Latin America Helps Colgate-Palmolive Post Solid Organic Sales Growth In Q4

Colgate-Palmolive (NYSE:CL) ended the year 2013 with a 6.5% year-on-year rise in organic sales (net sales excluding foreign exchange, acquisitions and divestments), the strongest quarterly growth figures for the year. This was driven by a 6.5% increase in volumes, as prices were flat compared to the year-ago period. Net sales for the quarter stood at $4.4 billion, up by 2% as currency headwinds offset the organic sales growth by 4.5%. ^[1]

Colgate’s gross profit margin increased to 58.9%, inching closer to the company’s near-term target of 60%, helped by its cost savings program that more than offset higher raw and packaging material costs. On the other hand, net income declined by 5% to $564 million as the company incurred high advertising expenditure on brand building and supporting product launches. Colgate plans to increase its advertising spend absolutely and as a percentage of sales in 2014, since it has a long pipeline of global product launches. ^[1] Although this will continue to weigh on its bottom-line, we think that such investments are necessary to drive top-line growth in a competitive environment.

We are in the process of updating our $63 price estimate for Colgate-Palmolive’s stock, based on the results that were announced recently.

Latin America Leads Growth, More Innovation Coming Up To Maintain Momentum

Registering 12.5% year-on-year organic sales growth, Latin America (which generates 29% of company net sales) led Colgate’s promising results in the fourth quarter. The company maintained its leadership position in toothpaste and manual toothbrushes in the region, and continued to close the gap with its largest competitor in the mouthwash category. Its toothpaste market share reached a record level of 71.5% in Brazil, and stood over 80% in Mexico despite high promotional activity from competitors. Its market share in bar soaps also increased to 29.4%, making the company a leader in that category. Broadly, the Latin American geography benefited from sustained innovation, new product launches and increased adoption of premium priced offerings by consumers. ^[2]

Colgate feels that innovations and new product launches are the key to driving increases in market share and category growth. Therefore, the company has built a strong pipeline of product launches. Its Maximum Cavity Protection, plus Neutrazucar toothpaste that was launched in Brazil in Q4, has already gained 3% share in the market. The company intends to build on the success of this toothpaste by launching it in Mexico. Further, it is planning a comprehensive marketing campaign for Colgate Total Professional whitening toothpaste, a premium product that is gaining traction in the Brazilian market. Colgate will also launch products in the personal care category to drive growth. Some of the proposed launches include men’s Speed Stick and Lady Speed Stick stress defense deodorant. We believe that the company will continue to gain share in the Latin American market on the back of such a robust pipeline of product launches. ^[2]

Pet Nutrition Business Consistently Improving

Until Q1 2013, the Hill’s pet nutrition business (generates 13% of company net sales) had been under-performing relative to Colgate’s other divisions, mainly due to lower volume sales. The company managed to turnaround the business in Q2 2013 with strong innovation and effective communication with customers through a widespread marketing campaign. Organic sales from the pet nutrition business increased 5.5% year over year in Q2, much higher than the 0.5% growth achieved in Q1. The turnaround occurred a quarter ahead of schedule, due to faster execution from the company’s retail partners, PETCO and PetSmart.

In the final quarter of 2013, Hill’s registered its strongest organic sales growth (7%) in five years. This was largely driven by the success of its Ideal Balance and Prescription Diet products. During the earnings call, Colgate announced that it will continue to support these products this year by providing nutritional consulting to customers at superstores, offering in-clinic communication and sampling programs, and increasing its advertising spend. ^[2] Although this will drive down Hill’s gross margins in the near term, we believe that such initiatives are necessary to drive long-term growth.

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1. Colgate Announces 4th Quarter and Full Year 2013 Results, www.sec.gov, January 2014 [↩] [↩]
2. Colgate-Palmolive Company Fourth Quarter/Full Year 2013 Earnings Release Prepared Remarks, Colgate-Palmolive Investor Relations, January 2014 [↩] [↩] [↩]