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Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report:1Q18 Earnings Update
Prev. Ed.: Apr 16, 2018; Colgate Hiked Quarterly Dividend
Brokers’ Recommendations: Neutral: 61.5% (8 firms); Positive: 23.1% (3); Negative: 15.4% (2) Prev. Ed.: 9;4;2
Brokers’ Target Price: $72.22 ($6.22from the last edition; 9 firms) Brokers Avg. Expected Return:16.0%
Note: A flash update was done on Apr 27, 2018, on 1Q18 Earnings Release
Note: We do not have access to ‘Sell’ reports.
Portfolio Manager Executive Summary
Colgate-Palmolive Company (CL) is a global consumer products company, which along with its subsidiaries engages in the manufacturing and marketing of consumer products worldwide.
Of the 13firms covering the stock, threeassignedpositive rating,eightprovided neutral rating and tworendered a negative rating to the stock.
Neutral or equivalent outlook (8/13 firms or 61.5%)–These firms believe that Colgate’s leadership position in several household and personal care categories gives it a strong footing to expand in the fast-growing markets from where it derives the majority of its top-line growth. Additionally, the firms expect the company to benefit from emerging markets, owing to higher growth potential. Innovation and in-store implementation have been the guiding principles for the company’s growth strategy, enabling it to capture market share across all regions and categories.Further, it stands to gain from its sturdy portfolio of high-profile brands and solid market presence in the global oral care category. The firms remain optimistic about the company’s sound financials coupled with disciplined capital allocation strategy as well.
However, the neutral firms remaincautious about the intense competitive environment and slow rates of growth in various markets, where it operates.
Positive or equivalent outlook (3/13 firms or23.1%) –The firms remain bullish, given Colgate’s organic sales growth andcombination of top-line growth opportunities, cost-saving initiatives and reinvestment programs, which continue to drive strong growth. Moreover,theybelieve thatColgate has consistently demonstrated strong business fundamentals. The company's exceptional level of internal discipline represents a point of differentiation, when compared withits peers.The firms have highlighted that Colgate’s superiority as a toothpaste and dental care brand across different nations enhances its image, further supporting its innovation and portfolio expansion strategies.
Looking ahead, these firms believe that the new product pipeline will enhance the company’s growth rate. It has adominant market share in regions where it operates. Further, the firms expect the company to gain from acceleration in the emerging market growth and positive foreign translations.
Additionally, the company continues to progress well with its savings programs via its Global Growth and Efficiency Program or 2012 Restructuring Program, and Funding the Growth initiative. These programs are expected to contribute significantly toward the improvement of gross and operating margins,and overall profitability.
May 9, 2018
Overview
The firms identified the following issues as critical to an evaluation of the investment merits of Colgate-Palmolive:
Key Positive Arguments / Key Negative ArgumentsDisciplined Acquisition Strategy: Colgate has a strong history of making strategic acquisitions at sensible prices. Management will continue to make conservative and selective acquisitions to expand the company’s strategic offerings and distribution channels without overpaying.
Long-Term Per Capita Consumption Opportunity: Colgate’s dominant market share, within many of the fastest-growing emerging markets, represents a significant opportunity for long-term volume growth as per capita consumption of toothpaste catches up with that of the more developed world.
Restructuring Program: The restructuring program initiated by Colgate is expected to allow the company to return to double-digit earnings growth. The program focuses on reducing costs. / Intense Competition:Colgate is facing intense competition from its business rivals, and in order to compete, it is incurring heavy promotional and marketing expenditures.
Soft Emerging Markets: There are a few signs of slowdown in the emerging markets, and further deterioration in currency in these markets is likely to negatively impact earnings.
Foreign Exchange Transaction: Deterioration in the currency environment would negatively impact the company’s earnings.
New York City-based Colgate-Palmolive Co. is a global consumer products manufacturer with a distribution network spanning across more than 200 countries. The company is the world leader in oral care products and one of the leading manufacturers of personal care products. The company follows a closely defined business strategy to increase its leadership positions in key product categories. The product categories are further prioritized based on their capacity to utilize the company’s core competencies and strong global equities at optimal levels in order to deliver sustainable long-term growth. Colgate-Palmolive operates through two business segments: (1) Oral, Personal and Home Care; and (2) Pet Nutrition.
