Colgate PalmOlive (CL): Margins and Balance Sheet Slip, Market Share Growth

Posted on Feb 10 2016 - 3:22pm by Dan

When I listen to the conference call of a company, I take some notes. And therefore … I thought that to help out new folks as they navigate conference calls, I would start posting my notes, as I’ve taken them. We have made this a continual feature here at Sharpe Trade with the stocks that we have mentioned in the free Sharpe Income project.

I’ve been a little ‘behind’ during this earnings season, getting caught up on posting the notes of all of the calls.  But we should do so now.  Colgate Palmolive (CL) recently reported earnings on January 29th, 2016.  The stocks price has risen by approximately 2.18 % since they released earnings.  As I have mentioned previously here on Sharpe Trade, this is a stock that I use in the equities section of my own personal income accounts.  I hold no Colgate Palmolive (CL) for valuation accounts.  This is purely a piece, a cog, in my Income accounts …

Colgate Palmolive (CL)
1 Hour Chart

Colgate-cl-palmolive-cl-earnings-chart-02-10-16

So what’s ‘the low-down’ for this quarter?

You can find my notes on last quarter’s earnings here, and as follows are a few notes from my desk as I listened to this quarters Conference Call and looked over the headline numbers …

Colgate Palmolive (CL)– From January 29, 2016

  • $0.72(3) Est. / $0.73 in Actual EPS
  • (Negative) -4.58 Million in Net Income.
  • Total Revenue of $3.89 Billion, down -2.506% from last quarter and down -7.82% from the same time last year.  Revenue has been falling for the entirety of 2015, but this has been outlined previously, and is the first year in four years, that this has happened.  
  • Operating Margin increased last quarter from 20.59% to 28.41%, a 37.98% increase.  This quarter, Operating Margin decreased closer to the 20% number.  Profit Margins fell from 14 1/2% to 8.63% for 2015.
  • Earnings per share (EPS) of $0.73 or 7/10ths of a penny beat.  Up 1.389% from last quarter, but down -3.947% from the same time a year ago
  • Cash flow dipped ever so slightly last quarter, from being steady all year.  Dividend yield is ~2.30% with a dividend payout ratio at around 53%.
  • Debt to Assets rose sharply last quarter, to 55%.   Assets fell for the second quarter.  Debt to Assets has been rising steadily year after year, ever so slightly.  Maintains an AA- S&P Credit Rating.  Once again, they stated Stated “Our balance sheet remain solid and we’re making very good progress on working capital” … well … it’s solid in that Colgate-Palmolive (CL) and they sell half the oral care products on this planet.  But I would question the continual rising debt to assets percentages, quarter over quarter … year over year.  In 2010, we were around 29%, last quarter is was approaching 50%, and this quarter, assets dropped, and debt increased simultaneously, putting debt levels over 50%.
  • Most analysts have a “Hold” rating on the stock (S&P Capital IQ, Credit Suisse, Ford Equity Research, and others).
  • Had a GAAP loss in the fourth quarter of 2015 due to the one-time charge with Venezuela, this number excludes 6.6 million of net incremental common shares outstanding assumed issued from the exercises in the money stock options as they’re anti-dilutive. Expecst the 6.6 million shares to be included in diluted common shares outstanding in the first quarter of 2016 as they should not be anti-dilutive in this period.
  • Strong organic sales growth in the fourth quarter. 5% growth within targeted growth rate of 4% to 7% and on top of strong growth in the year-ago quarter. Gross profit margin was up 20 BPS despite continued pressures from FX related transaction costs. Although down on a year-over-year basis, advertising as a percentage of sales was up sequentially from the third quarter.
  • Ongoing Growth & Initiatives Program is on track.
  • Effective December 31, 2015 Colgate (CL) to change accounting method for Venezuelan operations. As a result, in future periods, CL will no longer include the results of Venezuelan operations in consolidated financial statement. CL expects the EPS impact in 2016 resulting from the change in accounting for Venezuelan operation will be about a negative of $0.10 for the full year. They expect this impact to be negative $0.02 to $0.03 per quarter.
