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Financial Analysis of Colgate-Palmolive

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Financial Analysis of Colgate-Palmolive - February 18th, 2011

Colgate-Palmolive (NYSE: CL) is one of the world's largest Consumer Products companies by market share with commercial presence on six continents.[1] Since its 1806 founding, Colgate has grown into a multinational corporation known for its toothpaste and oral hygiene products with a $15.3 billion in net sales and $2.3 billion in net income for fiscal year 2009.[2] As of the end of 2009, the company holds a staggering 44.4% global market share with its flagship toothpaste line.[3]

Colgate's major advantages are the strength of its brand and its strong, global presence: over 82% of the company's 2009 revenues came from outside the United States. 45% of sales came from rapidly growing emerging markets, with Latin America representing Colgate's single largest source of revenue in 2009.[4] Colgate's brand strength in foreign markets allows the company to command impressive market share and high profit margins. For example, Colgate leads mouthwash sales in Brazil with a market share of 40%.[5] Colgate has been steadily expanding its operations throughout Latin America, Africa, and Asia, maintaining consistent positive sales growth in these regions. For example, in 2009 Colgate increased operating profit from Latin America and Asia/Africa by 15% and 20%, respectively.[4]

Q4 Earnings Results
Contents
1 Q4 Earnings Results
2 Business Overview
2.1 Product Sales by Region
2.1.1 North America
2.1.2 Latin America
2.1.3 Europe/South Pacific
2.1.4 Greater Asia/Africa
2.2 2004-2008 Restructuring
3 Trends & Forces
3.1 Emerging Markets Key for Growth
3.1.1 Latin America: Possible Market Saturation
3.2 Foreign Currency and the Dollar
3.3 Currency devaluation in Venezuela dragging Colgate
3.4 Retail Consolidation
3.5 Rise of Private Labels Leads to More Competition
4 Competition
5 Market Share
Colgate's fourth quarter earnings fell 1.1% on lower-than-expected revenue and higher costs of raw materials. U.S. consumers are still cautious about spending and only slightly increased their spending last year. Net income for the quarter was $624 million, or $1.24 a share, down from $631 million a year earlier. Revenue fell 2.5% to $3.98 billion as organic sales grew 1%. Gross profit margin fell slightly to 59.1% from 59.5% on high material costs, negative FX effects and increased promotional investments. The company reported that sales from Latin America, its biggest aggregate market, dropped 7.5% due to volume losses in Brazil and Venezuela.[6]

Business Overview

Colgate has operations in North America, Latin America, Europe/South Pacific, and Greater Asia/Africa. The company divides its business into two product segments: Oral, Personal and Home Care, and Pet Nutrition.

Oral, Personal and Home Care (86.1% of net sales, 99.1% of operating income)[7]
Oral Care: Colgate's most recognizable products are in oral care, including Colgate-brand toothpaste, toothbrushes, mouth rinses and dental floss. As of the end of 2008, the company holds a staggering 45.1% global market share with its flagship toothpaste product line.[8] Growth in this product line is highly dependent on rebranding and new product introduction. Colgate also produces pharmaceutical products for dentists and other oral health specialists.
Personal Care: Colgate has tried to grow this segment through acquisitions, taking a controlling stake in organic goods company Tom's of Maine in 2006. Primary brands: Irish Spring, Softsoap, Palmolive, Speed Stick, Lady Speed Stick, Crystal Clean, Team Spirit, Afta, Skin Bracer
Home Care: Ajax, Palmolive, Crystal White Octagon, and Dermassage dishwashing detergents/degreasers; Suavitel faric conditioners; Murphy and Ajax household cleaners.
Pet Nutrition (13.9% of net sales, 15.3% of operating income) [7] Colgate's Hill's Pet Nutrition makes specialty pet nutrition products for dogs and cats. Hill's pet products are marketed primarily under two brand names: Science Diet, a wide array of over-the-counter products for everyday use, and Prescription Diet, therapeutic products sold to help malnourished pets threatened by disease.
CEO Ian Cook said in June 2010 that future acquisitions would be in the areas of oral care, pet nutrition and personal care in that order of priority. [9]

Product Sales by Region
Colgate also divides its operations into the following regions:

North America
North America is Colgate-Palmolive's oldest geographic region and one of its most mature markets, representing 19% of total net sales.[10] Growth has slown noticeably in years, though it hasn't stopped: fiscal 2008 saw a North American revenue increase of 5%. [10] To maintain steady growth in this market, Colgate employs three principle strategies:


Continual rebranding--Colgate can convince customers to spend more and growing company sales by releasing new twists on under established brands. Examples: Colgate Luminous Mint Twist toothpaste, Softsoap Brand Pure Cashmere moisturizing body wash, Irish Spring MoistureBlast bar soap
Growth through external acquisition: Acquistions like the Tom's of Maine deal (2006) can help Colgate tap into hot new markets that Colgate itself has little or no expertise in. In Tom's case, it was the rapidly expanding organic personal care products market. Tom's of Maine contributed 0.5% to North American sales growth in 2007.[11]
Latin America
Latin America represents Colgate's single largest geographical region by sales and has been the prime propeller of the company's growth over the past decade.[12] In all, Latin America represented 27% of Colgate's sales.[10] Net sales and operating profit in Latin America both grew 17% in 2008.[10] Strong growth in countries such as Brazil, Colombia and Argentina were driven by core brands such as Colgate Total and Sensitive toothpastes and Lady Speed Stick Double Defense deodorants. Despite the strong performance of this region in the past, analysts now fear that Colgate may be approaching a point of saturation in its Latin American region--if so, a noticeable slowdown in sales growth may be in the company's future.

