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| CL > SEC Filings for CL > Form 10-Q on 30-Jul-2009 | All Recent SEC Filings |
30-Jul-2009
Quarterly Report
Executive Overview
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 (5% of the Company's Net sales) could adversely impact future results.
Easing commodity and oil prices have benefited the first half of 2009 and should continue as the year goes on. The Company believes that this, coupled with higher pricing and ongoing aggressive savings programs, should offset the expected impact of the stronger dollar during the year. The extent to which the Company is able to offset the effect of the strengthened U.S. dollar will be impacted by the sustainability of benefits from commodity cost declines and the Company's ability to successfully implement selling price increases and cost-savings initiatives. Moreover, 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 recent 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 $3,745.0 in the second quarter of 2009, down 5.5% from the second quarter of 2008 as net selling price increases of 7.5% were more than offset by volume declines of 1.5% and a negative foreign exchange impact of 11.5%. Organic sales (Net sales excluding the impact of foreign exchange, acquisitions and divestments) grew 6.0% in the second quarter of 2009.
Net sales in the Oral, Personal and Home Care segment were $3,215.1 in the second quarter of 2009, down 6.0% from the second quarter of 2008, as relatively flat volume and net selling price increases of 7.0% were more than offset by a negative foreign exchange impact of 13.0%. The 2008 divestments of a non-core brand in Germany and of a laundry detergent brand in Turkey impacted sales growth for the second quarter of 2009 by 0.5% versus the comparable period of 2008. Excluding the impact of these divestments, Net sales decreased 5.5% on volume growth of 0.5%. Organic sales grew 7.5% in the second quarter of 2009.
Net sales in North America increased 2.5% in the second quarter of 2009 to $734.4 as a result of volume growth of 2.5% and net selling price increases of 1.5%, partially offset by a negative foreign exchange impact of 1.5%. Organic sales grew 4.0% in the second quarter of 2009. Products contributing to the growth in oral care included Colgate Sensitive Enamel Protect, Colgate Max Fresh with Mouthwash Beads and Colgate Max White with Mini Bright Strips toothpastes, Colgate 360° Deep Clean, 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 Body Butter Apricot Scrub and Irish Spring Hair and Body and Cool Relief body washes, Softsoap Ensembles liquid hand soap and Ajax Lime with Bleach Alternative dish liquid. Operating profit in North America increased 17% in the second quarter of 2009 to $199.5, primarily due to new products, a continued focus on cost-savings programs and lower raw and packaging material costs, which more than offset increased advertising.
Net sales in Latin America decreased 1.5% in the second quarter of 2009 to $1,050.0 as volume growth of 2.0% and net selling price increases of 14.5% were more than offset by a negative foreign exchange impact of 18.0%. Organic sales grew 16.5% in the second quarter of 2009. Volume gains were led by Brazil and Venezuela. Products contributing to the growth in oral care included Colgate Sensitive Enamel Protect, Colgate Total Professional Sensitive and Colgate Max Fresh Night toothpastes, Colgate 360° Deep Clean and Colgate Max Fresh manual toothbrushes, and Colgate Plax Whitening and Colgate Plax Complete Care mouthwashes. Products contributing to growth in other categories included Palmolive Naturals Perfect Tone and Protex Aloe bar soaps, Lady Speed Stick Professional Protection and Mennen Cool Night deodorants, and Suavitel Magic Moments fabric conditioner. Operating profit in Latin America increased 14% to $334.9, reflecting higher pricing, a continued focus on cost-savings programs and lower advertising, partially offset by the negative impact of foreign exchange.
Net sales in Europe/South Pacific decreased 18.0% in the second quarter of 2009 to $790.5 as net selling price increases of 1.0% were more than offset by 3.0% volume declines and a 16.0% negative impact of foreign exchange. The 2008 divestment of a non-core brand in Germany impacted sales growth for the second quarter of 2009 by 0.5% versus the comparable period of 2008. Excluding the impact of this divestment, Net sales decreased 17.5% on volume declines of 2.5%. Organic sales decreased 1.5% in the second quarter of 2009. Volume gains in the United Kingdom and Greece were more than offset by volume declines in France, Iberia, Poland and the GABA business. Successful products in oral care included Colgate Total Advanced Clean, Colgate Max White and Colgate Sensitive Enamel Protect toothpastes, Colgate 360° Deep Clean and Colgate Max White manual toothbrushes, Colgate Plax Alcohol Free and Colgate Plax Ice mouth rinses. Successful products in other categories included Palmolive Madagascar Sunset and Palmolive Marrakech Sunrise shower gels and liquid hand soaps, 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 decreased 12% to $177.2, reflecting the negative impact of foreign exchange, partially offset by lower advertising.