  • North America: Continued solid organic sales growth in this region. Market shares increased year-to-date in toothpaste, manual toothbrushes, mouthwash, liquid hand soap, body wash, liquid cleaners and fabric conditioners.  Colgate Total Daily Repair Innovation for enamel strength, overall market share for Colgate Total toothpaste grew to 10.3% from 10% at the beginning of 2015.  Colgate Optic White toothpaste franchise is up to 5.7% at last period of 2015.  Liquid hand soap share was up 90 basis points year-to-date. Year-to-date body wash share increased 80 basis points.
  • Europe / South Pacific:  Return to positive organic sales growth in this region. Across Europe market shares increased – toothpaste, toothbrushes, body wash, underarm and fabric conditioner.  France, market share is up 80 basis points year-to-date to 22.4%. In Poland, grew share 160 basis points to 47.6% year-to-date. In Italy, increased share 30 basis points to 24.6% year-to-date. Similarly, in manual toothbrushes, market shares increased year-to-date. Overall in the region, market shares are up 120 basis points to 24.7% year-to-date.  Excellent results in areas such as the UK, which is up 340 basis points to 39.3%; Germany, which is up a full point to 21%; and Italy, which is up 60 basis points to 16.4%.
  • Latin America: Despite macroeconomic challenges in countries such as Brazil and Venezuela, the division delivered solid organic sales growth. Severe devaluations across the region have necessitated fairly significant price increases. Despite that, regional market shares are solid and increase year-to-date in toothpaste, manual toothbrushes, mouthwash, toilet soaps, shampoos and liquid cleaners. In Brazil, toothpaste market share continues to climb up 100 basis points year-to-date to 72.4% with the most recent lead at 73.4%.  In Mexico, despite continued competitive pressure, market share is up 120 basis points to 80.8%. New innovations of Colgate Maximum Cavity Protection with Neutrazucar increased 70 basis points and is now almost at 2 points. Market-leading manual toothbrush share is up 350 basis points year-to-date across the region.  Toilet soaps increased CL leadership share 40 basis points to 30.9% year-to-date. Protex and Palmolive continue to hold the number one and number two positions in the region. Achieved record shares in Mexico, Colombia and Guatemala
  • Asia: Organic sales growth was somewhat muted in this region in the fourth quarter.  Volume increased in  largest businesses – Greater China and India.  Some overall slowing in category growth rates.  India’s toothpaste share is up to 54.7% year-to-date.  Toothpaste shares were a little soft on a year-to-date basis but market shares for the fourth quarter increased versus fourth quarter 2014 in China, Thailand, The Philippines, Singapore, Taiwan and Pakistan.  Across the region, our market share is up to 25.7% year-to-date, up 70 basis points year-on-year with the most recent lead at 26.5%.
  • Africa, Eurasia:  Currency headwinds in this part of the world have necessitated some significant pricing in countries such as Russia, but market shares are solid and growing.  Year-to-date regional toothpaste market share is at 33.2%, up a full point from a year-ago period.   In Russia, share is up 260 basis points year-to-date to 34.5%, reaching a record-high of 35.2% in the most recent period. In South Africa, CL market share is up 80 basis points year-to-date to 49.6%.  Bar soap business is strong as well, up 80 basis points to 21.7% on a year-to-date basis. And in South Africa, the Protex brand is helping grow the business and CL market share is up 20 basis points on a year-to-date basis. In Russia, Palmolive is leading growth driven by promotional support as well as strong in-store execution. CL year-to-date share is up 50 basis points.
  • Hills:  Hill’s finished the year with a strong quarter, both in the U.S. and abroad. All three brands – Prescription Diet, Science Diet and Ideal Balance doing well.  Hill’s Prescription Diet or flagship line of therapeutic pet foods became a $1 billion brand in 2015. In the U.S., superstore retail consumption is growing in both PetSmart and Petco, which contributed to solid results.  In Europe, Ideal Balance line is now fully rolled out across all key countries and doing well. CL is seeing a steady build of distribution and volume.  Hill’s will also be entering the wearables space, wearable sensor for dogs that is sophisticated enough to distinguish the acts of scratching and shaking from running. Coupled with a robust data and analytics platform, it’s designed to more quickly alert veterinarians and pet owners to potential health concerns as part of an ongoing monitoring program.
