Colgate-Palmolive Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless noted otherwise, amounts are in millions of dollars. Colgate sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries and territories.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $4,484 | $4,260 | $8,883 | $8,604 |
| Gross profit / margin | $2,554 / 57.0% | $2,556 / 60.0% | $5,126 / 57.7% | $5,193 / 60.4% |
| Operating profit / margin | $884 / 19.7% | $996 / 23.4% | $1,744 / 19.6% | $2,000 / 23.2% |
| Net income attributable to Colgate | $603 | $703 | $1,162 | $1,384 |
| Diluted EPS | $0.72 | $0.83 | $1.38 | $1.63 |
| Cash from operations | Not provided by quarter | Not provided by quarter | $914 | $1,225 |
- Q2 net sales rose 5.5%; organic sales, a non-GAAP measure, increased 9.0%. Higher pricing contributed 8.5%, volume 0.5%, and foreign exchange reduced growth by 3.5%.
- Q2 gross margin fell 300 basis points, chiefly from higher raw and packaging material costs (800 bps), partly offset by pricing (310 bps) and cost savings (190 bps). First-half gross margin declined 270 bps.
- Q2 operating profit declined 11% and diluted EPS fell from $0.83 to $0.72. Excluding the productivity-program charges and prior-year Brazil tax benefit, operating profit declined 8% and adjusted diluted EPS declined 10% to $0.72. First-half adjusted operating profit declined 8%, and adjusted diluted EPS declined 9% to $1.46.
- First-half operating cash flow decreased 25%, mainly due to lower net income and higher inventory. Capital expenditures were $300, versus $237 in the prior-year period.
- At June 30, cash and equivalents were $858; total debt was $7,986, including $7,957 of long-term debt and $13 current maturities. Total current assets were $5,160 and current liabilities $4,395. Debt increased from $7,245 at year-end 2021. The company said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs; it reported compliance with borrowing covenants.
Material changes and business drivers
- Q2 Oral, Personal and Home Care sales increased 3.0% and Hill’s Pet Nutrition sales increased 14.5%. Hill’s growth included 5.5% volume growth and 12.5% higher pricing, partly offset by currency.
- Regional Q2 sales were mixed: Latin America rose 12.5% and North America 6.0%; Europe fell 10.0%, largely reflecting currency and lower volume. Asia Pacific rose 3.5%, while Africa/Eurasia declined 3.5% amid sharp volume and currency headwinds. Organic sales increased in each of these regions except Europe, where they rose 0.5%.
- Profitability weakened across most segments as input and logistics costs increased. Hill’s operating profit was flat despite higher sales; Europe and Asia Pacific operating profit declined 20% and 18%, respectively.
- First-half sales grew 3.0% (organic sales +6.5%), supported by 7.0% higher pricing, partly offset by 0.5% lower volume and 3.5% adverse foreign exchange.
Outlook, risks and unusual items
- Management expected challenging macroeconomic, political and market conditions and higher raw-material, packaging and logistics costs to continue through 2022. It was taking additional pricing to offset costs, while cautioning that inflation and price increases could reduce demand, volumes or product mix.
- The 2022 Global Productivity Initiative is expected to be substantially completed by mid-2023. Estimated cumulative pretax charges are $200–$240 ($170–$200 after tax), with 80%–90% expected to be cash expenditures; projected annualized savings are $90–$110 pretax ($70–$85 after tax). First-half charges were $90 pretax and $70 after tax.
- Capital expenditures for 2022 were expected to be approximately 4.0%–4.5% of net sales. The filing gives no specific full-year sales or EPS guidance.
- COVID-19 effects, supply-chain disruption, inflation, foreign-exchange volatility, competitive pressures and the war in Ukraine remain uncertainties. The company said the war had not materially affected consolidated results to date, but expected ongoing effects on costs, logistics and currency.
- For disclosed legal matters, the company estimated reasonably possible losses in excess of accruals of $0 to approximately $450. Management did not expect ultimate resolution to materially affect consolidated financial position or ongoing results, but acknowledged an adverse outcome could be material in a particular period. Matters include Brazilian tax disputes and 203 pending U.S. talcum-powder cases at June 30; the company contests the claims.
- The company raised its quarterly dividend to $0.47 per share, effective Q2, and had a $5 billion share-repurchase authorization. It repurchased approximately 4.8 million shares during the quarter.
Important facts for investors to verify
- Whether pricing can offset persistent input and logistics inflation without materially damaging volume, demand or mix.
- Whether cash generation improves as inventory levels and working-capital demands normalize; first-half operating cash flow was down 25% year over year.
- Progress, cash costs and realized savings from the productivity initiative relative to management’s estimates.
- Debt growth, refinancing needs, and the company’s capacity to sustain dividends and repurchases alongside capital spending.
- Developments in the disclosed legal matters and the potential impact of currency, COVID-19, geopolitical events and supply-chain disruption.