Key Takeaways:
Revenue were down 0.5% during the quarter. While pricing was better, volume impacted the overall sales number. In emerging markets, seen as the growth driver for the company, organic sales fell 2% (due to difficulties in Brazil and China). Gross margins missed as well, not surprising as transportation and raw material costs increase and market share eroded. Market share currently stands at 41.9% globally in toothpaste and 32.2% in manual toothbrush. The company is working on it country by country, and a relaunch of Total and oral care should help address this issue in early 2019.
Another negative tainted this earnings results, as the management team lowered yet again its 2018 earnings guidance to $2.95-2.98 which represents only 3-4% EPS growth thanks only to share repurchases.
They lost some volume in Brazil after the recent price increase, as competitors did not follow their lead. The launch of new premium products in the pharmacy channel should help going forward.
Two trends to note about China:
1/premiumization of categories led by some local brands.
2/change in consumption patterns and shopping environment (e-commerce – nothing new). To address those problems, they are bringing Elmex (premium toothpaste) to the online channel with the electric toothbrush and a whitening kit.
Europe grew nicely this quarter. India saw volume and price growth, as share improved after innovation & advertising support. This is supportive of their strategy to focus on innovation & advertising to sustain growth going forward.
They are now OK with changing the shape of the portfolio: now less global brands and more local retail/local brands in response to competitors if its needed.
While the stock has done poorly year-to-date and the market share decline (and its impact on financial results) is concerning, 2018 could prove to be the worst year for Colgate as the management team finally addresses the problems by being more local/nimble and flexible on distribution channels. There is not much they can do regarding raw materials and transportation costs increases if scale diminishes, but as market share improves and brand regains its strength, pricing increase to offset this problem should alleviate any earnings disappointments.
The Thesis on Colgate
- High exposure to fast growing emerging markets (36% of Operating Profit from Latin America; 50%+ from EM)
- Defensive Product set (soap and toothpaste). Product line less vulnerable to trade downs due to low private label exposure in the categories
- Strong balance sheet (net debt/ebitda 1.4x) and highest ROIC in the sector
- 2.64% dividend yield
$CL.US
[tag CL]
Julie S. Praline
Director, Equity Analyst
Crestwood Advisors