NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Colgate-Palmolive Company's (Colgate) ratings as follows:
--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 Holdings, N.V.).
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 Subsidiary Linkage