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| CL > SEC Filings for CL > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
Colgate-Palmolive Company seeks to deliver strong, consistent business results and superior shareholder returns by providing consumers on a global basis with products that make their lives healthier and more enjoyable.
To this end, the Company is tightly focused on two product segments: Oral, Personal and Home Care; and Pet Nutrition. Within these segments, the Company follows a closely defined business strategy to develop and increase market leadership positions in key product categories. These product categories are prioritized based on their capacity to maximize the use of the organization's core competencies and strong global equities and to deliver sustainable long-term growth.
Operationally, the Company is organized along geographic lines with specific regional management teams having responsibility for the business and financial results in each region. The Company competes in more than 200 countries and territories worldwide with established businesses in all regions contributing to the Company's sales and profitability. This geographic diversity and balance help to reduce the Company's exposure to business and other risks in any one country or part of the world.
The Oral, Personal and Home Care segment is operated through four reportable operating segments: North America, Latin America, Europe/South Pacific and Greater Asia/Africa, all of which sell to a variety of retail and wholesale customers and distributors. The Company, through Hill's Pet Nutrition, also competes on a worldwide basis in the pet nutrition market, selling its products principally through the veterinary profession and specialty pet retailers.
On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include market share, sales (including volume, pricing and foreign exchange components), organic sales growth, gross profit margin, operating profit, net income and earnings per share, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. The monitoring of these indicators, as well as the Company's corporate governance practices (including the Company's Code of Conduct), are used to ensure that business health and strong internal controls are maintained.
To achieve its business and financial objectives, the Company focuses the organization on initiatives to drive and fund growth. The Company seeks to capture significant opportunities for growth by identifying and meeting consumer needs within its core categories, through its focus on innovation and the deployment of valuable consumer and shopper insights in the development of successful new products regionally, which are then rolled out on a global basis. To enhance these efforts, the Company has developed key initiatives to build strong relationships with consumers, dental and veterinary professionals and retail customers. Growth opportunities are greater in those areas of the world in which economic development and rising consumer incomes expand the size and number of markets for the Company's products.
The investments needed to fund this growth are developed through continuous, Company-wide initiatives to lower costs and increase effective asset utilization through which the Company seeks to become even more effective and efficient throughout its businesses. The Company also continues to prioritize its investments toward its higher margin businesses, specifically Oral Care, Personal Care and Pet Nutrition.
The Company operates in a highly competitive global marketplace and looking forward, expects global macroeconomic and market conditions to remain highly challenging. As previously disclosed in "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, with approximately 75% of its Net sales generated outside of the United States, the Company is exposed to changes in economic conditions, movements in commodity prices and foreign currency exchange rates, as well as political uncertainty in some countries, all of which could impact future operating results. Exchange control limitations or a significant currency devaluation in Venezuela (6% of the Company's Net sales) could have a material adverse impact on operating results in a particular quarter or year.
Lower commodity and oil prices as compared with 2008 have had a favorable impact on the Company's results for the first nine months of 2009 and should have a similar impact for the remainder of the year. The Company believes that this effect should continue and, coupled with ongoing aggressive savings programs and a weakening dollar, should offset the impact of any pressures on selling prices or the costs of any consumption building programs to drive volume that may be required given the current economic environment. However, difficult macroeconomic conditions and uncertainties in the global credit markets could negatively impact the Company's suppliers, customers and consumers which could, in turn, have an adverse impact on the Company's business.
The finalization of the 2004 Restructuring Program should enhance the Company's ability to compete successfully in the current environment. As a result of the 2004 Restructuring Program, the Company streamlined its global supply chain, reallocated resources to enhance its sales, marketing and new product organizations in high-potential developing countries and other key markets and consolidated these organizations in certain mature markets. Savings are estimated to be in the range of $475 to $500 pretax ($350 to $375 aftertax) annually, substantially all of which will increase future cash flows. The savings and benefits from the 2004 Restructuring Program, along with the Company's other ongoing cost-savings and growth initiatives, are anticipated to provide additional funds for investment in support of key categories and markets and new product development, while also supporting an increased level of profitability.
