COLGATE PALMOLIVE CO quarterly report, Q2 FY2016

Colgate-Palmolive Company — Q2 2016 Form 10-Q

Reporting period: Three and six months ended June 30, 2016. Dollar amounts are in millions unless otherwise noted. The company sells in more than 200 countries and territories; roughly 75% of sales came from outside the U.S. and about 50% from emerging markets.

Financial performance

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Net sales	$3,845	$4,066	$7,607	$8,136
Gross profit	$2,304	$2,367	$4,552	$4,759
Operating profit	$944	$932	$1,811	$1,792
Net income attributable to Colgate	$600	$574	$1,133	$1,116
Diluted EPS	$0.67	$0.63	$1.26	$1.22
Operating margin	24.6%	22.9%	23.8%	22.0%

• Sales and underlying growth: Reported sales fell 5.5% in Q2 and 6.5% year to date, primarily reflecting negative foreign exchange, divestitures and Venezuela’s deconsolidation. Organic sales, a non-GAAP measure, grew 4.5% in both periods. Q2 price increases were 3.0%, offset by 3.0% reported volume declines and 5.5% adverse currency; excluding divestitures and Venezuela, volume rose 1.5%.
• Profitability: GAAP gross margin was 59.9% in Q2 and 59.8% year to date. Excluding restructuring charges, gross margin was 60.2% and 60.1%, respectively, up 190 and 150 basis points year over year. Cost savings and pricing were partly offset by higher raw and packaging costs, including currency-related costs. Adjusted operating profit was $1,003 in Q2 versus $1,000 a year earlier; for six months it was $1,925 versus $1,960.
• Earnings quality: Q2 GAAP net income and diluted EPS increased, but excluding the specified unusual items, Q2 net income declined 1% to $631 and diluted EPS was $0.70, unchanged. For six months, adjusted net income declined 4% to $1,202 and adjusted diluted EPS declined 2% to $1.33. Adjustments include restructuring, prior-year Venezuela remeasurement and foreign-tax items.
• Cash flow: Six-month operating cash flow was $1,320, up from $1,223. Capital expenditures were $248, down from $280; investing activities used $340. Dividends paid were $704 and treasury-share purchases were $482. Cash increased $115 to $1,085.
• Debt and liquidity: Total debt was $6,572 at June 30, compared with $6,548 at year-end; cash was $1,085. Current portion of long-term debt rose to $950 from $298, while long-term debt declined to $5,619 from $6,246. Current assets were $4,614 versus current liabilities of $4,671. The company reported no commercial paper outstanding and said it was in compliance with borrowing covenants.

Material changes and segment trends

• Venezuela was deconsolidated effective December 31, 2015; its assets and operating results are excluded from 2016 consolidated results. This affects comparability, especially in Latin America, and contributes to reported sales declines.
• Q2 Oral, Personal and Home Care sales declined 7.0% to $3,273; Pet Nutrition sales rose 3.5% to $572. Hill’s Pet Nutrition reported 4.0% organic growth and 11% higher operating profit. North America sales rose 2.0%; Latin America reported sales fell 16.5%, while organic sales grew 9.5%. Currency and other portfolio effects materially affected reported regional results.
• Effective April 1, 2016, South Pacific operations moved from Europe/South Pacific management to Asia Pacific. Historical geographic segment information was recast; consolidated results were unaffected.
• The company increased its annualized dividend 3% to $1.56 per share, effective in Q2. The Q2 dividend declared was $0.39 per share.

Outlook, risks and unusual items

• Management expects challenging global macroeconomic and market conditions, heightened competition, volatile currencies and high raw and packaging material costs. It cited pricing, innovation, cost reduction and funding-the-growth initiatives as responses. No specific consolidated sales or EPS guidance is provided in the filing text.
• The 2012 Restructuring Program is expected to run through December 31, 2017. Estimated cumulative pretax charges are $1,405–$1,585, with annual pretax savings of $430–$495 once fully implemented. For 2016, estimated charges are $270–$310 and savings $60–$70 pretax. The program is expected to reduce the workforce by approximately 3,300–3,800 positions.
• A $13 net tax benefit was recorded in Q2 after a foreign court decision in the company’s favor for tax years 2002–2005. Related deductions for 2006–2014, with an estimated tax benefit of approximately $32, remain challenged.
• For disclosed matters, the company estimated reasonably possible losses in excess of accrued liabilities of $0–approximately $250; actual outcomes could differ. Brazilian tax assessments include approximately $141 and $59, both being contested. A French competition fine of $57 and a related $25 fine for which the company says it is entitled to indemnification remain under appeal. A Greek competition matter is pending.
• There were 79 pending talcum-powder cases at June 30; the company said potential losses could not currently be estimated. In an N8 Medical-related lawsuit, plaintiffs alleged approximately $2,500 in damages; the company disputes the allegations, and trial was expected in 2017.
• The Mexico City property transfer was expected in Q3 2016, but site-preparation conditions were not expected to be met by the stated July 29 deadline. The purchaser could terminate the agreement and seek return of the first two installments; management expected to negotiate another amendment.

Investor verification priorities

1. Separate organic growth from reported sales declines and assess the continuing effects of foreign exchange, divestitures and Venezuela’s deconsolidation.
2. Reconcile GAAP earnings with management’s adjusted results, including the $13 foreign-tax benefit and restructuring charges.
3. Monitor debt maturities, the $950 current portion of long-term debt, cash generation, dividends and share repurchases.
4. Track restructuring charges and realized savings against management’s 2016 and cumulative estimates.
5. Review developments in the Brazilian, competition, talcum-powder and N8 matters, and the status of the Mexico property sale.