes natural calcium and other minerals back into weakened enamel, filling in rough spots while, at the same time, polishing the enamel surface so germs are less likely to stick on the teeth.

The North American market accounts for about 20% of Colgate’s oral, personal and home care revenues. Therefore, strong product uptake from a new product launch should lift volume growth for Colgate and contribute to an expansion in its market share in North America in the second half of fiscal year 2014.

Gross Margin Expansion to Help Fuel Further Gains in Market Shares

Despite the weakness in volumes and organic sales, gross margins weathered the currency headwinds, with Q2’14 margins trending close to FY13 margin of 58.8%. The ‘funding the growth’ savings program contributed to 220 bps of margin expansion while product pricing facilitated a 50 bps expansion in margins. ^[2] These increases in gross margins were offset by 250 bps of increase in material prices during the quarter. ^[3] The company has been working towards reducing its non-manufacturing related overhead, mainly in its raw materials, to expand gross margins further.

Under its cost savings program, Colgate is: 1) substituting raw materials; 2) reducing packaging material; 3) negotiating better lease and contract terms with current suppliers; and 4) increasing manufacturing efficiency by reducing the number of stock keeping units (SKUs). By substituting its raw materials and reducing packaging material, the company has successfully hedged against volatile global FX movements that have contracted product volumes and consequently, sales.

The savings from the program are helping Colgate to reinvest in building its brands, which is essential to counter heightened competitive activity in some important markets such as the U.S., India and Mexico. Colgate leads the global toothpaste market with over 40% share. Its market shares in the toothbrush and mouthwash categories are also strong at 33% and 17%, respectively. ^[4] We believe the company’s savings program will allow it to support these launches with increased advertising expenditure, which will fuel further market share gains.

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1. Second Quarter Earnings Release, Colgate-Palmolive Investor Relations, July 2014 [↩] [↩]
2. Colgate-Palmolive’s (CL) CEO Ian Cook on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, Q2 2014 [↩]
3. ref:1 [↩]
4. Colgate Announces 2nd Quarter 2014 Results, MarketWatch, 2014 [↩]