Europe/South Pacific
At the beginning of 2006, Colgate modified its geographic report structure to "address evolving markets and more closely align countries with similar consumer needs and retail trade structures." As part of this move, Eastern European countries and Russia were transfered to the "Asia" region, while operations in the South Pacific and Australia were transfered to the Europe/South Pacific region. The Europe/South Pacfic segment represents another of Colgate-Palmolive's more mature, slow-growing markets. In 2008, net sales grew 6% and operating profit declined 2%.[10] Again, growth in this more mature market was driven primarily by rebranding and introducing new products such as Colgate Time Control, Colgate Max Fresh and Colgate Sensitive Multi-Protection toothpastes. Colgate also used its acquisition strategy to grow sales with its acquisition of GABA, a Swiss toothpaste maker, in 2003.

Greater Asia/Africa
Eastern European countries and Russia are grouped into the Greater Asia/Africa region because they are more closely aligned with the growing emerging markets found in places like the Philippines, Vietnam and India. The company experiences particularly strong sales growth in Malaysia, Thailand, Vietnam, India and the Gulf States. This segment includes several rapidly growing emerging markets and will likely be a driver of the company's sales growth. Asia and Africa accounted for 17% of net sales in fiscal 2009.[13]

2004-2008 Restructuring
In 2008, Colgate completed a 4-year restructuring program in which it cut 12% of its workforce and closed a third of its factories. [14] production processes were streamlined and eight manufacturing facilities were closed or realigned, including consolidating all Europe toothpaste production into one plant in Poland.[15] Overall, Colgate streamlined its global supply chain, reallocated resources to enhance the operations in high-potential developing countries and consolidated these organizations in certain mature markets.[16] The company incurred a pretax cost of roughly $1 billion as a result of the restructuring, though the plan is expected to save $475-$500 pretax annually. [15] Colgate's management expects the finalization of the restructuring plan to enhance the company's ability to compete in the 2008 recession. [16]

Trends & Forces

Emerging Markets Key for Growth
Emerging markets across the globe present strong growth opportunities for Colgate-Palmolive. In 2009, 45% of sales were in Greater Asia, Africa, and Latin America.[17] As populations grow wealthier in emerging markets such as Brazil, Russia, India and China, consumers are becoming ever more sophisticated shoppers. Colgate Palmolive's strong international brand presence means that it is much more highly exposed to emerging markets than its competitors. Generally, this exposure benefits Colgate--emerging markets can grow at three to four times the rate of developed markets such as the US, Western Europe and Japan, which means more profit opportunities and sales growth for Colgate. [18]

Latin America: Possible Market Saturation
One challenge that has arisen with Colgate's rapid expansion in Latin America is the company's overdependence on growth in that region. In 2008, Latin America accounted for 27% of total sales and 33% of operating profit.[19] Due to fast growth in the region, Latin America alone has contributed to 40% of Colgate's organic growth over the past few years. Because of this high dependence on Latin American growth, the company is highly vulnerable to Latin American economic slowdown and market saturation. This is particularly true of Mexico, where Colgate already has an 80% market share of the toothpaste market. [20]



US Dollar has risen against major basket of currencies [21]
Foreign Currency and the Dollar
Another trend affecting Colgate-Palmolive is the relative strength of the dollar. Although the company is based in the US, Colgate-Palmolive generates more than two thirds of its revenue outside United States.[12] Because of this, the company is very sensitive to the strength of the dollar, with a weaker dollar generally boosting sales. Expectations of Quantitative Easing in the United States has pushed the dollar lower into the fourth calendar quarter of 2010. Currency fluctuations hurt the firm's Q3 2010 revenue, pushing sales into negative growth.[22]

Colgate has broad exposure to foreign currencies and actively hedges a large portion of these to avoid wide swings in earnings from currency fluctations. Although this heding limits the potential upside of a weakening dollar, it also insulates the company from drastic upswings in the dollar's strength.

Currency devaluation in Venezuela dragging Colgate
The devaluation of the currency in Venuzuela in response to growing hyperinflation in the currency has hurt Colgate in fiscal 2010.[3] On January 8, 2010, President Hugo Chavez devalued the Venezuelan bolivar at 50% by creating a two-tiered exchange system for imports, where "essential" items including many consumer staples were valued at 2.6 bolivars per US dollar while other products were subject to a 4.3 bolivar per dollar exchange rate. [23] The lower exchange rate, as well as Venezuela's inflation rate of 31.3%, has hurt Colgate and many of its consumer product competitors such as Procter & Gamble Company (PG) and Avon Products (AVP).