Net sales in Greater Asia/Africa decreased 4.5% in the second quarter of 2009 to $640.2 as net selling price increases of 9.0% were more than offset by 1.5% volume declines and a 12.0% negative impact of foreign exchange. The 2008 divestment of a laundry detergent brand in Turkey impacted sales growth for the second quarter of 2009 by 0.5% versus the comparable period of 2008. Excluding the impact of this divestment, Net sales decreased 4.0% on volume declines of 1.0%. Organic sales increased 8.0% in the second quarter of 2009. Volume gains in India and the Greater China region were more than offset by volume declines in Russia, South Africa and Ukraine. Successful new products driving oral care growth included Colgate Total Professional Clean and Colgate Sensitive Enamel Protect toothpastes and 360° Acti-Flex and Colgate Max Fresh manual toothbrushes. New products contributing to growth in other categories included Palmolive Papaya Yogurt shower gel, bar soap and liquid hand soap, Protex Clean and Pure cream and bar soap and Lady Speed Stick Pure Freshness deodorant. Operating profit in Greater Asia/Africa increased 14% to $144.8, reflecting higher pricing, lower advertising and lower raw and packaging material costs, partially offset by the negative impact of foreign exchange.
Net sales for Hill's Pet Nutrition decreased 3.0% in the second quarter of 2009 to $529.9 as net selling price increases of 12.5% were more than offset by 11.5% volume declines and a negative foreign exchange impact of 4.0%. Organic sales grew 1.0% in the second quarter of 2009. Successful products within the U.S. specialty pet channel included Science Diet Nature's Best Canine and Feline, Science Diet Culinary Creations Feline and the relaunch of Science Diet Puppy and Kitten dry foods with improved formulas. Prescription Diet r/d and w/d Canine and Feline contributed to sales in the U.S. veterinary channel. Successful new products contributing to international sales included Science Diet Culinary Creations Feline, the relaunch of Science Diet Puppy and Kitten foods, and Prescription Diet r/d and w/d Canine Small Bites. Operating profit increased 7% to $139.4, reflecting higher pricing, partially offset by higher raw and packaging material costs and the negative impact of foreign exchange.
Worldwide Net sales were $7,247.8 in the first half of 2009, down 5.5% from the first half of 2008 as net selling price increases of 8.0% were more than offset by volume declines of 1.0% and a negative foreign exchange impact of 12.5%.
Net sales in the Oral, Personal and Home Care segment were $6,211.5 in the first half of 2009, down 6.5% from 2008 as net selling price increases of 7.0% and relatively flat volume were more than offset by a negative foreign exchange impact of 13.5%. The 2008 divestment of a non-core brand in Germany impacted sales growth for the six months ended June 30, 2009 by 0.5% versus the comparable period of 2008. Excluding this divestment, sales decreased 6.0% on volume growth of 0.5%. Within this segment, North America sales increased 3.0% driven by volume growth of 2.5% and net selling price increases of 2.0%, Latin America sales decreased 2.5% on volume growth of 2.0% and net selling price increases of 14.5%, Europe/South Pacific sales decreased 19.0% on volume declines of 3.5% and net selling price increases of 1.5%, Greater Asia/Africa sales decreased 3.5% on volume growth of 1.5% and net selling price increases of 8.0%, with the remainder of the change in each region due to negative foreign exchange. Excluding the impact of the 2008 divestment of a non-core brand in Germany, sales decreased 18.5% on volume declines of 3.0% for Europe/South Pacific.
Net sales for the Hill's Pet Nutrition segment decreased 1.5% in the first half of 2009 to $1,036.3 as net selling price increases of 13.0% were more than offset by volume declines of 9.5% and a negative foreign exchange impact of 5.0%.
Operating profit (loss) related to Corporate decreased to ($108.7) in the second
quarter of 2009 from ($134.4) in the comparable 2008 period. Operating profit
(loss) related to Corporate decreased to ($221.5) in the first half of 2009 from
($280.3) in the comparable period of 2008. There were no charges related to the
2004 Restructuring Program in the first half of 2009. Restructuring charges
amounted to $38.9 and $77.3 in the second quarter and the first half 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 58.8% in the second quarter of 2009 from 56.5% in the second quarter of 2008 and increased to 58.1% in the first half of 2009 from 56.5% in the first half of 2008. Restructuring and implementation-related charges lowered the reported gross profit margin by 30 basis points (bps) and 50 bps in the second quarter and in the first half of 2008, respectively. Excluding the impact of the 2004 Restructuring Program, gross profit margin was 56.8% and 57.0% in the second quarter and in the first half 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.
Selling, general and administrative expenses as a percentage of Net sales decreased to 34.6% in the second quarter of 2009 from 35.9% in the second quarter of 2008 and decreased to 34.2% of Net sales in the first half of 2009 from 36.1% in the first half of 2008. For both periods presented, the decreases were driven primarily by lower advertising, lower charges related to the 2004 Restructuring Program and a continued focus on cost-savings programs. In the second quarter of 2009 advertising decreased 15% to $391.7 as compared with $462.1 in 2008 and decreased 19% to $708.9 in the first half of 2009 as compared with $876.2 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 second quarter and the first half of 2008 were $20.7 and $33.9, respectively.
