Colgate-Palmolive’s (CL) performance over the first nine months of 2012 has been strong driven by robust demand for the company’s flagship oral care products in emerging markets. The company is continuing to focus on its oral care segment over other categories such as home care and personal care, although this may hurt it short-term sales growth. In addition, Colgate also initiated two restructuring plans in 2012, one short-term and another for four years, which should result in substantial cost savings this fiscal year and help improve margins. As investors gear up for the the year’s final earnings announcement on January 31, we take a look at the key factors expected to influence the company’s full year results.
High Demand In Emerging Economies To Drive Top-Line
Colgate Palmolive’s net sales for the first nine months of 2012 stood at $2.3 billion, up more than 2% over the previous year. This growth was largely driven by a robust 6.5% increase in organic sales. Emerging markets underlined their importance with organic sales growth for both Latin America and Asia-Pacific finishing in double digits.
We expect this trend to continue in the final quarter with growing demand for consumer products in regions such as Argentina, China, India and South-East Asia. The company’s long history of operations in emerging markets have helped it establish effective sales channels in these regions, and a renewed focus on new product launches in the recent quarter has helped it grow international market shares rapidly. For example, in the last quarter, Colgate expanded its dominance in India’s oral care market with share gains of 250 basis points, taking its market share in the region to over 53%. In China, the launch of innovative products such as Colgate Plax Fresh Tea and Colgate Plax Fruity Fresh contributed to strong growth in the company’s share of the mouthwash market in the Greater Asia/Africa region. As a result, its market share in the region’s mouthwash increased 3% to 19.3%. Investors will expect the upcoming results to bring more good news on these fronts.
On the other hand, the disproportionate growth in emerging economies is exposing Colgate Palmolive to significant currency headwinds and higher selling costs. For example, last quarter the company’s net sales fell by around 1% despite 5% growth in overall volumes. Unfavorable exchange rates due to a stronger U.S. dollar was the main culprit with a net -5% impact on sales growth.
Oral Care To Dominate Yet Again
According to our estimates, Colgate-Palmolive’s oral care products contribute more than 40% of the company’s total value. This is also the segment which generated highest growth for the company in the first nine months. With a slew of new product launches, the company has been busy cementing an already tight stranglehold in global markets. Even in relatively economically stagnant regions such as North America, Colgate-Palmolive has seen very good traction in oral care sales. For example, the launch of Optic White Colgate enamel toothpaste in the U.S. during Q3 2012 was a big success and helped the company increase market share of its Optic White franchise in the country to over 6%.
One of the key things to watch for in the final quarter will be the impact of the Colgate-Omron partnership that the companies entered into in October 2012. Together, the companies are innovating with traditional oral care products and have so far come up with a sensor-enabled toothbrush. This is a product almost exclusively aimed at developed markets, but whether it is enough to stimulate sales in the flagging European region remains to be seen.
Less Focus On Personal And Home Care May Benefit Investors
Colgate-Palmolive’s strong focus on its oral care segment has often resulted in other product segments such as personal and home care being sidelined in recent quarters. The company has been actively divesting its portfolio in home care in recent years, exiting the laundry segment in Colombia in mid-2011. In fact, with bigger competitors such as Unilever and P&G posting most of the global growth in these segments in 2012, Colgate-Palmolive’s focus on its flagship oral care products should benefit investors in the long run despite hurting short-term sales.
Margins Expected To Improve Driven By Restructuring
Colgate-Palmolive announced a four-year restructuring plan in Q3 2012 which is expected to create annual savings of $365-465 million by the fourth year of the program, with $30-50 million in cost savings this fiscal year. Moreover, the company also had another short-term restructuring plan in place for 2012, with the aim of achieving annual cost savings up to $700 million. The two plans seem to be working well for the company and helped Colgate raise gross margins for Q3 2012 by 180 basis points compared to the same quarter in the prior year.
We will update our $105 price estimate for Colgate-Palmolive based on the earnings results.
Disclosure: No positions