Higher Volumes Help Colgate-Palmolive Beat Currency Troubles in Q4

Global oral care major Colgate-Palmolive (NYSE: CL) reported strong fourth quarter and full year results on January 29th. The company fought back foreign currency headwinds on the back of across-the-board volume expansion, ably supported by price hikes. In doing so, Colgate-Palmolive outperformed bigger competitors like Procter & Gamble (NYSE: PG), Unilever (NYSE: UL) and Kimberly-Clark (NYSE: KMB), each of which fell prey to adverse foreign exchange movements.

Colgate-Palmolive’s full year revenues stood at $17.28 billion, 1% lower than revenues of $17.42 billion in 2013. The decline was because of a 6 percentage point negative impact of foreign currency movements, which was partly offset by volume growth of 3% and pricing expansion of 2%. The resultant organic growth of 5% overshadowed P&G’s organic growth of 2%, Unilever’s 3% and Kimberly-Clark’s 4%. Investors responded to Colgate-Palmolive’s unexpectedly strong performance by driving its share price up by 6% following the earnings release.

Full year adjusted gross margin declined by 10 basis points to 58.7%, primarily as a result of commodity cost inflation including the impact of foreign exchange headwinds. On the other hand, full year adjusted net income increased by 2% year on year to $2.7 billion, while adjusted diluted EPS expanded by 3% year on year to $2.93. The improvement in adjusted net income and adjusted diluted EPS is attributed to cost savings from Colgate-Palmolive’s Funding the Growth program and its 2012 restructuring program. ^[1]

The company guides gross margin to improve by 50 to 100 basis points in 2015, while adjusted EPS is expected to grow by low single-digits in constant currency terms.

We are currently revising our price estimate of $65 for Colgate-Palmolive to reflect the latest earnings.

See our complete analysis of Colgate-Palmolive here

Across the Board Volume Expansion Driven by Shrewd Pricing Strategy

Colgate-Palmolive achieved 5% year on year organic revenue growth in 2014, comprising 3% volume expansion and 2% pricing growth. Emerging markets led the way with 7.5% organic revenue growth despite a consumption slowdown in major markets like China, Russia and Brazil. In fact, Latin America clocked in the highest organic revenue growth rate of 9%, thanks to higher pricing implemented to counter adverse currency movements. Organic revenue from developed markets accelerated by 2% year on year, thanks to volume expansion egged on by promotional pricing.

A look at the regional data reported by the company provides an interesting bird’s eye view of Colgate-Palmolive’s pricing strategy driving the volume growth. With the exception of North America and Europe/South Pacific regions, the company raised prices in all other markets. Tellingly, the trouble in North America and Europe was not currency movements but a slump in consumption due to faltering economic recovery. Among other regions, the price expansion was the highest in Latin America, which suffered the worse currency headwinds to the tune of 14.5 percentage points on revenues. Prices were hiked in Asia and Africa/Eurasia regions as well.

This indicates that Colgate-Palmolive drove volume expansion by lowering prices in regions facing sluggish demand, and hiked prices to counter currency headwinds in emerging markets. The company’s significant market share and relatively lower priced products allowed it to retain or even grow market share in emerging markets notwithstanding increased prices. This allowed Colgate-Palmolive to achieve organic revenue growth despite difficult macroeconomic environment and strong currency headwinds.

Cost Saving Initiatives Support Margins

Colgate-Palmolive’s cost saving measures, including its Funding the Growth program and the ongoing 2012 Restructuring Program, together contributed about 280 basis points benefit to the gross margin. Combined with 140 basis points benefit from higher pricing, the company was able to largely offset the negative impact 430 basis points from commodity cost inflation. As a result, Colgate-Palmolive was able to restrict the fall in gross margin to a mere 10 basis points.

Going forward, the company expects to be able to improve gross margin by 50 to 100 basis points in 2015 due to lower oil and raw material costs. Benefits from the lower oil cost are expected to kick in around the middle of 2015, while commodity costs are expected to remain stable through the year, in contrast to 2014 which suffered due to cost inflation. Consequently, the company expects the combination of a benign commodity cost environment, the continuation of savings from the  Funding the Growth program, and increased selling prices in emerging markets to facilitate gross margin expansion in 2015.

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1. Colgate-Palmolive Q4 2014 Earnings Call Transcript, Seeking Alpha, January 29, 2015 [↩]