Oral, Personal and Home Care: The company’s portfolio of oral care products include toothpaste (Colgate, Total), toothbrushes (Actibrush, Navigator), and other offerings such as dental floss and tooth whiteners (Simply White). Personal care items include deodorants (Speed Stick, Mennen), shampoos (Thermal Spa gel, Naturals), soaps (Irish Spring, SoftSoap) and other offerings such as Colgate shaving cream. Moreover, in 2011, the company had added Sanex brand to its portfolio. The brand has a distinct positioning around healthy skin with a strong market share in Western Europe. Household products include dishwashing detergents (Palmolive), cleaners (Ajax, Fabuloso), and fabric care products (Ajax, Fab).
Pet Nutrition: The pet nutrition segment consists of pet food products for dogs and cats manufactured by Colgate-Palmolive’s subsidiary, Hill’s Pet Nutrition (Hill’s Science Diet and Hill’s Prescription Diet). The pet products are sold to veterinarians and specialty pet retailers in over 95 countries.
More information on Colgate-Palmolive Co. is available at the company’s website: Colgate-Palmolive’s year ends on Dec 31.
May 9, 2018
Long-Term Growth
The firmsare impressed by Colgate’s brand management as well astop-line and bottom-line growth and hence, are convinced about the company’s future.
The company has embarked upon a four-year Global Growth and Efficiency Program (the 2012 Restructuring Program) to ensure a sustained long-term business performance by improving growth trends in unit volume, organic sales and earnings per share. This program is aiding the company to strengthen its global footprint, especially in its core business. Moreover, the company’s Funding the Growth initiative is delivering impressive results.
With these initiatives, Colgate focuses on reducing structural costs in order to improve gross and operating profit, standardizing processes to improve the decision-making procedure and enhance its market share position worldwide. Also, the company aims at opening new environmentally sustainable distribution centers to offer better service to its customers, besides reducing fuel and transportation costs.
Acknowledging the success of the Global Growth and Efficiency Program to date, the company’s board has approved an expansion and extension of the program through Dec 31, 2019. This will enable Colgate to take advantage of the incremental opportunities in the process of streamlining operations. Additionally, it expects after-tax savings from the program of $500-$575 million. The projected savings target a three to four year average cash payback, with an after-tax rate of return above 30%.
The company is also stringently focused on strategic pricing initiatives.Furthermore, the firms believe that there are niches and larger opportunities for Colgate in the oral care, pet nutrition and personal care sections.
The firmsalso observethat Colgate has a solid long-term growth record.The company’s secure financial controls and history of new product innovations, coupled with efforts to enhance its shareholder value through share repurchases and dividend increases, support a positive long-term stance.In order to sustain long term strategies, the company has maintained disciplined capital allocation policies. Investments in this regard are mainly done for facilitating business expansion, while excess cash would be utilized for providing returns to shareholders.
May 9, 2018
Target Price/Valuation
Rating DistributionPositive / 23.1%
Neutral / 61.5%
Negative / 15.4%
Avg. Target Price / $72.22
Highest Target Price / $80.00
Lowest Target Price / $64.00
No. of Analysts with Target Price/Total No. / 9/13
Risks to the target price primarily include unsuccessful new product launches, sensitivity to global macro and foreign exchange volatility, slowdown in Latin America and developing markets, failure to achieve targeted cost reductions, higher-than-expected advertising and promotion expenditures, unexpected competitive pricing pressures, unexpected increases in cost of raw materials and a slower-than-expected recovery at the Hill's business.
Recent Events
On Apr 27, 2018, Colgate reported 1Q18adjusted earnings of 74 cents a sharethat surpassed the Zacks Consensus Estimate of 73 cents and grew 10.4%from the prior-year quarter.Total sales of $4,002 million improved 6.5% year over year (y/y) but lagged the Zacks Consensus Estimate of $4,018 million.