  • Questions and Answers:  Question: Consumer demand elasticity in this current macroenvironment CL is seeing any different behavior versus past with the macro slowdown we’re seeing in Latin America and then how that may impact your desire to take additional pricing going forward to offset incremental FX pressure?   At the Competitor level what is CL generally seeing from CL competitors? Are they following and can CL characterize the competitive environment that they are seeing?  Answer:   Foreign exchange headwind there as it was in Africa, Eurasia, was the most severe we experienced in our world for 2015.  CL think about the consumers, the brands and the health of brands and the development of the market share of brand.  But obviously, need to be focused on rebuilding the margin which is the fulcrum for investment in a business.  So in both those divisions, we took conscious decision to take pricing to help recover gross margin and suffered the volume decline you see.  We feel, however, very comfortable because of the performance of our market shares whether you look at the value market share and local currency as Bina talked specifically to Brazil or whether you look at the volume market shares in that region, they’re up.  So Consumer is staying with CL.  General commodity pricing environment year-on-year will be flat to modestly down, which is a positive.  So the consumer behavior hasn’t changed. CL hasn’t seen down trading. CL confident about the reversal back to volume more and price less in 2016 for Latin America and the overall business.  Question:  Comps in Latin America on the volume, so either really tough in the first half of ‘16. So do you think we’re going to see negative volume growth maybe for the next quarter or two, potentially even worse than we just saw in the fourth quarter in Latin America?  Asia, the slowdown in category growth that you’re seeing there, it surprises caller that we’re seeing a slowdown in category growth given the very low per capita consumption levels.  Answer: In Latin America, the expectation is to see – not to see the kind of volume negative that we had in the fourth quarter as we set our way into 2016.  No, CL doesn’t expect to repeat of that level.  Asia, and if you look at the emerging markets in general, the local currency growth rates in category is still mid-single digits, maybe slightly off that in the fourth quarter. We haven’t seen anything dramatic in terms of a change in behavior thus far.  Question:  Indicated that CL saw traditional advertising ratios would be up again as a percentage of sales in 2016. A good deal has changed, since then the macroenvironment, so just curious if that’s still CL expectation in terms of what’s embedded in your outlook, the Super bowl ad notwithstanding.  Answer:  CL expected as we got into their budgeting process that our innovation flow would be such that CL would expect to see coming into 2016, an increase in the traditional advertising while still using the in-store lever as well.  And that is exactly where CL has ended up with their plan.  Question:  How do you define strong organic growth?  How does this fit with Venezuela?  Answer:  In the environment wherein the range we had 4% to 7% bookends strong organic growth and 5% for 2015 in that regard is therefore strong.  2016 without Venezuela is exactly the same way which is to say CL target for organic growth is to grow in that 4% to 7% range without Venezuela.  Chair. M. Ian Cook states that from a top line point of view, the year is off to a bright start.. 

Briefly put, due to the one-time charge with Venezuela, Colgate Palmolive (CL) had a GAAP loss in the fourth quarter of 2015.  Some bounce-back is expected in the beginning of 2016 once this charge is complete.  However, on an ongoing basis, the debt to asset levels are slowly creeping higher, and profit margins continue to sink from quarter to quarter in 2015, exacerbated by the charge of Venezuela.  

Yet, Colgate-Palmolive (CL) continues to wade through that pain to grind on their “Growth and Initiatives” program … 

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