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Business Context and Reporting Period

Company: Colgate-Palmolive Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: The Company operates in two primary segments: Oral, Personal and Home Care (divided into North America, Latin America, Europe/South Pacific, and Greater Asia/Africa) and Pet Nutrition (Hill's Pet Nutrition). The Company is executing a four-year restructuring program (2004 Restructuring Program) expected to conclude by December 31, 2008.

Key Financial Metrics

Margins (YTD 2008): Gross Profit Margin was 56.5% (up from 56.2% in YTD 2007). Operating Profit Margin was 19.4% (up from 19.8% in YTD 2007).

Material Changes vs. Prior Period

• Sales Growth: Worldwide net sales increased 16.5% in Q2 2008 and 16.0% YTD 2008. Growth was driven by volume (5.0%), net selling price increases (4.5% in Q2), and a positive foreign exchange impact (7.0% in Q2).
• Profitability: Operating profit increased 17% in Q2 2008 and 14% YTD 2008. This was aided by a decrease in restructuring charges compared to the prior year.
• Restructuring Charges: Pretax charges for the 2004 Restructuring Program were $38.9 million in Q2 2008 (down from $55.4 million in Q2 2007) and $77.3 million YTD 2008 (down from $101.3 million YTD 2007).
• Segment Performance:
  • Latin America: Sales up 23.5% in Q2; Operating profit up 19%.
  • Greater Asia/Africa: Sales up 17.5% in Q2; Operating profit up 21%.
  • Pet Nutrition: Sales up 19.5% in Q2; Operating profit up 6%, though margins were pressured by higher agricultural commodity costs.
• Divestitures: The Company sold its household bleach businesses in Latin America in 2007. In 2008, it divested its fabric care business in Senegal, which reduced sales growth by 0.5%.

Guidance, Outlook, Risks, and Unusual Items

• Restructuring Outlook: The 2004 Restructuring Program is on schedule to complete by December 31, 2008. Cumulative pretax charges are estimated between $1,000 million and $1,075 million. Expected annual savings range from $425 million to $475 million pretax.
• Capital Allocation: Capital expenditures for 2008 are expected to be approximately 4.5% of Net sales. The Company increased its annualized common stock dividend by 11% to $1.60 per share in Q1 2008. A new stock repurchase program authorizing up to 30 million shares was approved in January 2008.
• Market Risks: Management notes that increasing material and commodity costs will impact gross profit margins in the near-term, though price increases and cost-savings initiatives are expected to offset these pressures.
• Legal and Tax Contingencies:
  • Mexico: Significant tax assessments totaling approximately $1.6 billion (including interest/penalties) regarding VAT credits and transfer pricing. The Company intends to challenge these vigorously.
  • Brazil: Ongoing disputes regarding tax assessments related to the 1995 Kolynos acquisition and foreign exchange filings. The Company believes it will prevail.
  • Competition Law: Investigations into potential competition law violations are underway in multiple European countries (France, Germany, UK, etc.). No fines have been levied against the Company to date.
• Unusual Items: Q2 2008 included a $13.0 million provision for legal and environmental costs. YTD 2007 included a $48.6 million gain on the sale of the Latin American bleach business and a $13.6 million charge for a Hill's Pet Nutrition voluntary recall.

Investor Verification Checklist

• Commodity Cost Exposure: Verify the extent to which raw material and packaging cost increases are being passed through to consumers via price hikes versus absorbed in margins.
• Restructuring Completion: Monitor the final cumulative costs of the 2004 Restructuring Program against the $1,000-$1,075 million estimate and the realization of projected $425-$475 million annual savings.
• Foreign Exchange Sensitivity: Assess the impact of currency fluctuations, which contributed 7.0% to Q2 sales growth, on future reported earnings.
• Legal Reserves: Review the status of the Mexican tax assessments and Brazilian legal proceedings to ensure adequate reserves are maintained for potential liabilities.
• Working Capital Trends: Analyze the increase in working capital (3.5% of sales YTD 2008 vs. 3.3% YTD 2007) driven by inventory build-up and receivables growth.