NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to Colgate Palmolive Company's (Colgate) $600 million senior unsecured 30-year note. Fitch currently rates Colgate's IDR 'AA-'. The Rating Outlook is Stable. Proceeds will be used for general corporate purposes including repaying commercial paper. As of June 30, 2015 Colgate had $236 million in outstanding CP. However, CP balances are typically higher within the reporting period with average daily balances of $2 billion in the first quarter.
The new notes are issued under the company's 1992 indenture and may be redeemed at Colgate's option. Given Colgate's high credit quality, repurchase upon change of control language has not been included in any notes to date.
KEY RATING DRIVERS
Scale, Strong Credit Measures
The ratings reflect the company's scale with more than $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 personal care manufacturers. Leverage (total debt to operating EBITDA) was 1.3x at the LTM and Fitch anticipates that leverage will trend back to Colgate's normal level of 1.2x or less by year end.
The company has generated approximately $1 billion in free cash flow (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 cost of between $1.3 billion to $1.4 billion (75% cash) with annualized expected savings in the $407 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 emergency 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 modest 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.
--Mid-single-digit organic growth. 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 the pressure via cost savings programs and pricing. The LTM EBITDA was margin of 28% and on track with this assumption.
--FCF remains in the $1 billion range.
--Leverage remains in the 1.2x range.
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 noted that Colgate increases its discretionary activities to manage within certain metrics.
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 annual FCF under $1 billion with leverage sustained over 1.5x. The company's 28% 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.
LIQUIDITY AND DEBT STRUCTURE
The company is highly liquid with a $2.37 billion un-utilized five-year bank facility expiring in November 2019, a 364-day $165 million revolver maturing in November 2015, more than $1 billion in cash, 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 2014 were $1.4 billion.
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 5% range and improving margins. Fitch expects debt balances to continue trending upward over time as the company manages its capital structure and 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 four years.
Fitch currently rates Colgate as follows:
--Long-term Issuer Default Rating (IDR) 'AA-';
--Short-term IDR 'F1+';
--Senior unsecured notes 'AA-';
--Revolving credit facility 'AA-';
--Commercial paper (CP) program 'F1+'.
The Rating Outlook is Stable.
Date of Relevant Committee: July 28, 2014.
Additional information is available at 'www.fitchratings.com'.