Colgate-Palmolive Q2’16 Earnings: Emerging Markets Pose a Concern to Top-line

The world’s leading manufacturer of oral care products, Colgate Palmolive (NYSE:CL) released it Q2’16 earnings on July 28th. Colgate’s top line suffered primarily from the de-consolidation of its Venezuelan operations and the growing volatility in currencies. The major concern which has come up for the company is the decrease in net sales and volumes from both Asia Pacific and Latin America, especially China which is a major player for any consumer based company. Emerging markets account for around 51% of the company’s sales, and negative signals from these regions are a cause of concern.

Going forward into the year, the currency situation is not expected to improve from these regions, as US indices are already outperforming the world markets indicating a comparatively stronger US Dollar. Adding fuel to the fire is the fact that the OECD has reduced the economic growth forecast for China from 6.5% to 6.2% by 2017. ((OECD China Economic Forecast Summary)) Therefore, inline with the company’s guidance, we believe that moving into second half of the year, net sales will decrease by low to mid single digits. ^[1]

 See our complete analysis for Colgate-Palmolive

A Quick Review of the Q2’16 Earnings

• In the table below, it can be seen how currency has impacted the net sales of the company from emerging markets. The low demand from these regions can be clearly seen from the declining volumes figure.
• Segment wise, Colgate’s market share in toothpastes and toothbrushes decreased marginally by 0.5% and 0.1% respectively reaffirming the fact that the company is not passing through a rosy phase.
• Net operating profits decreased marginally, but on a positive note, adjusted operating profits continued to increase due to the company’s ‘funding the growth’ cost savings initiative.
• Overall, organic sales also grew 4.5% despite slow response from emerging markets, indicating that net sales decline is temporary and can improve significantly if currencies and emerging markets stabilize in future.

Cost Savings Continue to Support Margin Expansion

Similar to Kimberly Clark, Colgate has its own cost saving program named ‘funding-the-growth’. It mainly focuses on increasing the efficiency of production to minimize the costs. It has been primarily responsible for continuous increase in Colgate’s margins over past few quarters. This initiative, along with higher prices, helped in continuing this trend to Q2 also. Looking at the challenging macroeconomic conditions, the consumer products vendors are highly dependent on such programs to hold on to the bottom-line.

Here is a chart of how operating profits of Colgate might unfold in the future according to our estimates:

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