Fitch Ratings has assigned a 'AA-' rating to Colgate-Palmolive Company's (Colgate) 0.9% $400 million notes due May 1, 2018 and 2.1% $400 million notes due May 1, 2023. The company plans to use the proceeds to repay and retire the 4.2%, $250 million note maturing on May 15, 2013 with the remainder for general corporate purposes including repaying commercial paper.
Colgate had $627 million in commercial paper outstanding at March 31, 2013. The new notes are issued under the company's 1992 indenture. Given Colgate's high credit quality, repurchase upon change of control language has not been included in any notes to date.
KEY RATING DRIVERS
The ratings reflect the company's scale with approximately $17 billion in revenues for the last 12 months (LTM) ended March 31, 2013, leading market shares, consistently strong operating performance, and considerable liquidity. Colgate's EBITDA margins of more than 25% are in the top tier of large personal care manufacturers. The company generated $1.4 billion free cash flow (cash flow from operations minus capital expenditures and dividends) for the period. Leverage has been 1.2 times (x) or less in each of the past five years and through the LTM. Fitch expects leverage to remain near 1.2x.
Colgate is one of the most geographically diversified consumer products companies, generating more than 80% of its revenues outside the United States. Latin America (28% of revenues and adjusted operating profit before corporate expenses in the first quarter of 2013) is a particular stronghold where the company maintains very high toothpaste and toothbrush shares of more than 40% (Nielsen Holdings, N.V.). The ratings also encompass potential volatility in revenues and profits from developing markets. More than half of Colgate's revenues are generated from developing markets.
The Stable Outlook is based on Fitch's expectations that Colgate's high level of profitability, cash generation, and credit protection measures with modest leverage will continue into the medium term. Fitch's expectations are predicated on there being no change in management's conservative financial posture and commitment to maintaining leverage appropriate for current rating levels.
For the first quarter ended March 31, 2013 revenues increased 2.5% to $4.3 billion. Colgate's organic revenues increased 6% with a strong 4.5% contribution from volume growth and 1.5% in pricing which partially offset 3% in negative foreign exchange translation and .5% in divestments. The 6% organic growth level exceeded Fitch's expectations given the overall global economic slowdown. EBITDA was flat with last year at $1.1 billion. FCF improved to $392 million from $324 million last year. With the company's focus on cost containment, the benefit of recent price increases and moderation in non-agricultural based commodity costs, Colgate's margins and cash flow should remain ample. LTM FCF of more than $1.4 billion helped by the company's tight working capital management in the quarter. FCF is currently trending higher than Fitch's expectation of approximately $1.2 billion in through 2013.
Liquidity and Debt
The company is highly liquid with a $1.85 billion un-utilized five year bank facility expiring in November 2017, a 364 day $145 million revolver maturing in November 2013, ample cash, and considerable access to the capital markets. The 364 day revolver is likely to be extended as it provides additional support to the company's large CP program. During the quarter, Colgate's CP outstanding can approach total revolver commitments.
Debt balances were essentially flat with year end at almost $5.4 billion as was leverage of 1.2x. Fitch does not expect leverage to increase markedly from this level. Long-term debt maturities over the next four years are modest in relation to Colgate's substantial cash flow. Nonetheless, these maturities are likely to be refinanced as the company manages its capital structure. In 2013, $250 million is due but has already been refinanced with this debt issuance. Maturities after 2013 are $887 million in 2014, $494 million in 2015 and $254 million in 2016.
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. 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. While Colgate's credit protection measures are solid there is little room for further increases in leverage within this rating category.
Fitch rates Colgate as follows:
--Long-term Issuer Default Rating (IDR) 'AA-';
--Short-term IDR 'F1+';
--Senior unsecured notes 'AA-';
--Revolving credit facilities 'AA-';
--Commercial paper program 'F1+'.
The rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Grace Barnett, +1 212-908-0718
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Judi Rossetti, CFA, CPA, +1 312-368-2077
Wesley E Moultrie, II, CPA, +1 312-368-3186
Brian Bertsch, +1 212-908-0549