Other (income) expense, net amounted to $18.4 in the second quarter of 2009 as compared with $28.7 in the second quarter of 2008 and amounted to $33.7 in the first half of 2009 as compared to $33.9 in the first half of 2008. The second quarter and the first half of 2008 included expenses related to the Company's 2004 Restructuring Program in the amounts of $7.2 and $6.5, respectively.
Operating profit increased 13% to $887.1 in the second quarter of 2009 from $788.4 in 2008, which included $38.9 of charges related to the 2004 Restructuring Program. Operating profit increased 11% to $1,698.5 in the first half of 2009 from $1,534.1 in 2008, which included $77.3 of charges related to the 2004 Restructuring Program. Excluding the restructuring charges in 2008, Operating profit increased 7% and 5% for the second quarter and first half 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 $21.5 and $42.7 for the three and six months ended June 30, 2009, respectively, as compared with $25.4 and $59.1 in the comparable periods of 2008, 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 second quarter of 2008. The tax rate for the second quarter of 2008 of 32.5% includes the impact of the Company's 2004 Restructuring Program (40 bps).
Net income for the second quarter of 2009 increased 14% to $561.6 from $493.8 in the comparable 2008 period, and earnings per common share on a diluted basis increased to $1.07 per share compared with $0.92 per share in the comparable 2008 period. Net income for the second quarter of 2008 includes $29.5 ($0.06 per share) of charges related to the Company's 2004 Restructuring Program. Net income for the first half of 2009 increased 11% to $1,069.5 from $960.3 in the comparable 2008 period, and earnings per common share on a diluted basis increased to $2.04 per share compared with $1.78 per share in the comparable 2008 period. Net income for the first half of 2008 included $50.7 ($0.10 per share) of charges related to the Company's 2004 Restructuring Program.
Non-GAAP Financial Measures
Net sales and volume growth, both worldwide and in relevant geographic divisions, are discussed in this quarterly report on Form 10-Q both on a GAAP basis and excluding divestments (non-GAAP). Management believes these non-GAAP financial measures provide useful supplemental information to investors as they allow comparisons of Net sales and volume growth from ongoing operations. This quarterly report on Form 10-Q also discusses organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments) (non-GAAP). Management believes this measure provides investors with useful supplemental information regarding the Company's underlying sales trends by presenting sales growth excluding the external factor of foreign exchange, as well as the impact of acquisitions and divestments.
Worldwide Gross profit margin and Operating profit are discussed in this quarterly report on Form 10-Q both on a GAAP basis and excluding the impact of the 2004 Restructuring Program (non-GAAP). Management believes these non-GAAP financial measures provide useful supplemental information to investors regarding the underlying business trends and performance of the Company's ongoing operations and are useful for period-over-period comparisons of such operations. The Company uses the above financial measures internally in its budgeting process and as a factor in determining compensation.
While the Company believes that these non-GAAP financial measures are useful in evaluating the Company's business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.
Liquidity and Capital Resources
Net cash provided by operations increased 17% to $1,210.7 in the first half of 2009, compared with $1,036.4 in the comparable period of 2008. The increase is primarily related to improved profitability, lower cash spending in restructuring and working capital improvements. 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 3.2% of Net sales for the first half of 2009 as compared with 3.6% of Net sales for the first half of 2008. With the finalization of the 2004 Restructuring Program, pretax restructuring charges decreased $77.3 and cash spending decreased $115.4 relative to the comparable period of 2008. Substantially all of the restructuring accrual at June 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 $216.7 in the first six months of 2009, compared with $171.0 in the comparable period of 2008. Investing activities for the first half of 2008 include $44.9 of proceeds from the sale of certain assets, primarily related to the 2004 Restructuring Program.
Capital spending decreased slightly in the first half of 2009 to $210.1 from $216.7 in the comparable period of 2008. Capital spending continues to focus primarily on projects that yield high aftertax returns. Overall capital expenditures for 2009 are expected to be at an annual rate of approximately 4.5% of Net sales.
Financing activities used $664.8 of cash during the first half of 2009 compared with $672.5 in the comparable period of 2008. This decrease is primarily due to fewer purchases of treasury shares offset by an increase in dividends paid and fewer exercises of stock options.
In May 2008, the Company issued $250 of U.S. dollar-denominated five-year notes at a fixed rate of 4.2% under the shelf registration statement for the Company's medium-term note program. The Company simultaneously entered into interest rate swaps to effectively convert the fixed interest rate of the notes to a variable rate based on LIBOR. In May 2008, the Company also issued approximately $75 of . . .
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