Colgate Beats on Bottom Line - Analyst Blog

By Zacks Equity Research,

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Colgate-Palmolive Company ( CL ) - a global dealer in consumer goods - came up with third-quarter 2012 adjusted earnings of $1.38 per share, which was in line with the Zacks Consensus Estimate. However, quarterly earnings were approximately 5% above the year-ago quarter's adjusted earnings of $1.31 per share.

Global sales of $4,332 million inched down nearly 1% from the prior-year quarter's level of $4,383 million, since the benefit from a 3% upside in pricing and 3% increase in global unit volumes (excluding divested businesses) were more than offset by a 6% negative impact from foreign exchange.

Moreover, quarterly revenue remained below the Zacks Consensus Estimate of $4,387 million. On an organic basis (excluding foreign exchange, acquisitions and divestitures), the company recorded sales growth of 5%.

Adjusted gross profit margin expanded 180 basis points to 58.6%, driven by increased prices as well as cost savings from the company's funding-the-growth initiatives. This was offset in part by higher raw and packaging material expenses and negative foreign exchange transaction costs. Selling, general and administrative expenses, as a percentage of revenue, grew 60 basis points to 34.6%, on account of a 1% rise in advertising costs.

Third quarter adjusted operating profit of $1,037 million climbed 3% compared to the last year. On a reported basis, including costs associated with the business realignments and the sale of land in Mexico, operating profit inched down 1% to $1,027 million while operating margin expanded 10 basis points to 23.7%.

Colgate-Palmolive's market share of global toothpaste and manual toothbrushes are at record highs year to date at 44.9% and 32.7%, respectively. Global toothpaste and manual toothbrushes share represented an increase of 0.6 and 0.8 share points from the year-ago period.

Segment Discussion

North America sales (18% of total sales) increased 2.5% in the quarter. The growth was primarily driven by a 0.5% upside in prices and a 2% rise in unit volume.

On an organic basis, sales increased 2.5%. Segment operating profit inched up 3% to $219 million while operating margin expanded nearly 10 basis points (bps) to 27.5%. The year-over-year increase in operating profit margin was primarily driven by increased gross profit, which was partially offset by higher selling, general and administrative expenses as a percentage of net sales.

Latin America sales (29% of total sales) were flat year over year as 2.5% and 5.5% increase in volume and pricing, respectively, were fully offset by negative foreign exchange impact of 8.0%. Volume gains were most prominent in Brazil, Ecuador, Mexico and Central America. On an organic basis, sales increased 9%.

Consequently, operating profit inched up 2% to $371 million from the prior-year quarter. Moreover, operating margin expanded 50 bps to 29.8%, primarily due to increased gross profit, which was partially offset by increase in selling, general and administrative expenses.

Europe/South Pacific sales (20% of total sales) dipped 11%, given a decline of 1.5% in unit volume while pricing and foreign exchange had a 1.5% and 9.0% negative impact on growth, respectively. Volume gains were primarily led by better performance in Australia, which were more than offset by volume decline in Western Europe. Organic sales for the region were down by 2.5%.

Operating profit inched up 1% year over year to $198 million. Furthermore, the operating profit margin in the region expanded 270 bps to 22.9%, driven by higher gross profit margin and lower SG&A expenses as a percentage of sales.

Greater Asia/Africa sales (20% of total sales) climbed 5%, with a 7.5% increase in unit volume, primarily led by volume gains in India, China Russia, South Africa, and Thailand. Pricing contributed 4.0% to growth, which was offset by a 6.5% negative impact from foreign currency. On an organic basis, sales grew 11.5%.

Operating profit jumped 14% to $231 million on account of improved gross margins, which came from higher prices and cost benefits from the company's funding-the-growth initiatives. Operating profit margin also expanded 220 bps to 25.8%.

Hill's Pet Nutrition sales (13% of total sales) inched down 1.5%. Unit volume decreased 2.5% as volume declines in the U.S., Japan and Europe overshadowed the volume gains in Russia, Canada and South Africa. Pricing had a 4.0% positive impact on sales growth while foreign exchange negatively impacted sales by 3.0%. On an organic basis, sales grew marginally by 1.5% from the year-ago quarter.

Operating profit increased 16% to $147 million. Furthermore, the operating profit margin expanded 420 bps to 27.8%, primarily due to a rise in gross profit margin, which is offset by an increase in selling, general and administrative expenses, as a percentage of net sales.

Other Financial Details

Colgate-Palmolive ended third-quarter 2012 with cash and cash equivalents of $909 million, total debt of $5,246 million and shareholders' equity of $2,507 million. Net cash provided by operating activities came in at $2,133 million for the nine months ended September 30, 2012.

Global Growth and Efficiency Program

Concurrent to its earnings result, Colgate-Palmolive announced a four-year Global Growth and Efficiency Program or 2012 Restructuring program, with an aim to improvise unit volume, organic sales, and earnings per share and enhance its global leadership position.

The program is expected to cost in between $1,100 million and $1,250 million ($775 million and $875 million after tax). The company is anticipated to save in the band of $365-$435 million ($275-$325 million after tax) annually from the fourth year of the program. Moreover, through the implementation of the program, by the end of 2016, the company may reduce its workforce by approximately 8% from the current level of 38,600.

Looking ahead, Colgate-Palmolive continue to expect registering double-digit earnings per share growth for fiscal 2012, excluding the impact of foreign currency translation. Assuming average currency rates at current spot prices, the company expects currency translation to reduce fiscal 2012 earnings per share growth by 6%-7%. Furthermore, the company still anticipates achieving its targeted gross margin expansion of 75-125 bps in 2012.

Colgate-Palmolive competes with Procter & Gamble Company ( PG ) and Church & Dwight Company Inc. ( CHD ). The company retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, we are maintaining our long-term Neutral recommendation on the stock.

CHURCH & DWIGHT (CHD): Free Stock Analysis Report

COLGATE PALMOLI (CL): Free Stock Analysis Report

PROCTER & GAMBL (PG): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: CHD , CL , PG

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