Colgate-Palmolive: A Look At Recent Quarters

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Colgate Palmolive

Colgate-Palmolive (NYSE: CL) is one of the world’s largest personal care products manufacturers and is a global leader in oral care products. Following a 6% appreciation in its share price in 2014, it currently has a market capitalization of $62.5 billion. Its revenues for first 9 months of 2014 were $13 billion while fourth quarter consensus revenue estimates stand at $4.3 billion. In other words, its 2014 annual revenues are estimated to be $17.3 billion, representing a marginal decline from 2013 revenues of $17.4 billion.

Colgate-Palmolive operates in four primary segments, namely, Oral Care, Personal Care, Home Care, and Pet Nutrition. The Oral Care segment is the company’s largest segment and accounts for 46% of its total revenues. It is followed by the Home Care segment with 21% revenue share and the Personal Care segment with 20% revenue share. The Pet Nutrition segment constitutes the remaining 13% of total revenues. The company competes with other global personal care behemoths like Procter & Gamble (NYSE: PG), Unilever (NYSE: UL) and L’Oreal (OTC: LRLCY).

In this report, we take a look at Colgate-Palmolive’s performance in 2014 and major trends that impacted the same.

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Our price estimate of $65 for Colgate-Palmolive is marginally lower than its current market price.

See our full analysis for Colgate-Palmolive

Gains in Oral Care Market Share Partly Shields Colgate-Palmolive From Industry-wide Slowdown

Colgate-Palmolive’s foundation lies in the oral hygiene business, given that it derives nearly half of its revenues from the Oral Care division. Unfortunately for the company, consumption in the developed markets has still not recovered fully and the unabated growth in emerging markets is beginning to wind down. GDP growth in countries like China, Brazil and Russia is now decelerating due to a host of economic factors. [1]

Between 2009 and 2013, total revenues in the oral hygiene industry grew at a meager 3.4%, while consumption volume grew at an even lower 2.9%. These growth levels are expected to continue till 2018. [2]

The silver lining is that Colgate-Palmolive has historically beaten industry growth rates in the oral care segment. Between 2009 and 2013,  Colgate-Palmolive’s Oral Care segment grew at a CAGR of 6%, beating the industry growth rate of 3.4% by a considerable margin. The company was able to pull this off because it has consistently gained market share in nearly all regions it operates in. Its share in the global oral care market increased from 22% to 25% between 2009 and 2013.

However, the positive impact of market share gains in the oral care industry is partly offset by market share losses in its home care business. Between 2009 and 2013, Colgate-Palmolive’s share in the Surface, Dish and Air Care industry fell from 7.7% to 7.1%, while its Fabric Care market share declined from 2% to 1.8%. The company does not have the advantage of large market shares in its smaller segments, making it more immune to consumption slowdown in those businesses.

Currency Headwinds Halt Revenue Growth

Colgate-Palmolive’s troubles were compounded by strong currency headwinds in 2014, because of which it was unable to gain traction in revenues from its primary businesses in 2014. It derives approximately 80% of its sales from outside the U.S., with over 50% coming from emerging markets. [3] This geographical skew made the company heavily susceptible to adverse movements in emerging market currencies like the Venezuelan Bolivar and Brazil’s Real.

As a result, Colgate-Palmolive’s total revenue during the nine months ended September 2014 remained flat compared to the same period in 2013. The heavy impact of currency headwinds on overall revenues is evident from the fact that excluding forex impact, the company registered revenue growth in each of the first three quarters.

Revenues from Oral, Personal and Home Care segments declined by nearly 50 basis points on a year-on-year basis (the company does not report standalone revenues from Oral Care, Personal Care and Home Care segments in its quarterly filings). Given the company’s historical performance, we believe that the decline in revenues was primarily due to poor performance of the personal and home care segments. In fact, continuing the historical trend, the company reported market share gains in its oral care business in nearly all major geographical regions.

This decline in revenues from the Oral, Personal and Home Care segments was almost fully offset by a 3 percentage points growth in revenues from the Pet Nutrition division. This is all the more remarkable because the Pet Nutrition business accounts for only 13% of total revenues, yet it was able restrict the overall revenue decline to a mere 2 basis points. Since its pet nutrition business is concentrated in North America, it was largely shielded from adverse currency fluctuations and was able to register a nominal growth.

Volume and Price Growth Stabilize Margins

The impact of adverse foreign currency movements was also felt on margins in the form of higher raw material and packaging material prices. This was partially offset by cost savings and higher prices, as a result of which non-GAAP gross margin remained flat at 59% during the nine months ended September 2014. Non-GAAP operating margin, after adjusting for Venezuela and the 2012 restructuring costs, appreciated by over 50 basis points year-on-year.

The stable non-GAAP gross margin and improvement in non-GAAP operating margin were primarily a result of sustained volume and pricing growth. The company achieved volume growth of 5.0%, 2.5% and 2.0% in the first, second and third quarter respectively. Likewise, pricing growth was 1.5% in each of the three quarters. While volume growth has evidently slowed, sustained pricing growth indicates that the company has considerable pricing power even in the midst of decelerating consumption in emerging markets. This is an encouraging sign which extends the possibility of a strong recovery once the currency fluctuations subside.

Colgate-Palmolive has stated that it plans to further reinvigorate margins by prioritizing investments in higher margin businesses, specifically the Oral Care, Personal Care and Pet Nutrition divisions. [4]

Acquisitions and Divestitures: Conspicuously Absent

So far, Colgate-Palmolive seems to have chosen to not follow the ongoing trend of shedding non-core businesses in the personal care industry (Read: Personal Care Companies Shed Weight in 2014). P&G leads this trend with its strategy of shedding as many as 100 of its non-core brands, including its pet nutrition business. Similarly, Unilever is gradually stepping away from its foods business, while Kimberly-Clark (NYSE: KMB) has spun off its healthcare business into a separate company.

Unlike its competitors, Colgate-Palmolive has not indicated any intention of divesting its non-core pet nutrition business. To the contrary, when revenue growth from this segment fell to 2% in 2012 and 2013, the company enforced measures to revive the business. The measures seem to be have paid off and the company was able to turn around the segment in the second quarter of 2014, achieving an year-on-year growth of 5.5%. The revival of the Hill’s Pet Nutrition brand is attributed to a steady release of new innovative products, and faster execution from the company’s retail partners, PETCO and PetSmart (Read: Latin America Lifts Colgate-Palmolive’s Results, Eyes Further Expansion In Gross Margins).

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Notes:
  1. Emerging markets enter slow growth era, Financial Times, October 12, 2014 []
  2. Global Oral Hygiene Report, MarketLine, July 31, 2014 []
  3. Q3 2014 Earnings Call Transcript, Seeking Alpha, October 24, 2014 []
  4. Q3 2014 SEC Filings []