TEXT-Fitch affirms Colgate-Palmolive ratings
July 27 - Fitch Ratings has affirmed Colgate-Palmolive Company's (Colgate) ratings as follows: --Long-term Issuer Default Rating (IDR) at 'AA-'; --Short-term IDR at 'F1+'; --Senior unsecured notes at 'AA-'; --$1.85 billion revolving credit facility at 'AA-'; --Commercial paper program at 'F1+'. The Rating Outlook is Stable. Senior unsecured notes totaling $4.3 billion and $1.1 billion in commercial paper outstanding as of June 30, 2012 are impacted by this action. Fitch also rates Colgate's new $500 million, 10 year note 'AA-'. The proceeds will be used to refinance commercial paper. Rating and Outlook: The ratings reflect the company's scale with approximately $17 billion in revenues at the last 12 months (LTM) ended June 30, 2012, leading market shares, consistently strong operating performance, and considerable liquidity. Colgate's EBITDA margins of 26% are in the top tier of large personal care manufacturers. The company generated $1.1 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. LTM funds from operations (FFO) interest coverage are over 56x, benefiting in part from the marked decline in interest rates. 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 more than 33% of operating profit before corporate expenses in 2011 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. Financial Performance: Fitch expects that there may be some pressure on revenue growth. Foreign exchange translation from an appreciating U.S. dollar and an overall global economic slowdown could hamper growth. However, 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. Colgate's EBITDA has increased in each of the past five years to the $4.5 billion level in the LTM, and as mentioned previously, free cash flow was approximately $1.1 billion in 2011 and $1.2 billion at the LTM. Fitch expects it to remain in that range in the next two years. Liquidity and Debt: The company is highly liquid with a $1.85 billion un-utilized five year bank facility expiring in November 2016, a 364 day $145 million revolver maturing in November 2012, ample cash, and considerable access to the capital markets. Unusually high for the sector, $329 million or 30% of Colgate's $995 million in cash on hand at June 30, 2012 is essentially trapped in Venezuela as it is subject to currency exchange controls. The remaining $666 million is a healthy amount, however, almost all of it is outside the U.S. and there could be tax implications upon repatriation. The 364 day revolver is likely to be extended as provides additional support to the company's large CP program. During the quarter, Colgate's CP outstanding can approach total revolver commitments. Debt balances increased to $5.4 billion from $3.4 billion at the end of 2010 to support the Sanex acquisition from Unilever and share repurchases. As a result, leverage increased modestly (.4x) to almost 1.2x at the LTM from the 0.8x level seen in 2010. Fitch does not expect leverage to increase markedly from this level. Long-term debt maturities are modest for the remainder of 2012 at $16 million, $264 million in 2013 and $882 million in 2014. Fitch expects the larger amounts due in 2013 and 2014 to be refinanced. What Could Trigger a Rating Action? Positive: A positive rating action is also 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, such as last years' $966 million acquisition of the Sanex personal care business, whenever credit protection measures drift towards a higher rating category. Negative: While Colgate's credit protection measures are solid there is little room for further increases in leverage within this rating category. A negative rating action is not expected given Colgate's low business risk and conservative management team.
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