Colgate-Palmolive lowers profit view as dollar gains

Strong US dollar hurts earnings at Colgate-Palmolive, which cut profit forecast

PUBLISHED : Friday, 26 July, 2013, 11:25am
UPDATED : Friday, 26 July, 2013, 11:25am

Colgate-Palmolive cut its this year profit forecast due to the stronger dollar as it posted a lower second-quarter net profit, citing restructuring and other charges.

The toothpaste maker’s earnings, excluding items, were in line with Wall Street’s expectations, despite slightly weaker-than-anticipated sales growth.

Still, Colgate said its sales and margins should keep rising this year as it promotes new products such as Colgate Sensitive SmartFoam with Whitening toothpaste.

Its shares were up 1.6 per cent at US$59.47.

A strong dollar represents a double whammy for US-based companies like Colgate. The company generates most of its sales outside the United States. So when those overseas revenues are brought home and translated into dollars, the US currency’s strength reduces their bookable value and results in lower reported earnings.

The higher dollar also increases production costs versus foreign rivals, making US products less competitive in international markets.

Colgate’s rivals such as Procter & Gamble also have vast international businesses, including in Europe where economic pressure persists. On Monday, Kimberly-Clark said the stronger US dollar may hurt its results more than it previously expected.

Also on Thursday, Europe’s Unilever posted weaker-than-anticipated quarterly sales growth, and said growth in emerging markets was slowing.

Colgate’s organic sales, which strip out the effects of foreign exchange fluctuations, acquisitions and divestitures, rose 5.5 per cent, with the biggest gains in North America, Asia and Africa, and a jump at its Hill’s pet food business as it brought out new pet foods.

In Latin America, its biggest market by far, Colgate continued to be hurt by the impact of February’s devaluation of the Venezuelan bolivar. That contributed to a 1.5 per cent net sales decrease in Latin America and a lower operating profit there.

Organic sales in Latin America, rose 7 per cent, after rising 9 per cent in the first quarter. That growth slowed less than feared, said JP Morgan analyst John Faucher.

For US companies that do business in Venezuela, the devaluation meant their earnings in bolivars were worth less when converted back to dollars.

The US dollar strengthened against foreign currencies in the last four to six weeks of the quarter, leading Colgate to cut its this year earnings guidance by 1 percentage point. Colgate now expects earnings per share to rise 4.5 per cent to 5.5 per cent for the year.

Venezuela accounts for about 5 per cent of Colgate’s total sales. The company warned earlier this year that the devaluation would trim earnings each quarter, as it translates its financial statements at the newer exchange rate.

P&G, the world’s largest household products maker, cited volatility in Venezuela and elsewhere in April when it said that its profit would fall more than Wall Street was anticipating. It is due to post its quarterly results on August 1.

Colgate’s sales in Europe and the South Pacific fell 3 per cent, due to factors such as lower prices and sales declines in France and Greece.

Colgate expects limited growth in Europe for the “foreseeable future,” chairman and chief executive Ian Cook said on a conference call.

Second-quarter net income fell to US$561 million, or 60 cents per share, from US$627 million, or 65 cents per share, a year earlier. Excluding 10 cents per share in after-tax charges, Colgate earned 70 cents per share, in line with analysts’ estimates, according to Thomson Reuters I/B/E/S.

Sales rose 1.9 per cent to US$4.35 billion, less than the US$4.39 billion that analysts expected. Unfavourable foreign exchange lowered sales by 3 percentage points. Pricing rose 1 per cent.

Colgate still expects its gross profit margin to improve by 0.3 to 0.7 percentage points this year, Cook said on the call.