Colgate-Palmolive Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Dollar amounts are in millions, except per-share data. Colgate operates Oral, Personal and Home Care and Pet Nutrition businesses; approximately 70% of sales came from outside the U.S.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $3,866 | $3,886 | $7,750 | $7,888 |
| Gross profit / margin | $2,308 / 59.7% | $2,301 / 59.2% | $4,595 / 59.3% | $4,709 / 59.7% |
| Operating profit / margin | $888 / 23.0% | $946 / 24.3% | $1,767 / 22.8% | $1,929 / 24.5% |
| Net income attributable to Colgate | $586 | $637 | $1,146 | $1,271 |
| Diluted EPS | $0.68 | $0.73 | $1.33 | $1.45 |
| Operating cash flow | — | $1,249 | $1,297 |
In Q2, sales declined 0.5% as volume growth of 1.0% and pricing of 3.0% were outweighed by a 4.5% foreign-exchange headwind. Organic sales increased 4.0%. For the first half, sales fell 2.0%, with organic sales up 3.5% and foreign exchange a 5.5% headwind. Q2 adjusted gross margin, excluding restructuring charges, rose 30 basis points to 59.6%; adjusted operating margin fell 180 basis points to 24.0%. For the first half, adjusted gross margin fell 40 basis points to 59.4% and adjusted operating margin fell 180 basis points to 23.7%.
Liquidity, debt and capital resources
- At June 30, cash and cash equivalents were $863, current assets $4,255 and current liabilities $3,782. Long-term debt was $6,640, with $1 current; total debt was $6,645. Total liabilities of $13,161 exceeded total assets of $13,151, leaving total equity of negative $10 and Colgate shareholders’ equity of negative $347.
- First-half operating cash flow was $1,249, versus $1,297 a year earlier. Capital expenditures were $146, versus $216. Investing activities used $212; financing activities used $904. Cash increased $137 from year-end 2018.
- First-half dividends paid were $770 and treasury-share purchases were $664. The company raised its annualized dividend to $1.72 per share, effective Q2.
- Debt increased from $6,366 at December 31, 2018. First-quarter euro note issuances totaled €1 billion: €500 million of seven-year notes at 0.50% and €500 million of fifteen-year notes at 1.375%. The company reported compliance with its borrowing covenants.
Material changes and management commentary
- Profitability weakened despite higher Q2 gross margin: Q2 SG&A rose 5% to $1,369, with increased overhead and advertising contributing to margin pressure. Advertising was $416 in Q2, 10.8% of sales. Higher raw and packaging costs partly offset savings and pricing.
- Q2 Pet Nutrition sales increased 3.5% and organic sales 6.0%; Oral, Personal and Home Care sales declined 1.5%, though organic sales rose 3.5%. Asia Pacific and Europe were notable sources of reported sales declines, heavily affected by currency; Asia Pacific also had lower organic sales. Global toothpaste and manual toothbrush share were down 0.9 and 0.7 percentage points, respectively, year to date.
- Management described category growth as below historical levels and competition as heightened. It cited foreign-exchange volatility, high input costs, retailer inventory de-stocking and shelf-access changes, eCommerce and alternative channels, and changing consumer preferences as pressures. It emphasized innovation, consumer engagement, efficiency, cash generation and shareholder returns.
- The Global Growth and Efficiency Program remains in its final year, through December 31, 2019. First-half pretax charges were $71; cumulative pretax charges were $1,793. Total program charges are estimated at $1,820–$1,870 pretax, with annual savings of $590–$635 pretax once projects are implemented. Management expects 2019 pretax charges of $100–$150. Approximately 75% of cumulative charges are expected to require cash expenditure.
- On July 11, 2019, after quarter-end, Colgate agreed to acquire Filorga skin care for €1,495.5 million (approximately $1,690 million) in cash, funded with a combination of debt and cash. Closing was expected in Q3, subject to specified regulatory approvals.
Risks, contingencies and unusual items
- Management estimated reasonably possible legal losses above accrued liabilities at $0 to approximately $225, while cautioning that actual exposure could be higher or lower. It stated that resolution of the matters was not expected to materially affect consolidated financial position or ongoing results, but an adverse outcome could materially affect a particular quarter or year.
- Brazilian matters include disputed tax assessments of approximately $158 and $66, relating to the Kolynos acquisition and foreign-exchange transactions, respectively. The company is contesting them; outcomes remain uncertain.
- There were 237 pending U.S. talcum-powder cases at June 30. The company reported one adverse jury verdict during Q2 and plans to appeal; it says a significant portion of defense and resolution costs may be covered by insurance, subject to policy terms.
- Hill’s expanded a voluntary recall of select canned dog food due to potentially elevated Vitamin D from a supplier error. As of June 30, 35 putative class actions and one individual action had been filed; the supplier indemnifies Hill’s. The company said the recall had no material impact on first-half sales or operating profit and was not expected to have a material future impact.
- Other unusual items include restructuring charges and a foreign-tax benefit in the 2018 comparison period. Q2 GAAP net income and diluted EPS were $586 and $0.68; excluding specified items, management reported $617 and $0.72, versus $673 and $0.77 in Q2 2018.
Important facts for investors to verify
- Whether organic sales growth can continue to offset foreign-exchange pressure, and whether market-share declines stabilize.
- Whether cost savings and pricing can counter raw-material, logistics, overhead and advertising costs and restore operating margins.
- Progress, remaining cash costs and realized savings from the restructuring program as it concludes in 2019.
- Filorga’s final purchase financing, regulatory approvals, closing terms and integration performance.
- Developments in Brazilian tax disputes, talcum-powder litigation and Hill’s recall-related claims, including insurance recoveries and potential costs.
- Debt, cash generation and liquidity after the Filorga acquisition, given negative reported total equity and expected funding needs.