COLGATE PALMOLIVE CO quarterly report, Q2 FY2018

Full document

Business context and reporting period

Colgate-Palmolive Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars, millions except per-share data. Its businesses are Oral, Personal and Home Care and Pet Nutrition; approximately 75% of sales came from outside the U.S.

Financial performance

MetricQ2 2018Q2 2017Six months 2018Six months 2017
Net sales$3,886$3,826$7,888$7,588
Operating profit$946$878$1,929$1,790
Net income attributable to Colgate$637$524$1,271$1,094
Diluted EPS$0.73$0.59$1.45$1.23
  • Sales: Q2 grew 1.5%; organic sales grew 0.5%. First-half sales grew 4.0%; organic sales grew 1.0%. Q2 volume growth was 1.5%, with flat pricing and foreign exchange; acquisitions contributed 1.0% to volume.
  • Margins: Q2 GAAP gross margin was 59.2% (down 90 basis points); excluding restructuring charges, 59.3% (down 140 basis points). GAAP operating margin was 24.3% (up 140 basis points); adjusted, 25.8% (down 80 basis points). First-half adjusted gross and operating margins were 59.8% and 25.5%, down 90 and 50 basis points, respectively.
  • Profit comparison: Q2 GAAP operating profit rose 8%, but excluding restructuring charges fell 1%; adjusted diluted EPS increased 7% to $0.77. First-half GAAP operating profit rose 8%, adjusted operating profit rose 2%, and adjusted diluted EPS rose 9% to $1.51. Adjusted measures exclude restructuring charges and, where applicable, a foreign tax benefit; they are non-GAAP.
  • Cash flow: First-half operating cash flow was $1,297 versus $1,305 a year earlier; capital expenditures were $216 versus $229. Operating cash flow less capital expenditures was approximately $1,081. Cash and cash equivalents fell to $833 from $1,535 at year-end 2017.
  • Debt and liquidity: Total debt was $6,865, up from $6,577 at year-end, largely due to higher short-term borrowings; long-term debt was $6,519 versus $6,566. Cash was $833. Current assets were $4,172 and current liabilities $3,942. Management expects operating cash flow and debt issuance to meet foreseeable operating and recurring cash needs and reported compliance with borrowing covenants.
  • Other: The company paid $756 in dividends and repurchased $696 of treasury shares in the first half. The annualized dividend was increased 5% to $1.68 per share, effective in Q2.

Material changes versus the prior comparable period

  • Q2 organic sales were modest, with regional results mixed. Latin America sales fell 7% (including a 5.5% foreign-exchange headwind); its operating profit fell 15%. Pet Nutrition sales rose 3.5%, but segment operating profit declined 2%.
  • Higher raw and packaging material costs pressured adjusted gross margin: management attributed 320 basis points of Q2 pressure to these costs, partly offset by 180 basis points of savings initiatives. First-half cost pressure was 240 basis points, partly offset by 150 basis points of savings.
  • Q2 reported earnings benefited from a $15 foreign tax benefit and lower restructuring charges than in 2017. The effective tax rate was 24.0% versus 32.4% in Q2 2017; management’s estimated full-year rate before discrete items was 26.4%.
  • Cash used in investing was $1,013 versus $312 in the first half of 2017, reflecting the skin-care acquisitions. In January, Colgate acquired Physicians Care Alliance and Elta MD Holdings for approximately $730, entering professional skin care.
  • Shareholders’ equity was negative $189 at June 30, versus positive $243 at year-end 2017. The balance sheet also reflected substantial treasury stock and accumulated other comprehensive losses.

Outlook, management commentary, risks and unusual items

  • The filing provides no specific full-year sales or EPS guidance. Management described global macroeconomic and market conditions as highly challenging, with low category growth, intensified competition, retail inventory de-stocking, e-commerce-driven changes, currency volatility and high raw-material costs.
  • The Global Growth and Efficiency Program runs through December 31, 2019. Management expects annual savings of $560–$635 pretax ($500–$575 after tax) once approved projects are implemented; 2018 savings are projected at approximately $90–$120 pretax. Estimated 2018 charges are $100–$175 pretax. Approximately 80% of program charges are expected to require cash, and the program is expected to reduce the workforce by 3,800–4,400 positions. Cumulative charges recorded through June 30 were $1,650 pretax.
  • The 2017 U.S. tax-reform provisional charge of $275 remained subject to refinement, with finalization expected by Q4 2018. A $15 foreign tax benefit was recorded in Q2 after favorable court rulings resolved the disclosed disputes.
  • Management said Argentina’s July 1, 2018 hyperinflationary-economy designation was not expected to materially affect the financial statements. Adoption of the new revenue standard had no material impact.
  • Legal matters include Brazilian tax assessments of approximately $144 and $64, French and Greek competition matters, 222 pending talcum-powder cases, and a certified ERISA class action. The estimated reasonably possible losses above accrued liabilities for matters that could be estimated were $0–approximately $200; this range excludes talcum-powder and ERISA matters, for which losses could not be reasonably estimated. Management believes ultimate resolution will not materially affect consolidated financial position or ongoing results, but acknowledges an adverse outcome could materially affect a particular period.
  • Management identified foreign exchange, commodity costs, competitive and pricing pressures, retail practices, supply-chain disruption, restructuring execution, acquisition integration and legal outcomes as risks. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether organic sales and volume trends improve, particularly in Latin America and Oral, Personal and Home Care, and how market-share declines in toothpaste affect growth.
  2. Whether pricing and productivity savings can offset raw-material inflation and restore adjusted gross and operating margins.
  3. Actual cash generation, working-capital needs, acquisition spending, share repurchases and the effect of short-term borrowing on leverage and liquidity.
  4. Progress, cash costs and realized savings from the restructuring program, and any updates to the tax-reform provisional amount or 2018 tax-rate outlook.
  5. Developments in the Brazilian, talcum-powder, ERISA and competition matters, including potential losses not captured in the disclosed estimable range.