Revenues
Colgate posted total sales of $4,002 million in 1Q18 that increased 6.5% y/y. The top line gained from 2% increase in global unit volumes and 4.5% favorable currency impact while pricing remained flat. During the reported quarter, unitvolume growth included a 0.5% contribution from recently-acquired professional skin care businesses. However, the sales lag can be attributed to soft category growth across many markets.
On an organic basis (excluding foreign exchange, acquisitions and divestitures), the company’s sales advanced 1.5%, which was below expectations. Lower organic sales resulted from flat unitvolume growth in emerging markets. However, unit volume improved 4.5% and organic volumes were up 3% in developed markets, driven by strength in North America and Europe.
Year to date, Colgate’s market share of manual toothbrushes has reached 32.5%. The company continues to lead in the global toothpaste market with 42.4% market share year to date.
Geographic Breakdown of Sales
North America (21% of Total Sales)
Net sales in North Americaimproved 9%, reflecting a 9% increase in unit volumes and 0.5% favorable currency impacts, offset by a 0.5% fall in pricing. On an organic basis, sales increased 5% while unit volume grew 5.5%.
Colgate gained market leadership in the toothpaste category as its year-to-date market share for the category reached 35.2%. Also, the company maintained its leadership within the United States with products such asColgate Optic White Stain-Less White,Colgate Optic White Stain Fighter, Colgate Sensitive Smart White and Tom’s of Maine toothpastes.
In the reported quarter, the company displayed strength in the manual toothbrushes category with year-to-date market share improving 42.6%. This upside was owing to increased sales of Colgate Gum Health and Colgate Total 360° Advanced Optic White manual toothbrushes.
Apart from oral care, new products in other categories consist of Irish Spring Pure Fresh bar soap, Softsoap Hydra Bliss body wash and liquid hand soap, Fabuloso Complete liquid cleaner and Suavitel Complete fabric conditioner.
Latin America (23% of Total Sales)
Net sales in Latin Americainched up 0.5% y/y, driven by a 0.5% increase in pricing. However, unit volume and currency remained flat year over year. During the quarter, volume growth in Brazil was negated by soft volumes in Mexico. On an organic basis, sales increased 0.5% as well.
During the quarter, Colgatewas successful in maintaining its lead in the toothpaste category in the Latin American region along with gains emerging from regions such as Puerto Rico, Guatemala,Peru, Brazil, Chile, andEl Salvador. Volume growth in the region was mainly fueled by solid sales ofColgate Triple Action Xtra Freshness,Colgate Total 12 Salud Visible, Colgate Luminous White XD Shine, Colgate Kids and Colgate Sensitive Pro-Alivio Complete Repair toothpastes. The company gained market supremacy in the manual toothbrushcategory owing to robust sales of Colgate 360° AdvancedTotal 12 as well as Colgate Pro Cuidado manual toothbrushes.
Furthermore, the region depicted market share growth in other product categories such as Protex Pro-Hidrata shower gel and bar soap, Palmolive Natural Secrets shower gel and bar soap, Colgate Total 12 mouthwash, Lady Speed Stick Derma + Aloe antiperspirant, Suavitel Superior Care fabric conditioner and Axion Perfect Fusion and Fabuloso Complete liquid cleaners.
Europe (16% of Total Sales)
Net sales in Europe rose 16% y/ydue to 4% increase in unit volumes and a favorable currency impact of 14.5%, offset by 2.5% decline in pricing. Unit volumes gained from strength in France and Italy. Organic sales in Europe were up 1.5%.
Notably, Colgate’s oral care leadership in the region gained momentum with market share gains in toothpastes, led by Germany, France,Denmark, Greece, Italy, Austria andSwitzerland. In fact, products driving volume growth in oral care included Colgate Max White Expert Complete, Colgate Natural Extracts and meridol Parodont Expert toothpastes, Colgate Enamel Strength, and Colgate 360° Advanced Whole Mouth Health and Colgate 360° Advanced Max White Expert White manual toothbrushes.
Products in the other categories that helped boost volume growth included Colgate Plax mouthwash, Sanex Zero% shower gel, deodorant and body lotion, Palmolive Handwash + Lotion liquid hand soap, Palmolive Aroma Sensations shower gel, Ajax Boost liquid cleaner and Soupline Parfum Supreme fabric conditioner.
