Executive Overview
Colgate-Palmolive Company (together with its subsidiaries, "we," "us" "our" the "Company" or "Colgate") is a caring, innovative growth company reimagining a healthier future for all people, their pets and our planet. We seek to deliver sustainable, profitable growth and superior shareholder returns, as well as to provide Colgate people with an innovative and inclusive work environment. We do this by developing and selling products globally that make people's lives healthier and more enjoyable and by embracing our sustainability and social impact and diversity, equity and inclusion strategies across our organization. We are tightly focused on two product segments: Oral, Personal and Home Care; and Pet Nutrition. Within these segments, we follow a closely defined business strategy to grow our key product categories and increase our overall market share. Within the categories in which we compete, we prioritize our efforts based on their capacity to maximize the use of the organization's core competencies and strong global equities and to deliver sustainable, profitable long-term growth. Operationally, we are organized along geographic lines with management teams having responsibility for the business and financial results in each region. We compete in more than 200 countries and territories worldwide with established businesses in all regions contributing to our sales and profitability. Approximately 70% of our Net sales are generated from markets outside theU.S. , with approximately 45% of our Net sales coming from emerging markets (which consist ofLatin America ,Asia (excludingJapan ),Africa /Eurasia andCentral Europe ). This geographic diversity and balance help to reduce our exposure to business and other risks in any one country or part of the world. The Oral, Personal and Home Care product segment is managed geographically in five reportable operating segments:North America ,Latin America ,Europe ,Asia Pacific andAfrica /Eurasia, all of which sell primarily to a variety of traditional and eCommerce retailers, wholesalers and distributors. Through Hill's Pet Nutrition, we also compete on a worldwide basis in the pet nutrition market, selling products principally through authorized pet supply retailers, veterinarians and eCommerce retailers. We are engaged in manufacturing and sourcing of products and materials on a global scale and have major manufacturing facilities, warehousing facilities and distribution centers in every region around the world. On an ongoing basis, management focuses on a variety of key indicators to monitor business health and performance. These indicators include net sales (including volume, pricing and foreign exchange components), organic sales growth (net sales growth excluding the impact of foreign exchange, acquisitions and divestments), a non-GAAP financial measure, and gross profit margin, operating profit, net income and earnings per share, in each case, on a GAAP and non-GAAP basis, as well as measures used to optimize the management of working capital, capital expenditures, cash flow and return on capital. In addition, we review market share data to assess how our brands are performing within their categories on a global and regional basis. The monitoring of these indicators and our Code of Conduct and corporate governance practices help to maintain business health and strong internal controls. For additional information regarding non-GAAP financial measures and the Company's use of market share data and the limitations of such data, see "Non-GAAP Financial Measures" and "Market Share Information" below. 20
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) COVID-19 The COVID-19 pandemic and government steps to reduce the spread and address the impact of COVID-19 have had and continue to have a profound impact on the way people live, work, interact and shop and have significantly impacted and will likely continue to impact economic activity around the world. We have a well-established Crisis Management Team ("CMT") process, and the CMT, together with our senior management team and Colgate people around the world, continue to respond to and manage the challenges presented by COVID-19. During the COVID-19 pandemic, many of the communities in which we manufacture, market and sell our products have experienced unprecedented "stay at home" orders, travel or movement restrictions and other government actions to reduce the spread and address the impact of COVID-19, and have implemented varying policies to resume economic activity and distribute effective vaccines. The situation continues to be uncertain and varies by geography, as infection rates of COVID-19 remain high in many regions throughout the world, includingBrazil ,India andMexico where we have substantial manufacturing facilities, and authorities have taken different approaches to address the pandemic, resume economic activity and vaccinate their populations. Because the vast majority of our products (such as oral care products, soaps and other personal hygiene products, home cleaners and pet food) have been deemed essential for the health and well-being of people and their pets, we have, in most instances, been able to continue operating our business. In doing so, the health, safety and well-being of our employees has been and remains our first priority. Many of our employees globally continue to work from home. In those instances where our employees cannot perform their work at home, such as in our factories and in certain of our laboratories, or in geographies where circumstances have allowed us to offer employees the ability to return to the office, often on a voluntary and staggered basis, we have implemented additional health and safety measures and social distancing protocols, consistent with government recommendations and/or requirements, to help to ensure their safety, often at an additional cost. In addition, during the COVID-19 pandemic, we have experienced some limited factory closures and, in some cases, we have seen increased instances of absenteeism. Furthermore, some of our suppliers, customers, distributors, logistics providers and service providers have experienced disruptions to their businesses. We saw a significant increase in demand across many