Accordingly, the Company believes it is well prepared to meet the challenges ahead due to its strong financial condition, experience operating in challenging environments and continued focus on the Company's strategic initiatives: getting closer to the consumer, the profession and customers; effectiveness and efficiency in everything; innovation everywhere; and leadership. This focus, together with the strength of the Company's global brand names and its broad international presence in both mature and developing markets, should position the Company well to increase shareholder value over the long-term.
Results of Operations
Worldwide Net sales were $3,998 in the third quarter of 2009, level with the third quarter of 2008 as volume growth of 1.5% and net selling price increases of 5.0% were offset by a negative foreign exchange impact of 6.5%. The 2008 divestment of a non-core brand in Germany impacted sales growth for the third quarter of 2009 by 0.5% versus the comparable period of 2008. Excluding the impact of this divestment, Net sales increased 0.5% on volume growth of 2.0%. Worldwide organic sales (Net sales excluding the impact of foreign exchange, acquisitions and divestments) grew 7.0% in the third quarter of 2009.
Net sales in the Oral, Personal and Home Care segment were $3,467 in the third quarter of 2009, level with the third quarter of 2008, as volume growth of 2.0% and net selling price increases of 5.5% were offset by a negative foreign exchange impact of 7.5%. The 2008 divestment of a non-core brand in Germany impacted sales growth for the third quarter of 2009 by 0.5% versus the comparable period of 2008. Excluding the impact of this divestment, Net sales increased 0.5% on volume growth of 2.5%. Organic sales in the Oral, Personal and Home Care segment grew 8.0% in the third quarter of 2009.
Net sales in North America increased 3.0% in the third quarter of 2009 to $740 as a result of volume growth of 5.0%, partially offset by net selling price decreases of 1.5% and a negative foreign exchange impact of 0.5%. Organic sales in North America grew 3.5% in the third quarter of 2009. Products contributing to the growth in oral care included Colgate Total Enamel Strength, Colgate Sensitive Enamel Protect, Colgate Max Fresh with Mouthwash Beads and Colgate Max White with Mini Bright Strips toothpastes, Colgate 360° ActiFlex, Colgate Max Fresh and Colgate Max White manual toothbrushes and the new Colgate Wisp mini-brush. Successful new products in other categories contributing to growth included Softsoap Nutri Serums, Softsoap Body Butter Apricot Scrub and Irish Spring Hair and Body and Cool Relief body washes and Ajax Lime with Bleach Alternative dish liquid. Operating profit in North America increased 32% in the third quarter of 2009 to $217, as increased advertising was more than offset by higher sales driven by new products, lower raw and packaging material costs and a continued focus on cost-savings programs.
Net sales in Latin America increased 5.0% in the third quarter of 2009 to $1,136 as volume growth of 3.0% and net selling price increases of 13.0% were partially offset by a negative foreign exchange impact of 11.0%. Organic sales in Latin America grew 16.0% in the third quarter of 2009. Volume gains were achieved in most countries, led by a significant increase in Venezuela. Products contributing to the growth in oral care included Colgate Total Professional Sensitive, Colgate Total Professional Whitening and Colgate Max Fresh Night toothpastes, Colgate 360° Deep Clean and Colgate Max White manual toothbrushes, and Colgate Plax Complete Care mouthwash. Products contributing to growth in other categories included Fabuloso Oxy liquid cleaner, Lady Speed Stick Depil Control and Speed Stick Waterproof deodorants, and Suavitel GoodBye Ironing and Suavitel Magic Moments fabric conditioners. Operating profit in Latin America increased 11% to $346, reflecting higher pricing, a continued focus on cost-savings programs and lower advertising costs, partially offset by the negative impact of foreign exchange.
