Colgate-Palmolive Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Amounts are in millions of dollars, except per-share data.
Business context and results
Colgate sells oral, personal and home care products across five geographic regions and pet nutrition products through Hill’s Pet Nutrition. Approximately 70% of sales came from outside the U.S. and approximately 50% from emerging markets.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $3,884 | $4,002 | Down 3%; organic sales up 3% |
| Gross profit / margin | $2,287 / 58.9% | $2,408 / 60.2% | Margin down 130 bps |
| Operating profit / margin | $879 / 22.6% | $983 / 24.6% | Profit down 11%; margin down 200 bps |
| Net income attributable to Colgate | $560 | $634 | Down 12% |
| Diluted EPS | $0.65 | $0.72 | Down 10% |
| Cash from operations | $605 | $616 | Down 2% |
Reported sales reflected 1% volume growth and 2% higher net selling prices, more than offset by 6% negative foreign exchange. Excluding Global Growth and Efficiency Program charges, gross margin was 59.2% (down 110 bps), operating profit was $907 (down 10%), and diluted EPS was $0.67 versus $0.74.
Segments and material changes
- Oral, Personal and Home Care: Sales of $3,284, down 4%; organic sales increased 2.5%. North America sales grew 3%; Latin America, Europe, Asia Pacific and Africa/Eurasia sales declined, largely reflecting currency effects. Asia Pacific organic sales declined 2.5%.
- Hill’s Pet Nutrition: Sales of $600, up 3%; organic sales increased 6%. Operating profit was $164, unchanged, while margin fell 80 bps to 27.3%.
- Global toothpaste share was 41.7%, down 1.0 percentage point year over year; manual toothbrush share was 31.6%, down 1.1 points.
- Higher raw and packaging material costs were the principal gross-margin pressure, partly offset by cost savings and pricing. SG&A fell in dollars, but increased as a percentage of sales; advertising investment rose to $429 from $416.
Cash, debt and liquidity
- Cash and equivalents were $843 at March 31, 2019, versus $726 at year-end; $782 was held by foreign subsidiaries.
- Total debt was $6,661, versus $6,366 at year-end; long-term debt including current portion was $6,656. Shareholders’ equity was negative $210, compared with positive $197 at year-end.
- Operating cash flow was $605. A $102 voluntary contribution to U.S. postretirement plans was a significant cash-flow item. Capital expenditures were $71 versus $118.
- Financing activities used $392, including $366 of dividends and $399 of treasury-share purchases. The company issued €500 of seven-year notes at 0.50% and €500 of 15-year notes at 1.375%; proceeds supported general corporate purposes and debt repayment.
- Management said operating cash flow and debt issuance should meet foreseeable operating and recurring cash needs. Capital expenditures for 2019 were expected to be 2.3%–2.6% of sales. The annualized dividend was increased to $1.72 per share from $1.68, effective Q2 2019.
Outlook, risks and unusual items
- Management expected challenging macroeconomic and market conditions, with category growth below historical levels. It cited intense competition, changing retailer practices, e-commerce and channel shifts, foreign-exchange volatility, and high raw and packaging material costs.
- The Global Growth and Efficiency Program was in its final year, scheduled through December 31, 2019. Cumulative pretax charges were $1,751 to date; total charges were estimated at $1,820–$1,870, with $100–$150 expected in 2019. Fully implemented annual savings were projected at $590–$635 pretax. The filing gives a 2019 savings estimate of $25–$55 pretax and $40–$60 after tax; those figures appear inconsistent and should be checked against the filing.
- Hill’s expanded a voluntary recall of select canned dog food due to potentially elevated vitamin D from a supplier error. Recalled products represented less than 2% of Hill’s annual sales; the company said the recall had no material Q1 impact and was not expected to have a material future impact. Hill’s is entitled to supplier indemnification. Eighteen putative class actions had been filed by quarter-end, two dismissed.
- For disclosed matters with estimable losses, reasonably possible losses above accruals were estimated at $0–$225. This range excludes talcum-powder and ERISA matters whose potential losses could not be reasonably estimated. Brazilian tax disputes include assessments of approximately $151 and $64; management said it believes it should prevail. The French competition appeal was denied in March 2019; a Greek competition fine of $11 is being appealed.
- Adoption of the new lease standard on January 1, 2019 added right-of-use assets of $458 and lease liabilities of $574; management reported no material income-statement or cash-flow impact. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether organic sales growth and pricing can offset currency headwinds, particularly in international markets.
- Progress on input-cost inflation, margin recovery, market-share trends and the expected realization of restructuring savings.
- The 2019 restructuring savings figures, which are stated inconsistently in the filing.
- Debt, negative shareholders’ equity, foreign-held cash, and continued dividends and share repurchases.
- Developments in Brazilian tax disputes, talcum-powder and ERISA litigation, competition matters, and Hill’s recall-related claims.