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Fitch Affirms Colgate's IDR at 'AA-'; Withdraws All Ratings
December 12, 2016 / 3:24 PM / a year ago

Fitch Affirms Colgate's IDR at 'AA-'; Withdraws All Ratings

(The following statement was released by the rating agency) NEW YORK, December 12 (Fitch) Fitch Ratings has affirmed and withdrawn the following ratings for Colgate-Palmolive Company (Colgate): --Long-Term Issuer Default Rating (IDR) at 'AA-'; --Short-Term IDR at 'F1+'; --Senior unsecured revolving credit facility at 'AA-'; --Senior unsecured notes at 'AA-'; --Commercial paper (CP) program at 'F1+'. Fitch has withdrawn Colgate's ratings for commercial reasons. Fitch reserves the right in its sole discretion to withdraw or maintain any rating at any time for any reason it deems sufficient. KEY RATING DRIVERS Significant Scale and Consistently Strong Operating Results The ratings reflect the company's scale with approximately $15 billion and $4.5 billion in revenues and EBITDA, respectively, leading market shares, consistently strong operating performance, and considerable liquidity. The company has generated 3% average annual volume growth from 2011 through 2015 with 2% average annual price increases yielding positive constant currency organic growth, although reported revenue has been held back since 2012 due to the strong U.S. dollar. EBITDA margins have remained within the 26%-28% range since 2011 and are in the top tier of large household and personal care manufacturers. As a result of the company's significant scale, average annual free cash flow (FCF) after dividends generation has been in the $1 billion range the past five years and Fitch expects FCF generation to remain at this level over the next two to three years. Latest 12 months (LTM) leverage (total debt to operating EBITDA) was a manageable 1.4x, modestly above the company's normal operating range due to the negative impact of the strong U.S. dollar on reported EBITDA. Leverage could remain near this level should the company continue to execute debt-financed share buybacks. Broad Geographic Diversification Colgate is one of the most geographically diversified consumer products companies in the world, generating more than 75% of its revenues outside the United States. Further, half of Colgate's revenues are generated in comparatively faster growing emerging 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 27% of revenues and adjusted operating profit before corporate expenses) is a particular stronghold where the company maintains very high toothpaste and toothbrush shares. Periodic Currency 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 costs and/or used pricing as an offset to currency swings. Periodic foreign exchange volatility, such as the 7% or so negative impact to revenue growth in the first half of 2016, is reflected in the ratings. KEY ASSUMPTIONS --Organic growth in the 2%-4% range over the next 24-36 months with near term pressure on reported revenue from the strong U.S. dollar. --EBITDA remains near the 28% levels reported in 2015. --FCF remains in the $1 billion average range annually. --Leverage remains in the 1.4x range. RATING SENSITIVITIES Rating sensitivities are no longer relevant given today's rating withdrawals. LIQUIDITY AND DEBT STRUCTURE The company has significant liquidity with more than $1.29 billion in cash, a $2.37 billion un-utilized five-year bank facility expiring in November 2019, and considerable access to the capital markets. Colgate had no commercial paper outstanding as of Sept. 30, 2016, but the average daily balance outstanding for the first three quarters was $1.19 billion. Debt of $6.5 billion yields leverage of 1.4x, modestly above historical levels due in part to sales declines and EBITDA deleverage caused by negative currency translation. However, the impact of negative foreign currency trends has been mitigated by positive organic growth (from both volume and pricing) and expense management. Fitch expects debt balances to continue their upward trend over time as the company manages its capital structure near current levels. 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 three years; Fitch expect Colgate to refinance most debt maturities. Contact: Business Relationship Management Tiffany Co +1-312-368-3185 tiffany.co@fitchratings.com Primary Analyst David Silverman, CFA Senior Director +1-212-908-0840 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Monica Aggarwal, CFA Managing Director +1-212-908-0282 Committee Chairperson Philip M. Zahn, CFA Senior Director +1-312-606-2336 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and exclude restructuring charges. In 2015, Fitch added back $125 million in non-cash stock-based compensation and $84 million in restructuring expenses to its EBITDA calculation. 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