Net sales in Europe/South Pacific decreased 5.5% in the third quarter of 2009 to $896 as volume growth of 2.5% and level net selling prices were more than offset by an 8.0% negative impact of foreign exchange. The 2008 divestment of a non-core brand in Germany impacted sales growth for the third quarter of 2009 by 0.5% versus the comparable period of 2008. Excluding the impact of this divestment, Net sales decreased 5.0% on volume growth of 3.0%. Organic sales in Europe/South Pacific increased 3.0% in the third quarter of 2009. Volume gains were led by France, Germany, the United Kingdom, Denmark, Greece, Portugal and the GABA business. Successful products in oral care included Colgate Sensitive Pro Relief, Colgate Total Advanced Sensitive and Colgate Max Fresh with Mouthwash Beads toothpastes, Colgate 360° ActiFlex, Colgate Max White and Colgate Zig Zag toothbrushes, and Colgate Plax Alcohol Free and Colgate Plax Ice mouth rinses. Successful products in other categories included Palmolive Aromatherapy Morning Tonic and Palmolive Thermal Spa Beauty Soft shower gels, Ajax Professional bucket dilutable and Ajax Professional glass cleaners, Lady Speed Stick Aloe spray deodorant and Soupline Magic Moments and Soupline Aroma Tranquility fabric conditioners. Operating profit in Europe/South Pacific increased 6% to $219, reflecting a continued focus on cost-savings programs, lower advertising costs and lower raw and packaging material costs, partially offset by the negative impact of foreign exchange.
Net sales in Greater Asia/Africa decreased 3.0% in the third quarter of 2009 to $695 as net selling price increases of 7.0% were more than offset by 2.5% volume declines and a 7.5% negative impact of foreign exchange. Organic sales in Greater Asia/Africa increased 4.5% in the third quarter of 2009. Volume gains in India, Thailand and Turkey were more than offset by volume declines in Russia, Philippines, South Africa and Ukraine. Successful new products driving oral care growth included Colgate Total Professional Clean and Colgate Sensitive Enamel Protect toothpastes, Colgate 360° ActiFlex, Colgate Max Fresh and Colgate Extra Clean Gum Care manual toothbrushes, and Colgate Plax Ice mouthwash. New products contributing to growth in other categories included Protex hand sanitizer, Protex Clean and Pure shower cream and bar soap and Lady Speed Stick Cloud Freshness deodorant. Operating profit in Greater Asia/Africa increased 17% to $161, reflecting higher pricing and lower raw and packaging material costs, partially offset by the negative impact of foreign exchange.
Net sales in Hill's Pet Nutrition increased 1.5% in the third quarter of 2009 to $531 as net selling price increases of 4.5% were partially offset by 2.5% volume declines and a negative foreign exchange impact of 0.5%. Organic sales in Hill's Pet Nutrition grew 2.0% in the third quarter of 2009. Volume growth achieved in France, Mexico and Australia was more than offset by volume declines in the U.S. Successful products within the U.S. specialty pet channel included Science Diet Culinary Creations Feline and a significantly expanded line of Science Diet Simple Essentials Treats Canine. Successful new products contributing to international sales included Science Plan Simple Essentials Snacks Canine and Science Plan Healthy Mobility Canine. Operating profit in Hill's Pet Nutrition increased 2% to $136, reflecting a continued focus on cost-savings programs, higher pricing and lower raw and packaging material costs, partially offset by higher advertising.
Worldwide Net sales were $11,246 in the first nine months of 2009, down 3.5% from the first nine months of 2008 as net selling price increases of 7.0% and level volume were more than offset by a negative foreign exchange impact of 10.5%.
Net sales in the Oral, Personal and Home Care segment were $9,679 in the first nine months of 2009, down 4.0% from 2008 as volume growth of 1.0% and net selling price increases of 6.5% were more than offset by a negative foreign exchange impact of 11.5%.
Within this segment, North America sales increased 3.0% in the first nine months of 2009, driven by volume growth of 3.0% and net selling price increases of 1.0%, partially offset by a negative foreign exchange impact of 1.0%. Latin America sales were level with volume growth of 2.5% and net selling price increases of 14.0%, offset by a negative foreign exchange impact of 16.5%. Europe/South Pacific sales decreased 14.5% on volume declines of 1.5%, net selling price increases of 1.0%, and a negative foreign exchange impact of 14.0%. Excluding the impact of the 2008 divestment of a non-core brand in Germany, Europe/South Pacific sales decreased 14.0% on volume declines of 1.0%. Greater Asia/Africa sales decreased 3.5% on level volume, net selling price increases of 7.5%, and a negative foreign exchange impact of 11.0%. Excluding the impact of the 2008 divestment of a laundry detergent brand in Turkey, Greater Asia/Africa sales decreased 3.0% on volume growth of 0.5%.