Asia Pacific (19% of Total Sales)
Net sales in Asia Pacific rose 5.5% y/yattributable to a 0.5% increase in unit volume and positive currency impact of 5.5%, partly compensated by 0.5% lower pricing. Volumes benefited from strength in India and the Philippines, which was partly neutralized by declines in Greater China and Australia. On an organic basis, Asia Pacific sales were flat.
Similar to other regions, Colgate continued with its market share leadership in the toothpaste category in Asia Pacific. Increased market share was primarily observed in the Philippines. Products that witnessed market growth in the region includeColgate Swarna Vedshakti, Colgate Naturals, Colgate Dare To Love and Colgate Total Charcoal toothpastes.
Products that gained success in other categories are Colgate Slim Soft Advanced, Colgate Super Flexible and Colgate Slim Soft Micro Silky manual toothbrushes, Protex Thai Therapy bar soap, Protex shower cream and Softlan Aroma Therapy fabric conditioner.
Africa/Eurasia (6% of Total Sales)
Net sales in Africa/Eurasiawere up 3.5% y/y, fueled by 2.5% higher pricing and 4.5% gains from positive currency, partly offset by 3.5% drop in unit volumes. Lower volumes are attributed to the decline in South Africa. Organic sales for Africa/Eurasia dropped 1%.
However, Colgate continued its leadership in the toothpaste category within the Africa/Eurasia region and gains primarily emerged from regions such as Kenya, Kuwait, Saudi Arabia,Qatar and Oman. Further, products that were successful in the region in terms of sales include Colgate Ancient Secrets, Colgate Safe Whitening, Colgate Optic White Extra Power and Colgate Natural Extracts toothpastes, Colgate Zig Zag Charcoal and Colgate Triple Action manual toothbrushes, Palmolive Luminous Oils shower gel and Protex Herbal bar soap.
Hill’s Pet Nutrition (15% of Total Sales)
Net sales in Hill’s Pet Nutritionwere up 5.5% from the year-ago quarter. Results gained from 0.5% rise in unit volumes, 1% increase in pricing and 4% positive impact from currency. Volume gains in the United States, Brazil and Australia were offset by fall in Japan. On an organic basis, sales rose 1.5%.
In the United States, products that were successful include Hill’s Prescription Diet k/d and k/d + Mobility along with Enhanced Appetite Trigger (E.A.T.) technology, Hill’s Prescription Diet i/d for digestive care, Hill’s Science Diet Youthful Vitality, Hill’s Science Diet Urinary and Hairball Control and Hill’s Science Diet Perfect Weight.
Internationally, products that were successful includeHill’s Prescription Diet k/d and k/d + Mobility, Hill’s Prescription Diet Metabolic + Urinary, Hill’s Prescription Diet k/d Early Stage and Hill’s Science Diet Youthful Vitality.
Guidance
Looking into 2018, Colgate anticipates the backdrop to remain challenging due to uncertain global markets and slowing category growth worldwide. However, the company remains on track with brand building and productivity maximization initiatives. Consequently, it expects net sales to increase in mid-single-digit in 2018 while organic sales are likely to grow in a low to mid-single-digit. Further, the company anticipates sequential improvement in organic sales through the rest of the year.
Margins
Adjusted gross profit margin of 60.3% contracted 40 basis points (bps) in 1Q18 from the prior-year quarter due to higher raw- and packaging-material expenses. However, this was partially offset by gains from the cost-saving initiatives under the company’s funding-the-growth program.
In 1Q18, adjusted operating profit of $1,007 million increased 5% while adjusted operating margin contracted 20 bps to 25.2%. Operating margin decline was due to lower gross margin, partly negated by 30 bps decline in adjusted selling, general & administrative expenses as a percentage of sales.
Geographic Breakdown of Margins
North America: In 1Q18, operating profit grew 4% to $257 millionwhileoperating margin fell 140 bps to 31.1%. The decline in margin wasattributable to higher SG&A expenses and Other (income) expense, net, both as a percentage of net sales, somewhat offset with increased gross margin.