Fitch Affirms Colgate-Palmolive's IDRs at 'AA-/F1+'; Outlook Stable
NEW YORK -- July 29, 2014
Fitch Ratings has affirmed Colgate-Palmolive Company's (Colgate) ratings as
--Long-term Issuer Default Rating (IDR) at 'AA-';
--Short-term IDR at 'F1+';
--Senior unsecured notes at 'AA-';
--Revolving credit facility at 'AA-';
--Commercial paper (CP) program at 'F1+'.
The Rating Outlook is Stable. Outstanding debt totaling $6.6 billion at March
31, 2014 is affected by this action. A small amount ($24 million) of short
term notes and loans payable are not rated.
KEY RATING DRIVERS
Scale, Strong Credit Measures
The ratings reflect the company's scale with more than $17 billion in revenues
at the last-twelve-months (LTM) ended March 31, 2014, leading market shares,
consistently strong operating performance, and considerable liquidity.
Colgate's adjusted EBITDA margin of approximately 27% is in the top tier of
large personal care manufacturers. The company has generated over $1 billion
in free cash flow (cash flow from operations minus capital expenditures and
dividends) in each of the past five years. Fitch expects the company to
continue generating FCF in the $1 billion range annually despite elevated
CAPEX and restructuring expenditures associated with the 'Global Growth and
Efficiency" program. The four-year restructuring program announced in the
fourth quarter of 2012 has an estimated cost of between $1.1 billion to $1.25
billion (75% cash) with annualized expected savings in the $365 million to
$435 million range by 2016.
Leverage (total debt to operating EBITDA) was 1.4x at the LTM, modestly high
due to pre-funding of debt maturities due in the second quarter of 2014. Fitch
anticipates that leverage will trend back to Colgate's normal level of 1.2x or
less by year end. FFO adjusted leverage was 2.3x.
Broad Geographic Diversification
Colgate is one of the most geographically diversified consumer products
companies, generating more than 75% of its revenues outside the United States.
Further, more than half of Colgate's revenues are generated in comparatively
faster growing developing markets which results in the company's average
organic growth rate of 5% over the past five years being at the top end of its
peer set. Latin America (approximately 29% of revenues and adjusted operating
profit before corporate expenses) is a particular stronghold where the company
maintains very high toothpaste and toothbrush shares of more than 40% (Nielsen
Periodic FX Volatility
A side effect of geographic diversification, particularly with a concentration
in Latin America and emerging markets, is periodic volatility against the U.S.
dollar. Therefore, foreign exchange translation and transaction costs can
create modest short-term volatility in revenues and margins. Given the
company's scale and category leadership, it has effectively managed its cost
or used pricing as an offset. Periodic foreign exchange volatility is
encompassed in the ratings.
The company is highly liquid with a $1.85 billion un-utilized five-year bank
facility expiring in November 2018, a 364-day $145 million revolver maturing
in November 2014, more than $1.7 billion in cash, and considerable access to
the capital markets. Cash balances are higher than normal as the company
raised $1 billion in notes in the first quarter to repay notes maturing in the
second quarter of 2014. Colgate has termed out a significant portion of its
C/P balances though it remains a large user. Average daily balances for the
first quarter of 2014 were $1.4 billion vs $1.7 billion last year, which may
indicate that the company might not need the additional liquidity provided by
the $145 million revolver.
Debt of $6.7 billion is temporarily high but should be $6.1 billion at the end
of the second quarter as two notes approximating $600 million were repaid
during the quarter. Fitch does not expect debt balances to increase markedly
from the $6.1 billion level this year. However, given the company's solid
revenue growth and high margins, debt balances will continue to trend upward
as the company manages its capital structure. Therefore most debt maturities
are likely to be refinanced. Long-term debt maturities over the next few years
are modest in relation to Colgate's substantial cash flow with a $300 million
3.15% note due in November of this year and less than $500 million due in each
of the following two years.
Future developments that may lead to a positive rating action include:
A positive rating action is not likely as Colgate manages its financial
metrics and performance commensurate with the current category. An upgrade
would involve the company's commitment to operate with leverage under 1x while
maintaining more than $1.5 billion in FCF. Fitch notes that Colgate executes
sizeable share repurchase programs and/or medium-sized acquisitions whenever
credit protection measures drift towards a higher rating category.
Future developments that may, individually or collectively, lead to a negative
rating action include:
A negative rating action is not expected given Colgate's low business risk and
conservative management team. However, factors that would be involved in a
negative rating action would be maintaining annual FCF under $1 billion with
leverage in the 1.3x range or higher. The company's EBITDA margin is currently
top tier however moderate sustained declines into the mid 20% range and
material global market share losses in key product categories such as oral
care would also be of concern.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-term Ratings and Parent and
Subsidiary Linkage' (May 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Grace Barnett, +1 212-908-0718
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Judi Rossetti, CFA, CPA, +1 312-368-2077
Michael Paladino, CFA, +1 212-908-0113
Brian Bertsch, +1 212-908-0549
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