of our categories such as liquid hand soap, dish liquid, bar soap and cleaners, during 2020 as a result of the COVID-19 pandemic, driven by consumer pantry-loading and increased consumption of our products. While during the quarter endedMarch 31, 2021 consumer demand for these categories softened, it remained above historical levels, and we believe that some of this increase in consumption is sustainable in light of changes in consumer behavior related to COVID-19. Across our business, changes in consumer demand for our products vary by product category and geography depending on, among other things, the severity of the COVID-19 outbreak and retailer availability. At the same time, during the COVID-19 pandemic, we have experienced declines in certain channels, including professional sales and travel retail, due to the economic slowdown and restricted consumer movement in many geographies throughout the world. We also continue to see changes in the purchasing patterns of our consumers, including the nature and/or frequency of visits by consumers to retailers and dental, veterinary and skin health professionals and a shift in many markets to purchasing our products online. In some instances during the COVID-19 pandemic, we were not able to keep up with the increased consumer demand for our products, and our products were at times out of stock on retailers' shelves. In some cases, we have incurred additional costs as we worked to meet this increased demand. COVID-19 and government steps to reduce the spread and address the impact of COVID-19 have impacted and may continue to impact our consumers' ability to purchase and our ability to manufacture and distribute our products. While we believe that, in the long-term, consumer demand for the products in our categories will continue to be strong, uncertainties continue surrounding the timing and extent of the pandemic and the recovery from it. These uncertainties include: the impact of the timing and scale of changes to travel and movement restrictions in certain geographies, the availability and widespread distribution and use of safe and effective COVID-19 vaccines and when communities will reach herd immunity, the emergence and spread of COVID-19 variants, the timing and impact of consumer pantry-loading and destocking activity in certain markets, product demand trends and the impact of COVID-19 on the global economy. Our retail customers, contract manufacturers, logistics providers and other third parties are also being impacted by the global pandemic; their success in addressing COVID-19 and maintaining their operations could impact consumer access to and sales of our products. We expect the ongoing economic impact and health concerns associated with COVID-19 to continue to impact consumer behavior, shopping patterns and consumption preferences despite the lifting of government restrictions and the reopening of economies around the world. 21 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) While we currently expect to be able to continue operating our business as described above and we intend to continue to work with government authorities and to follow the necessary protocols to maintain the health and safety of our employees and contract providers, uncertainty resulting from COVID-19 could result in an unforeseen additional disruption to our business, including our global supply chain and retailer network, and/or require us to incur additional operational costs. For more information about the anticipated COVID-19 impact, see "Outlook" below. 22
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Business Strategy
To achieve our business and financial objectives, we are focused on innovating our core businesses; improving our brand building activities with an elevated brand purpose model and the use of equity advertising; innovating to gain market share in high growth segments and adjacencies; expanding into new channels and markets; maximizing growth online; and investing to drive consumption in growing populations. We continue to develop initiatives to build strong relationships with consumers, dental, veterinary and skin health professionals and traditional and eCommerce retailers. In addition, we continue to invest behind our brands, not just in terms of advertising, but also to build key growth capabilities in areas such as innovation and data and analytics. We also continue to broaden our eCommerce offerings, including direct-to-consumer and subscription services. We continue to believe that 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 our products. We are also working to integrate our sustainability and social impact and diversity, equity and inclusion strategies across our organization. We are also changing the way we work to drive growth and how we approach innovation to respond to the dynamic retail landscape and the evolving preferences of our customers and consumers. The retail landscape, the ease of new entrants into the market in many of our categories and the evolving preferences of our customers and consumers demand that we work differently and faster in an agile, authentic and culturally relevant manner to drive innovation. The investments needed to drive growth are supported by strong cash flow performance and our disciplined capital allocation strategy. These investments are developed through continuous, Company-wide initiatives to lower costs and increase effective asset utilization. Through these initiatives, which are referred to as our funding-the-growth initiatives, we seek to become even more effective and efficient throughout our businesses. These initiatives are designed to reduce costs associated with direct materials, indirect expenses, distribution and logistics, and advertising and promotional materials, among other things, and encompass a wide range of projects, examples of which include raw material substitution, reduction of packaging materials, consolidating suppliers to leverage volumes and increasing manufacturing efficiency through SKU reductions and formulation simplification. We also continue to prioritize our investments in high growth segments within ourOral Care , Personal Care and Pet Nutrition businesses, including by expanding our portfolio in premium skin health.
