Fitch Rates Colgate's EUR500MM Notes 'AA-'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA-' rating to Colgate-Palmolive Company's (Colgate) EUR500 million senior unsecured medium-term notes due May 2019. Fitch rates Colgate's IDR 'AA-' with a Stable Outlook. The notes will be priced at 3-month Euribor plus a spread with a 0% floor as the reference rate is currently negative. Proceeds will be used for general corporate purposes including repaying commercial paper. As of March 31, 2015 Colgate had $227 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 March 31, 2015, leading market shares, consistently strong operating performance, and considerable liquidity. Colgate's adjusted EBITDA margin of approximately 27% 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 over $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 ended March 31, 2015. 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. To date, $427 million has been spent against $846 million in cumulative charges.

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, more than half of Colgate's revenues are generated in comparatively faster growing developing markets which has resulted in the company's average organic growth rate of 5% over the past five years, putting 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 Latin America and emerging markets, is periodic volatility against the U.S. dollar. Therefore, foreign exchange translation and transaction costs can create modest short-term volatility 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 is encompassed in the ratings.

Significant Liquidity

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 $850 million 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.

Manageable Debt

Debt of $6.1 billion is within Fitch's expectations and should not increase markedly this year. However, given the company's solid revenue growth and high margins, debt balances will continue to trend 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 $500 million due annually in calendar 2015 and 2016.

KEY ASSUMPTIONS

--Mid-single-digit organic growth.

--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 first quarter of 2015 was indicative with an EBITDA margin of 27.5%.

--FCF remains at or above $1 billion.

--Leverage remains at or close to 1.2xX.

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 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 Aannual FCF under $1 billion with leverage sustained over 1.5x. The company's 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.

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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-term Ratings and Parent and Subsidiary Linkage' (May 2014);

--'Fitch Affirms Colgate-Palmolive's IDRs at 'AA-/F1+'; Outlook Stable' (July 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984328

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Fitch Ratings
Primary Analyst
Grace Barnett, +1-212-908-0718
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Committee Chairperson
Michael Paladino, CFA, +1-212-908-0113
Managing Direction
or
Media Relations
Alyssa Castelli, +1-212-908-0540
[email protected]
or
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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