Net sales for the Hill's Pet Nutrition segment decreased 0.5% in the first nine months of 2009 to $1,567 as net selling price increases of 10.0% were more than offset by volume declines of 7.0% and a negative foreign exchange impact of 3.5%.
Operating profit (loss) related to Corporate decreased to ($153) in the third
quarter of 2009 from ($162) in the comparable 2008 period. Operating profit
(loss) related to Corporate decreased to ($374) in the first nine months of 2009
from ($443) in the comparable period of 2008. There were no charges related to
the 2004 Restructuring Program in the first nine months of 2009. Restructuring
charges amounted to $46 and $125 in the third quarter and the first nine months
of 2008, respectively.
For a table summarizing segment Net sales and Operating profit, refer to Note 10, "Segment Information," of the Notes to Condensed Consolidated Financial Statements.
For additional information regarding the Company's 2004 Restructuring Program, refer to Note 7, "Restructuring and Related Implementation Charges," of the Notes to Condensed Consolidated Financial Statements.
Worldwide gross profit margin increased to 59.2% in the third quarter of 2009 from 56.1% in the third quarter of 2008 and increased to 58.5% in the first nine months of 2009 from 56.4% in the first nine months of 2008. Restructuring and implementation-related charges lowered the reported gross profit margin by 30 basis points (bps) and 40 bps in the third quarter and in the first nine months of 2008, respectively. Excluding the impact of the 2004 Restructuring Program, gross profit margin was 56.4% and 56.8% in the third quarter and in the first nine months of 2008, respectively. For both periods presented, increases in gross profit margin were driven by higher pricing and a continued focus on cost-savings programs, partially offset by a negative foreign exchange impact and costs related to the remeasurement of liabilities related to inventory purchases in Venezuela.
In light of ongoing currency exchange control limitations in Venezuela, the Company's Venezuelan subsidiary (CP Venezuela) has begun to settle certain of its U.S. dollar-denominated liabilities with dollars obtained through securities transactions in the parallel market at an exchange rate less favorable than the official rate. As a result, in the third quarter of 2009, CP Venezuela incurred $47 of higher costs related to the remeasurement of U.S. dollar liabilities to be settled with proceeds from these transactions, $25 of which is included in Gross profit for liabilities related to the purchase of inventory and $22 of which is included in Other (income) expense, net for all other liabilities. Additionally, in order to manage its overall currency exposure, CP Venezuela has purchased $122 of U.S. dollar-denominated bonds issued by a Venezuelan state-owned corporation and U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government.
Selling, general and administrative expenses as a percentage of Net sales decreased to 35.1% in the third quarter of 2009 from 35.5% in the third quarter of 2008 and decreased to 34.5% of Net sales in the first nine months of 2009 from 35.9% in the first nine months of 2008. For both periods presented, the decreases were driven primarily by lower advertising, the finalization of the 2004 Restructuring Program in 2008 and a continued focus on cost-savings programs. In the third quarter of 2009, advertising decreased 2% to $429 as compared with $438 in 2008 and decreased 13% to $1,138 in the first nine months of 2009 as compared with $1,314 in 2008 due to lower media rates in many parts of the world and reduced levels of spending. Restructuring charges included in Selling, general and administrative expenses in the third quarter and the first nine months of 2008 were $21 and $55, respectively.
Other (income) expense, net amounted to $38 in the third quarter of 2009 as compared with $30 in the third quarter of 2008 and amounted to $72 in the first nine months of 2009 as compared to $65 in the first nine months of 2008. In the third quarter of 2009, Other (income) expense, net included costs of $22 related to the remeasurement of certain U.S. dollar liabilities in Venezuela to be settled with dollars obtained through securities transactions, as noted above. The third quarter and the first nine months of 2008 included expenses related to the Company's 2004 Restructuring Program in the amounts of $14 and $22, respectively.