Significant Items Impacting Comparability
OnJanuary 31, 2020 , we acquiredHello Products LLC ("hello"), an oral care business, for cash consideration of$351 . The acquisition was financed with a combination of debt and cash. This acquisition is part of our strategy to focus on high growth segments within ourOral Care , Personal Care and Pet Nutrition businesses. See Note 4, Acquisitions to the Condensed Consolidated Financial Statements for additional information. The provision for income taxes for the three months endedMarch 31, 2020 includes$71 of income tax benefits recorded on a discrete period basis of which$45 relates to previously recorded foreign withholding taxes and$26 relates to a previously recorded valuation allowance against a deferred tax asset. As more fully described in "Results of Operations-Income Taxes," and in Note 10, Income Taxes to the Condensed Consolidated Financial Statements, both items were previously recorded in connection with the charge recorded in 2017 and revised in 2018 related to the Tax Cuts and Jobs Act (the "TCJA"). 23
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Outlook Looking forward, we expect global macroeconomic, political and market conditions to remain challenging, especially due to COVID-19. During the first year of the COVID-19 pandemic, we saw improvement in category growth rates due to heightened demand for certain health and hygiene products, particularly liquid hand soap, dish liquid, bar soap and cleaners. We believe some of this increased consumption is sustainable due to consumer behavior changes related to COVID-19. However, we expect increased volatility across all of our categories and it is therefore difficult to predict category growth rates in the near term. While the global marketplace in which we operate has always been highly competitive, we continue to experience heightened competitive activity in certain markets from strong local competitors, from other large multinational companies, some of which have greater resources than we do, and from new entrants into the market in many of our categories. Such activities have included more aggressive product claims and marketing challenges, as well as increased promotional spending and geographic expansion. We have seen increases in promotional activities in certain markets as retailers try aggressively to get consumers back into the stores as prolonged "stay at home" and other government restrictions ease, a trend we expect will continue. We have been negatively affected by changes in the policies or practices of our retail trade customers in key markets, such as inventory de-stocking, limitations on access to shelf space, delisting of our products or sustainability, supply chain or packaging initiatives. In addition, the retail landscape in many of our markets continues to evolve as a result of the rapid growth of eCommerce retailers, changing consumer preferences (as consumers increasingly shop online) and the increased presence of alternative retail channels, such as subscription services and direct-to-consumer businesses. These trends have been magnified due to COVID-19 in many of our geographies and we plan to continue to invest behind our eCommerce capabilities. This rapid growth in eCommerce and the emergence of alternative retail channels have created and may continue to create pricing pressures and/or adversely affect our relationships with our key retailers. In certain markets, we have incurred and are likely to continue to incur increased logistics costs due to higher eCommerce demand and volume and capacity constraints in the shipping and logistics industry. In addition, given that approximately 70% of our Net sales originate in markets outside theU.S. , we have experienced and will likely continue to experience volatile foreign currency fluctuations and higher raw and packaging material costs. While we have taken, and will continue to take, measures to mitigate the effect of these conditions, in the current environment, it may become increasingly difficult to implement certain of these mitigation strategies. Should these conditions persist, they could adversely affect our future results. As discussed above, we continue to closely monitor the impact of COVID-19 on our business. While we have taken, and will continue to take, measures to mitigate the effects of COVID-19, we cannot estimate with certainty the full extent of COVID-19's impact on our business, results of operations, cash flows and/or financial condition. For more information about factors that could impact our business, including due to COVID-19, see "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2020 . In summary, we believe that we are well prepared to meet the challenges ahead due to our strong financial condition, broad based experience operating in challenging environments, resilient global supply chain and focused business strategy. Our strategy is based on driving organic sales growth through innovation within our core businesses, leveraging faster growth in adjacent categories and expanding in high-growth channels and markets; delivering margin expansion through operating leverage and efficiency; and maximizing the impact of our environmental, social and governance programs and leading in the development of human capital, including our sustainability and social impact and diversity, equity and inclusion strategies. Our commitment to these priorities, the strength of our brands, the breadth of our global footprint and a commitment to driving efficiency in cash generation should position us well to manage through COVID-19 and increase shareholder value over time. 24
