Colgate-Palmolive Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unless otherwise noted, financial amounts are in millions of U.S. dollars. Comparisons are with Q1 2017 for income and cash flow, and December 31, 2017 for balance sheet figures.
Business context and results
Colgate operates in Oral, Personal and Home Care and Pet Nutrition, serving more than 200 countries and territories. Approximately 75% of sales are generated outside the U.S. and about 50% in emerging markets. Q1 sales increased 6.5%, but growth was largely currency-driven: foreign exchange contributed 4.5%, volume 2.0%, and pricing was flat. Acquisitions contributed 0.5% to volume; organic sales growth was 1.5%.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net sales | $4,002 | $3,762; up 6.5% |
| Gross profit / margin | $2,408 / 60.2% | $2,269 / 60.3% |
| Operating profit / margin | $983 / 24.6% | $912 / 24.2% |
| Net income attributable to Colgate | $634 | $570 |
| Diluted EPS | $0.72 | $0.64 |
| Operating cash flow | $616 | $691 |
| Capital expenditures | $118 | $121 |
| Cash and cash equivalents | $851 | $1,535 at Dec. 31, 2017 |
| Total debt | $6,709 | $6,577 at Dec. 31, 2017 |
| Total equity | $101 | $243 at Dec. 31, 2017 |
On the company’s non-GAAP basis, excluding Global Growth and Efficiency Program charges, operating profit was $1,007 versus $957, and diluted EPS was $0.74 versus $0.67. Adjusted gross margin declined 40 basis points to 60.3%; management attributed the pressure primarily to higher raw and packaging material costs, partly offset by cost savings. Interest expense rose to $35 from $23, primarily due to higher average interest rates on debt.
Operating cash flow fell 11%, primarily due to increased working capital, including a $211 cash use from receivables. Investing cash use was $881, including approximately $727 paid for acquisitions. Financing cash use was $437, including $352 of dividends paid and $351 of treasury-share purchases. Cash declined by $684 during the quarter. Management said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs.
Material changes and segment performance
- In January, Colgate acquired professional skin-care businesses PCA and Elta for approximately $730 in cash, entering the professional skin-care category. Preliminary allocation included $438 of identifiable intangibles and $332 of goodwill, allocated to North America.
- Oral, Personal and Home Care sales rose 6.5% to $3,418; organic sales grew 1.5%. Pet Nutrition sales rose 5.5% to $584; organic sales grew 1.5%.
- Regional sales growth included North America up 9.0% (organic +5.0%) and Europe up 16.0% (organic +1.5%), with substantial foreign-exchange contributions. Asia Pacific organic sales were flat; Africa/Eurasia organic sales declined 1.0%; Latin America organic sales grew 0.5%.
- Global toothpaste market share was 42.4%, down 0.8 percentage points year over year; manual toothbrush share was 32.5%, down 0.2 points.
- Reported operating margin improved 40 basis points, but adjusted operating margin declined 20 basis points to 25.2%. Higher input costs and pricing pressure weighed on margins across several regions and Pet Nutrition.
Outlook, risks and unusual items
- Management described global macroeconomic and market conditions as highly challenging, citing low category growth, intensified competition and promotions, retailer inventory de-stocking, e-commerce changes, currency volatility and high raw and packaging material costs. The filing provides no specific company-wide sales or EPS guidance.
- The Global Growth and Efficiency Program remains on track and is extended through December 31, 2019. Management estimates cumulative pretax charges of $1,730–$1,885, with annual pretax savings of $560–$635 once approved projects are implemented. For 2018, expected charges are $100–$175 pretax and savings are stated as $90–$120 pretax. The filing gives 2018 after-tax savings as $100–$125, which is higher than the pretax range; investors should verify this apparent inconsistency. The program is expected to reduce employment by 3,800–4,400 positions.
- The Tax Cuts and Jobs Act lowered the U.S. corporate rate to 21%. The company’s estimated full-year effective tax rate before discrete items was 27.3%; its prior-year fourth-quarter provisional tax-reform charge of $275 remained subject to adjustment and was expected to be finalized by Q4 2018. A favorable foreign-court ruling could produce an additional tax benefit of approximately $15 if upheld on appeal.
- Potential reasonably possible legal losses in excess of accruals were estimated at $0–$250 in aggregate for matters whose losses could be estimated. This range excludes talcum-powder and ERISA matters, for which potential losses could not be reasonably estimated. The filing identifies Brazilian tax assessments of approximately $165 and $74, and ongoing competition and other proceedings; management said it did not expect the disclosed matters to materially affect consolidated financial position or ongoing results, while cautioning that an adverse outcome could affect a particular period.
- Other notable items: the company early-adopted guidance allowing reclassification of $163 of stranded tax effects from accumulated other comprehensive income to retained earnings. The revenue standard adopted in 2018 had no material effect. The annualized dividend was increased 5% to $1.68 per share effective Q2 2018.
Important facts for investors to verify
- Underlying sales momentum: organic growth was 1.5% while reported growth was 6.5%, including a 4.5% currency benefit.
- Whether cost savings and pricing can offset elevated material costs and sustain margins.
- Cash generation and debt levels following the skin-care acquisition, share repurchases and dividend payments.
- The 2018 restructuring savings ranges, particularly the inconsistent pretax and after-tax figures in the filing.
- Final adjustments to the $275 tax-reform provision and developments in material legal and tax contingencies.