Operating profit increased 17% to $926 in the third quarter of 2009 from $791 in 2008, which included $46 of charges related to the 2004 Restructuring Program. Operating profit increased 13% to $2,624 in the first nine months of 2009 from $2,324 in 2008, which included $125 of charges related to the 2004 Restructuring Program. Excluding the restructuring charges in 2008, Operating profit increased 11% and 7% for the third quarter and in the first nine months of 2009, respectively. The increases were driven by higher gross profit margins and lower advertising, partially offset by the impact of foreign exchange.
Interest expense, net decreased to $17 and $59 for the three and nine months ended September 30, 2009, respectively, as compared with $23 and $82 in the comparable periods of 2008, primarily due to lower average interest rates.
The quarterly provision for income taxes is determined based on the Company's estimated full year effective tax rate adjusted by the amount of tax attributable to infrequent and unusual items that are separately recognized on a discrete basis in the income tax provision in the quarter in which they occur. The Company's current estimate of its full year effective income tax rate before discrete period items is 32.1%, which is consistent with the estimate in the third quarter of 2008. The tax rate for the third quarter of 2008 of 32.0% includes the impact of the Company's 2004 Restructuring Program (10 bps).
Net income for the third quarter of 2009 increased 18% to $590 from $500 in the comparable 2008 period, and earnings per common share on a diluted basis increased to $1.12 per share compared with $0.94 per share in the comparable 2008 period. Net income for the third quarter of 2008 includes $31 ($0.05 per share) of charges related to the Company's 2004 Restructuring Program. Net income for the first nine months of 2009 increased 14% to $1,660 from $1,460 in the comparable 2008 period, and earnings per common share on a diluted basis increased to $3.16 per share compared with $2.72 per share in the comparable 2008 period. Net income for the first nine months of 2008 included $82 ($0.15 per share) of charges related to the Company's 2004 Restructuring Program.
Liquidity and Capital Resources
Net cash provided by operations increased 34% to $2,375 in the first nine months of 2009, compared with $1,777 in the comparable period of 2008. The increase is primarily related to improved profitability, lower cash spending in restructuring and decreases in working capital. The Company defines working capital as the difference between current assets (excluding cash and marketable securities, the latter of which is reported in Other current assets) and current liabilities (excluding short-term debt). Overall, working capital decreased to 0.7% of Net sales for the first nine months of 2009 as compared with 2.6% of Net sales for the first nine months of 2008. With the finalization of the 2004 Restructuring Program, pretax restructuring charges decreased $125 and cash spending decreased $147 relative to the comparable period of 2008. Substantially all of the restructuring accrual at September 30, 2009 will be paid out before year-end 2009. It is anticipated that cash requirements for the 2004 Restructuring Program will continue to be funded from operating cash flows.
Investing activities used $484 in the first nine months of 2009, compared with $341 in the comparable period of 2008. Investing activities for the first nine months of 2009 include the purchase of $72 of U.S. dollar-denominated bonds issued by a Venezuelan state-owned corporation and $50 of U.S. dollar-linked, devaluation-protected bonds issued by the Venezuelan government, as discussed above. Other investing activities for the first nine months of 2008 include $47 of proceeds from the sale of certain assets, primarily related to the 2004 Restructuring Program.
Capital spending decreased in the first nine months of 2009 to $347 from $392 in the comparable period of 2008. Capital spending continues to focus on projects that yield high aftertax returns. Overall capital expenditures for 2009 are expected to be at an annual rate of approximately 4.9% of Net sales.
Financing activities used $1,620 of cash during the first nine months of 2009 compared with $1,213 in the comparable period of 2008, due primarily to higher net debt payments and an increase in dividends paid, partially offset by fewer purchases of treasury shares.
During the third quarter of 2009, the Company issued $300 of U.S. dollar-denominated six-year notes at a fixed rate of 3.15% under the shelf registration statement for the Company's medium-term note program. Proceeds from the debt issuance were primarily used to reduce commercial paper borrowings. In addition, during the third quarter of 2009, to effectively convert a portion of the Company's fixed rate debt portfolio to a variable rate, the Company also . . .
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