Colgate-Palmolive Company — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Dollar amounts are in millions unless stated otherwise. The company sells oral, personal and home care products and pet nutrition products in more than 200 countries and territories; approximately 70% of sales are outside the U.S.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $3,845 | $3,974 | $11,733 | $11,562 |
| Operating profit | $874 | $957 | $2,803 | $2,747 |
| Net income attributable to Colgate | $523 | $607 | $1,794 | $1,701 |
| Diluted EPS | $0.60 | $0.68 | $2.05 | $1.91 |
| Gross margin | 59.0% | 60.0% | 59.5% | 60.1% |
| Operating margin | 22.7% | 24.1% | 23.9% | 23.8% |
- Q3 sales: Down 3.0% year over year; organic sales declined 0.5%. Foreign exchange reduced sales 4.0%; pricing added 1.0%, volume was flat and acquisitions added 1.5% to volume.
- Q3 profitability: Reported operating profit fell 9%. Excluding Global Growth and Efficiency Program charges, operating profit declined 10% and operating margin fell 190 basis points to 23.4%. Higher raw and packaging costs weighed on gross margin; cost savings and pricing partly offset the pressure.
- Nine-month results: Sales rose 1.5%, with organic sales up 0.5%. Reported operating profit increased 2%, but declined 2% excluding restructuring charges. Reported diluted EPS increased 7%; adjusted diluted EPS, as presented by the company, increased 5% to $2.23.
- Cash flow: Operating cash flow was $2,194 for the first nine months, down from $2,295. Investing activities used $1,174, including approximately $730 for acquisitions; capital expenditures were $321. Financing activities used $1,701, including $1,122 of dividends and $956 of treasury-share purchases. Cash declined $694 to $841.
- Debt and liquidity: Total debt was $6,604 at September 30, compared with $6,577 at year-end; cash was $841. Long-term debt was $6,519 and notes and loans payable were $85. Management said operating cash flow and debt issuance should meet foreseeable operating and recurring cash needs. The company reported compliance with borrowing covenants.
- Dividends and repurchases: The annualized dividend was increased 5% to $1.68 per share effective Q2 2018. The board authorized a new $5 billion repurchase program; $4.707 billion remained available at September 30.
Material changes and business drivers
- Q3 Oral, Personal and Home Care sales declined 4.0%, with organic sales down 1.0%; Pet Nutrition sales increased 1.5%, with organic sales up 3.0%.
- Latin America and Asia Pacific were significant Q3 pressure points: organic sales fell 3.5% and 4.0%, respectively. North America organic sales rose 2.0%; Europe rose 0.5%; Africa/Eurasia rose 2.5%.
- Year-to-date global toothpaste market share was 41.9%, down 1.3 percentage points; manual toothbrush share was 32.2%, down 0.6 points.
- The company acquired professional skin care businesses Physicians Care Alliance and Elta MD for approximately $730 in January, adding goodwill and intangible assets. The acquisitions contributed to North American sales growth and intangible-asset amortization.
Outlook, management commentary and risks
- Management characterized market conditions as highly challenging, citing low category growth, increased competitive and promotional activity, retailer inventory de-stocking, e-commerce shifts, currency volatility and high raw and packaging material costs. No specific full-year sales or EPS guidance is provided in the supplied filing text.
- The Global Growth and Efficiency Program runs through December 31, 2019. Management expects total pretax charges of $1,730–$1,885, including $125–$165 in 2018, and annual pretax savings of $560–$635 once approved projects are implemented. 2018 savings were estimated at $90–$120 pretax. Approximately 80% of total program charges are expected to be cash expenditures; the program is expected to reduce global positions by 3,800–4,400.
- The Q3 results include an $80 provisional U.S. tax-reform charge. Management said the estimate may change as further guidance and information become available. The estimated full-year effective tax rate before discrete items was 25.1%.
- Management cited reasonably possible legal losses of $0–approximately $200 in excess of accrued liabilities for matters where estimates could be made; this range excludes talcum-powder and ERISA matters whose potential losses could not be reasonably estimated. Brazilian tax assessments include approximately $139 and $62 in disputed matters. The company is appealing competition-law fines in France and Greece and reported 215 pending talcum-powder cases. Management believes the matters will not materially affect consolidated financial position or ongoing results, but notes an adverse outcome could materially affect a particular period.
- Argentina was treated as hyper-inflationary beginning July 1, 2018; the company said the effect was not material and is not expected to be material. The company also planned to adopt the new lease accounting standard on January 1, 2019 and was still assessing its impact.
Important facts for investors to verify
- Whether sales and organic growth stabilize, particularly in Latin America and Asia Pacific, and whether market-share declines continue.
- Whether cost savings offset raw-material, packaging, foreign-exchange and competitive pressures sufficiently to recover margins.
- Actual progress, cash costs and realized savings under the restructuring program, compared with management’s estimates.
- Final effects of U.S. tax-reform guidance and the company’s resulting effective tax rate.
- Cash generation, debt levels and capital allocation, including the pace of repurchases and dividends relative to liquidity.
- Developments in legal and tax proceedings, especially Brazilian assessments and talcum-powder and ERISA cases.