Retail Consolidation
The rise of a handful of powerful low-priced retailers has negatively impacted consumer products companies. A handful of big retailers have captured a large share of the market. For example, from 1999 to 2004, the top 10 food retailers in the US increased their share of food retail sales from 53.4% to 58.9%.[24] These large retailers have shifted the balance of power within the supply chain. For example, Wal-Mart has exerted its power over other suppliers to their detriment in the past, such as forcing record companies to produce clean-label CDs and pulling adult magazines.[25] In addition, many retailers have pushed their own higher margin private label brands in competition with Colgate.

Rise of Private Labels Leads to More Competition
In the past decade, Colgate has faced competition from private label brands or "store brands" of large retailers such as Wal-Mart, Target, and supermarket chains. Private label products often sell at lower price points and earn higher margins because the retailers can control the cost of their production. For example, Wal-Mart offers 5,500 products through its "Great Value" brand, which has increasingly sold as consumers feel the recession squeeze on their disposable income.[26] From 2003 to 2008, sales of Target's private label products rose an average of 15% annually. [26]

Large retailers are close to the consumers, have the point of sale data on consumer behavior and are in better position to understand consumer behavior. These strengths contribute to better private label product development, which directly compete with Colgate products. Retailers also promote their own brands as they earn higher margins on them. However, Colgate continues to maintain a 44.8% market share in toothpaste and a strong brand name,[1] which will make it difficult for private labels to erode Colgate's market leadership. In addition, many analysts believe that outside of home care, Colgate's exposure to private labels is limited. [27]

Competition

Colgate-Palmolive competes in the household consumer products industry indirectly with other companies that produce similar products.

Procter & Gamble provides the broadest and biggest portfolio of products in the household and personal care industry with 24 billion-dollar brands. P&G generates approximately one and half times the revenue than its closest competitor, Unilever (UL), and possesses a higher operating margin (20.30%) than any of its competitors as well. The company invests about $2 billion a year in R&D, nearly twice that of Unilever, and equal to the combined total of its other major competitors — Avon, Clorox Company (CLX), Colgate-Palmolive Company (CL), Energizer Holdings (ENR), Henkel, Kimberly-Clark (KMB), L'Oreal, and Reckitt Benckiser.[28]

Clorox is one of P&G's main competitors, specifically the two companies compete directly in the household products market, especially in household cleaning products. In 2009 Clorox's sales totaled to $5.5 billion, roughly half of which came from sales of household products such as their trademark Clorox bleach products and other cleaning supplies like Pine-Sol.[29] Although much of the two companies' product catalogs overlap, there are significant differences that prevent Clorox from being in complete, direct competition with P&G. For example, one of the largest sectors of P&G's business is beauty products, which are not part of Clorox's product offerings.

Kimberly-Clark competes with P&G in the household products market, particularly in tissues, paper towels, diapers, and feminine products. KMB reported 2009 sales of $19.1 billion. Major K-C brands include Huggies diapers, Kotex feminine products, Scott paper towels and Kleenex tissues. Kimberly Clark sells its products to both consumers and large businesses.

L'Oreal competes with P&G in the beauty products market. In 2009, L'Oreal reported total revenue of $17.5 billion euros. L'Oreal's two biggest product categories are skincare and haircare products. Unlike diversified companies like P&G, L'Oreal is purely a beauty and cosmetics company with its product catalog centered around skincare, haircare, make-up, perfume and other beauty products. However, the beauty industry has much higher margins than certain markets that P&G is involved in, which leads to high profits for L'Oreal.

PG Competitors
Revenue ($M)* Net income ($M)* Operating Margin R&D Spending ($M) R&D as % of Total Revenue Year-over-year Revenue Growth Major Brands/Products
Colgate-Palmolive Company (CL)[30] [31] $13,790 $1,737 14.8% $269 1.4% -1.5% Colgate Toothpaste, Colgate Toothbrushes, Irish Spring Soap, Palmolive Soap, SpeedStick Deodorant
Procter & Gamble[32] [33] $78,938 $12,736 20.30% $1,950 2.5% 3.33% Pantene, Crest, Tide, Downy, Bounty, Folgers, Gillette, Duracell
Unilever NV (UN)[34][35]** €39,823 €3,659 12.6% €891 2.2% -1.73% AXE, Lipton, Slim-Fast, Vaseline, Dove, Ben & Jerry\'s
Clorox Company (CLX)[36][37] $5,534 $603 16.7% $114 2.1% 1.54% Clorox Laundry Bleach, Pine-Sol Cleaner, Glad Plastic Bags, Brita Water Filters
Kimberly-Clark (KMB)[38][39] $19,115 $1,884 14.32% $277 1.52% 9.07% Huggies Diapers, Kleenex Tissue, Scott Paper Towels
L'oreal (LRLCY)[40][41]** €17,473 €2,578 14.8% €609 3.5% -0.39% Garnier Fructis, L\'Oreal Paris, Maybelline, Ralph Lauren
*Fiscal 2010 financials available for PG. All others are fiscal 2009.
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