Colgate-Palmolive Company — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless otherwise noted, amounts are in millions of dollars. Colgate-Palmolive sells Oral, Personal and Home Care products and Hill’s Pet Nutrition products in more than 200 countries and territories.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $4,822 | $4,484 | $9,592 | $8,883 |
| Operating profit | $974 | $884 | $1,883 | $1,744 |
| Net income attributable to Colgate-Palmolive | $502 | $603 | $874 | $1,162 |
| Diluted EPS | $0.60 | $0.72 | $1.05 | $1.38 |
| Gross margin | 57.8% | 57.0% | 57.3% | 57.7% |
| Operating margin | 20.2% | 19.7% | 19.6% | 19.6% |
- Q2 sales rose 7.5%; price increases contributed 11.0%, while volume declined 1.5% and foreign exchange reduced growth by 2.0%. Organic sales, a non-GAAP measure, grew 8.0%.
- Q2 gross margin improved 80 basis points, with pricing and cost savings more than offsetting higher input costs and unfavorable mix. For the six-month period, gross margin declined 40 basis points as raw and packaging costs and mix outweighed pricing and savings.
- Reported Q2 net income and diluted EPS fell 17% and 17%, respectively. Excluding the foreign tax matter and productivity-program charges, company-presented non-GAAP net income was $644 versus $608, and diluted EPS was $0.77 versus $0.72.
- For the first half, company-presented non-GAAP net income was $1,252 versus $1,232 and diluted EPS was $1.50 versus $1.46, excluding specified ERISA, tax, restructuring and recall items.
Cash flow, debt and liquidity
- Six-month operating cash flow was $1,457, up from $914, primarily reflecting improved working capital. Capital expenditures were $347, versus $300; operating cash flow less capital expenditures was approximately $1,110.
- Investing activities used $438 and financing activities used $955. The company paid $847 in dividends and repurchased $551 of treasury shares.
- At June 30, cash and cash equivalents were $819, current assets $5,437 and current liabilities $4,632. Total debt was $8,989, up from $8,766 at year-end 2022. Long-term debt, including current maturities, was $8,970.
- The company issued $1,500 of senior notes in March at fixed coupons of 4.6%–4.8%. It reported compliance with debt covenants and said operating cash flow and debt issuance should meet foreseeable operating and recurring cash needs.
Material changes and unusual items
- A $148 discrete tax charge related to prior-year deductions, partially offset by a $22 reversal of withholding-tax reserves, increased Q2 tax expense by a net $126. The Q2 effective tax rate was 39.8%, versus 24.0%; the estimated full-year rate before discrete items was 24.8%.
- A $267 charge was recorded in Q1 following an appellate decision in an ERISA retirement-plan case. The charge increased plan obligations but, based on current funded status, was not expected to require an immediate company cash contribution. The company petitioned the U.S. Supreme Court for review.
- The voluntary Fabuloso cleaner recall reduced first-half operating profit by $25; management did not expect a material future-period impact.
- The 2022 Global Productivity Initiative generated $27 of first-half pretax charges in 2023, compared with $90 in 2022. Cumulative charges reached $137 pretax by June 30. Management expects completion around mid-2024, total pretax charges of $200–$240 and annualized pretax savings of $90–$110 once all projects are approved and implemented.
Segments, outlook and risks
- Q2 Oral, Personal and Home Care sales rose 5.5% to $3,766; segment operating profit was $955. Hill’s Pet Nutrition sales rose 16.0% to $1,056, but operating profit declined 10% to $191 and its margin fell 520 basis points to 18.1%, primarily due to higher input costs and unfavorable mix.
- Latin America and Africa/Eurasia had strong organic sales growth in Q2, while North America volume declined 7.0%, Europe volume declined 6.5%, and Asia Pacific sales fell 4.5% amid foreign-exchange headwinds. Hill’s organic sales grew 10.5%.
- Management expects challenging conditions, including inflation, higher interest rates, elevated raw and packaging costs, currency volatility and uncertain near-term category growth. Pricing may further pressure consumer demand or shift purchases toward lower-priced products and private label. Competition, retailer practices and changing channels are additional risks.
- Management provided no specific full-year sales or EPS guidance in the supplied filing text. It expects 2023 capital expenditures of approximately 4.0% of net sales. It cited COVID-19 uncertainty, the Ukraine war, supply-chain and logistics pressures, and potential future impairment risk for Filorga assets as areas to monitor.
- For disclosed legal matters, the company estimated aggregate reasonably possible losses above accrued liabilities of $0 to approximately $275, while cautioning actual outcomes could differ materially. Separately, it estimated approximately $145 of tax and interest exposure in an IRS dispute for 2010–2018, which was not included in its uncertain tax positions.
Most important facts for investors to verify
- Whether pricing can sustain organic growth while volume remains under pressure, and whether input-cost relief improves margins—particularly at Hill’s.
- The recurring earnings and cash-flow impact of the discrete tax charge, ERISA matter, Fabuloso recall and productivity program; distinguish reported GAAP results from company-defined non-GAAP results.
- Whether projected productivity savings materialize and whether remaining charges and cash expenditures stay within management’s estimates.
- Debt, interest expense and liquidity trends, including the company’s reliance on commercial paper and access to capital markets.
- Developments in the ERISA appeal, tax disputes and other contingencies, as well as consumer, foreign-exchange and geopolitical risks.