Currency Headwinds Dampen Colgate-Palmolive’s Sales in Q1, Robust Cost Savings Continue

Global oral care leader Colgate-Palmolive (NYE:CL) reported its 2015 first quarter earnings on April 30th. The company’s top-line was hammered by currency headwinds and contracted by 6% year on year. Organic (non-GAAP) revenue growth rate was 4% year on year, of which 2.5 percentage points was driven by pricing growth and the rest by volume expansion. As in the fourth quarter of 2014, Colgate-Palmolive’s organic growth rate in this quarter also was higher than that of its rivals, Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL).

Colgate-Palmolive’s cost saving and restructuring programs got off to a good start in 2015. Benefits from cost savings along with higher pricing offset the impact of commodity cost inflation, which helped expand the non-GAAP gross margin by 30 basis points year on year to 58.9%. Currency headwinds caused non-GAAP diluted EPS to contract by 3% year on year to reach $0.66. The severe impact of adverse currency movements is underscored by the fact that on a constant currency basis, non-GAAP diluted EPS expanded by double digits. ^[1]

Despite the severe currency headwinds, Colgate-Palmolive stands by its long-term goal of double-digit growth in EPS. However, taking stock of the prevailing situation, the company expects the 2015 full year EPS to decline by low-single digits, excluding the impact of the 2012 Restructuring Program. On a constant currency basis, Colgate-Palmolive expects a double-digit increase in the 2015 full year EPS.

We are currently revising our price estimate of $56 for Colgate-Palmolive to reflect the first quarter results.

See our complete analysis for Colgate-Palmolive here

Price Hikes in Emerging Markets Drive Top-Line Growth

In the first quarter, Colgate-Palmolive’s organic revenue growth in emerging markets stood at 6.5%, compared to 1.5% organic revenue growth in developed markets. The revenue acceleration in emerging markets was driven primarily by higher pricing, which contributed 5 percentage points to the revenue growth. Colgate-Palmolive indicated that it expects “pricing to build” further over the rest of the year. ^[2]

On the other hand, promotional pricing resulted in a 50 basis points negative impact on organic revenue growth in the developed markets. The company indicated that it may pull back on promotional pricing in North America in the following quarters. Notably, volume growth contributed more than price hikes towards organic revenue growth in developed markets in the first quarter.

The company stated that another major factor that drove revenue growth in the first quarter was focus on innovation in the premium category. During the quarter, Colgate-Palmolive introduced a number of new products across all its business divisions, many of which were geared towards the premium segment. It combined the release of new innovative products with a heavy emphasis on marketing and efficient in-store execution, which facilitated faster adoption rates of its new products and thereby contributing to revenue growth. ^[2]

Volume Growth in Developed Markets Outpaces Emerging Markets

In the first quarter, Colgate-Palmolive’s volume expansion was higher in the developed markets than in the emerging markets. This is a departure from recent trends, since volume growth in emerging markets has steadily outpaced that in developed markets in recent years. The company attributes the volume growth in developed markets to an increase in retail consumption in large store formats in the U.S.

Additionally, we believe that the rapid increase in pricing may have impacted Colgate-Palmolive’s volume growth in the emerging markets. Sustained price hikes in a sluggish consumption paradigm may be causing the company’s customers to switch to cheaper local products, or worse, cheaper products offered by its rivals.

Until the fourth quarter of 2014, Colgate-Palmolive seemed to have maintained a fine balance between price hikes and maintaining volume growth. Thus, it avoided committing the same fallacy which seems to be ailing Procter & Gamble. However, the slowing volume expansion in emerging markets may indicate that the company has reached a stage where increasing prices further could push away customers. Whether the first quarter was a red herring in this regard or the beginning of a trend remains to be seen.

Margins Expand on Robust Cost Savings

Colgate-Palmolive’s non-GAAP gross margin expanded by 30 basis points year on year in the first quarter, thanks to higher pricing and benefits yielded by robust cost saving programs. The improvement in gross margin trickled down to the non-GAAP operating margin also, which increased by 40 basis points year on year. The improvement in operating margin was also helped along by lower SG&A expenses in the first quarter.

It should be noted that advertising expenses, which are included in SG&A expenses, declined in absolute terms sequentially, but increased as a percentage of sales. Colgate-Palmolive stated that advertising as a percentage of sales was 10.6% in the first quarter, compared to 9.7% in the fourth quarter of 2014. Comparatively, the figure was 11.1% in the first quarter of 2014 but had declined thereafter through the rest of 2014. ^[2]

This indicates that while advertising expenditure remains below the year-ago level, the company is increasing its investment in advertising as a percentage of sales. This is in contrast to Procter & Gamble’s strategy, which is to cut down on its advertising expenditure by focusing more on digital advertising (Read: P&G Reports Moderate Q3 Results, Lays Out Future Growth Strategy). On the other hand, Colgate-Palmolive reiterated its belief in traditional advertising modes, and hinted that it may consider a pullback in traditional advertising by its rivals as an opportunity to be leveraged. ^[2]

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More Trefis Research

1. Colgate-Palmolive 2015 First Quarter Earnings Press Release [↩]
2. Colgate-Palmolive 2015 First Quarter Earnings Call Transcript, Seeking Alpha, April 30, 2015 [↩] [↩] [↩] [↩]