Colgate-Palmolive’s Higher Pricing Trend Likely Continued in Q4

Oral care giant Colgate-Palmolive (NYSE:CL) is scheduled to report its fiscal 2015 fourth quarter earnings on January 29th. ^[1] The company had no plans to scale back its steep price hikes sooner than year-end 2016. ^[2] This could have resulted in the same downward pressure on volume growth in the fourth quarter that has been Colgate-Palmolive’s bane in the previous two quarters. Colgate-Palmolive had managed to eke out a nominal 1% year on year volume expansion in the third quarter due to growth in Asia and North America. However, if the company continued its policy of implementing steep price upticks, its volume growth may well have fallen into negative territory in the fourth quarter.

Colgate-Palmolive’s third quarter performance recap:

• Revenues declined by 8.9% year on year to $4 billion (5% growth in non-GAAP terms)
• Non-GAAP operating margin improved by 70 basis points year on year to 25.3%
• Non-GAAP diluted EPS contracted by 5% year on year to $0.72

Our price estimate of $60 for Colgate-Palmolive is about 10% lower than its current market price.

See our complete analysis for Colgate-Palmolive here

Weak Volumes and Higher Pricing Trend Likely Continued in Q4

Colgate-Palmolive does not report the revenue split between its Oral Care, Personal Care, and Home Care businesses. It clubs these three segments into a single category and focuses more on the geographical revenue share in its financial reports. Consequently, it is not possible to ascertain how the organic growth, volumes and prices are faring in the aforementioned individual segments quarter to quarter. We estimate that the Oral Care business accounts for over 45% of the company’s revenues. Personal Care and Home Care account for around 20% each, and the Hill’s pet nutrition business makes up for the remaining 15% revenue share.

Geographically, we have expounded in the past that Colgate-Palmolive is implementing steep increases in prices in its biggest market by revenue, Latin America. (Read: Colgate-Palmolive May be Headed for Trouble in Its Biggest Market) As we expected, the sustained price hikes in Latin America led to a volume contraction in the third quarter. (Read: Colgate-Palmolive’s Volumes Suffer Amidst Heavy Price Hikes in Third Quarter) Colgate-Palmolive has chosen to protect its margins against the disastrous impact of unrelenting double-digit currency headwinds in the market.

The currency situation in Latin America has still not improved, which leads us to believe that Colgate-Palmolive may have continued its streak of increasing prices in the market in the fourth quarter as well. Therefore, volumes are likely to have fallen even more in Latin America in the fourth quarter. Since Latin America alone accounts for over 30% of the company’s revenues from Oral Care, Personal Care, and Home Care, the impact of a volume contraction in this market on the company would be substantial.

A similar trend can be observed in the Africa/Eurasia market as well, with higher prices leading to volume contraction in the second and third quarter. This trend likely continued in the fourth quarter. However, the Africa/Eurasia market accounts for less than 10% of Colgate-Palmolive’s revenues from Oral Care, Personal Care, and Home Care and thus, the impact on the company’s overall performance would be relatively low.

Improvement in Margins Likely Continued in Currency-Neutral Terms

Colgate-Palmolive has managed to protect its bottom-line even in the face of nearly unprecedented currency headwinds in fiscal 2016. For the nine months ended September 30, 2015, its non-GAAP operating margin expanded by 50 basis points year on year even without adjusting for the currency impact. Similarly, the company was able to restrict the decline in the non-GAAP gross margin during the period to a mere 10 basis points compared to the prior year period. This impressive feat is attributed to Colgate-Palmolive’s solid Funding the Growth cost savings program besides the heavy reliance on price hikes. This trend likely continued in the fourth quarter also, which could help the company offset the impact of adverse currency movements to a large extent.

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More Trefis Research

1. Colgate-Palmolive Investor Relations [↩]
2. Colgate-Palmolive Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, October 30, 2015 [↩]