Fitch Affirms Colgate at 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed Colgate-Palmolive Company's (Colgate) long-term Issuer Default Rating (IDR) at 'AA-' and short-term IDR at 'F1+'.

The Rating Outlook is Stable. Outstanding debt totaling $6.7 billion at June 30, 2015 is affected by this action.

A full list of rating actions follows at the end of the release.

KEY RATING DRIVERS

Scale, Strong Credit Measures

The ratings reflect the company's scale with approximately $17 billion in revenues at the last 12 months (LTM) ended June 30, 2015, leading market shares, consistently strong operating performance, and considerable liquidity. Colgate's adjusted EBITDA margin of approximately 28% is in the top tier of large household and personal care manufacturers. Leverage (total debt to operating EBITDA) was 1.3x at the LTM, modestly above the company's normal operating range due to the negative effects of foreign exchange.

The company has generated approximately $1 billion in free cash flow (FCF; cash flow from operations minus capital expenditures and dividends) in each of the past five years and through the LTM. 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 and expanded in late 2014 has an estimated total cost of $1.3 billion to $1.4 billion (75% cash) with annualized expected savings in the $405 million to $475 million range by 2016.

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, half of Colgate's revenues are generated in comparatively faster growing emerging markets. As a result, the company's average organic growth rate of 5% over the past five years places it 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.

Periodic FX Volatility

A side effect of geographic diversification, particularly with a concentration in emerging markets, is periodic currency volatility. Therefore, foreign exchange translation and transaction costs can create moderate short-term swings 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, such as the 11% or so negative impact to revenue growth in the first half of 2015, is encompassed in the ratings.

KEY ASSUMPTIONS

--Mid-single-digit organic growth in 2015 and 2016. The company is on target in the first half of 2015.

--EBITDA margins remain in the 27% range. Despite current pressure from F/X, Fitch expects the company to manage most of the pressure via cost savings programs and pricing. The LTM EBITDA was margin of 28% and on track with this assumption for 2015.

--FCF remains in the $1 billion range annually.

--Leverage remains in the 1.2x range although currencies may elevate the metric in the near term.

RATING SENSITIVITIES

Future developments that may lead to a positive rating action include:

--An upgrade would involve the company's commitment to operate with leverage under 1x while maintaining more than $1.5 billion in FCF. This is not anticipated at this time. Fitch notes that Colgate has historically managed its discretionary activities to maintain leverage near 1.2x.

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 annual FCF under $1 billion with leverage sustained over the mid 1x range. The company's 28% EBITDA margin is currently top tier; however, sustained declines below the mid-20% range and global market share losses in key product categories such as oral care would also be of concern. Colgate's leaders has traditionally been from within the company and with a consistent mindset, particularly to maintaining strong credit protection measures. If there was a change in several of the top leaders (particularly the CEO) with outsiders, Fitch's concern related to adherence to top tier credit metrics in exchange for a 'needle moving' strategic event would be heightened.

LIQUIDITY

Significant Liquidity

The company is highly liquid with more than $1 billion in cash, a $2.37 billion un-utilized five-year bank facility expiring in November 2019, a 364-day $165 million revolver maturing in November 2015, a $20 million 364-day revolver maturing in December 2015, and considerable access to the capital markets. Colgate has termed out a significant portion of its C/P balances though it remains a large user. Average daily balances in the first half of 2015 was approximately $2 billion.

Manageable Debt

Debt of $6.7 billion and leverage of 1.3x is modestly above Fitch's expectations due in part to sales deleverage caused by negative translation. However, there is no impact to the ratings as periodic F/X volatility is expected and the company's core operations remain solid as reflected by organic growth in the 4% to 6% range, incremental reported market share growth in key categories, and stable to improving margins over the long term. Fitch expects debt balances to continue trending upward over time as the company manages its capital structure with leverage in the low 1.2x range. 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 less than $700 million due annually in each of the next three years.

FULL LIST OF RATING ACTIONS

Fitch affirms Colgate's 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.

Date of Relevant Rating Committee: Aug. 25, 2015.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Evaluating Corporate Governance (pub. 12 Dec 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989949

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989949

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Grace Barnett
Director
+1-212-908-0718
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Committee Chairperson
Monica Aggarwal
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Grace Barnett
Director
+1-212-908-0718
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Committee Chairperson
Monica Aggarwal
Managing Director
+1-212-908-0282
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com