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Results of Operations
Three Months
Worldwide Net sales were$4,344 in the first quarter of 2021, up 6.0% from the first quarter of 2020, due to volume growth of 0.5%, net selling price increases of 4.5% and positive foreign exchange of 1.0%. Organic sales (Net sales excluding the impact of foreign exchange, acquisitions and divestments), a non-GAAP financial measure, increased 5.0% in the first quarter of 2021. A reconciliation of net sales growth to organic sales growth is provided under "Non-GAAP Financial Measures" below. Net sales in the Oral, Personal and Home Care product segment were$3,558 in the first quarter of 2021, up 5.5% from the first quarter of 2020, due to net selling price increases of 4.5% and positive foreign exchange of 1.0%, while volume remained flat. Organic sales in the Oral, Personal and Home Care product segment increased 4.5% in the first quarter of 2021. The Company's share of the global toothpaste market was 39.2% on a year-to-date basis, down 1.1 share points from the year ago period, and its share of the global manual toothbrush market was 30.6% on a year-to-date basis, down 0.7 share points from the year ago period. Year-to-date market shares in toothpaste were up inNorth America andAfrica /Eurasia and down inLatin America ,Europe andAsia Pacific versus the comparable 2020 period. In the manual toothbrush category, year-to-date market shares were up inLatin America andAfrica /Eurasia and down inNorth America ,Europe andAsia Pacific versus the comparable 2020 period. For additional information regarding market shares, see "Market Share Information" below. Net sales in the Hill's Pet Nutrition segment were$786 in the first quarter of 2021, up 9.5% from the first quarter of 2020, due to volume growth of 3.0%, net selling price increases of 4.0% and positive foreign exchange of 2.5%. Organic sales in the Hill's Pet Nutrition segment increased 7.0% in the first quarter of 2021. 25 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Gross Profit/Margin
Worldwide Gross profit increased to$2,637 in the first quarter of 2021 from$2,465 in the first quarter of 2020. Gross profit in the first quarter of 2020 included acquisition-related costs. Excluding acquisition-related costs in the first quarter of 2020, Gross profit increased to$2,637 in the first quarter of 2021 from$2,469 in the first quarter of 2020, reflecting an increase of$150 resulting from higher Net sales and an increase of$18 resulting from higher Gross profit margin. Worldwide Gross profit margin increased to 60.7% in the first quarter of 2021 from 60.2% in the first quarter of 2020. Excluding acquisition-related costs in the first quarter of 2020, Gross profit margin increased by 40 basis points (bps) to 60.7% in the first quarter of 2021 from 60.3% in the first quarter of 2020. This increase in Gross profit margin was primarily due to cost savings from the Company's funding-the-growth initiatives (180 bps) and higher pricing (170 bps), partially offset by significantly higher raw and packaging material costs (310 bps), which included foreign exchange transaction costs. Three Months Ended March 31, 2021 2020 Gross profit, GAAP$ 2,637 $ 2,465 Acquisition-related costs - 4 Gross profit, non-GAAP$ 2,637 $ 2,469 Three Months Ended March 31, 2021 2020 Basis Point Change Gross profit margin, GAAP 60.7 % 60.2 % 50 Acquisition-related costs - 0.1 Gross profit margin, non-GAAP 60.7 % 60.3 % 40 26
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 9% to
Selling, general and administrative expenses as a percentage of Net sales increased 90 bps to 36.9% in the first quarter of 2021 from 36.0% in the first quarter of 2020. This increase was due to increased advertising investment (50 bps) and higher overhead expenses (40 bps), primarily driven by higher logistics costs, both as a percentage of Net sales. In the first quarter of 2021, advertising investment increased as a percentage of Net sales to 12.3% from 11.8% in the first quarter of 2020, or 11% in absolute terms to$535 as compared with$484 in the first quarter of 2020.
Three Months Ended
2021 2020 Selling, general and administrative expenses $
1,605
Three Months Ended March 31, 2021 2020 Basis Point Change Selling, general and administrative expenses as a percentage of Net sales 36.9 % 36.0 % 90 27
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Operating Profit
Operating profit increased 5% to$1,004 in the first quarter of 2021 from$952 in the first quarter of 2020. Operating profit in the first quarter of 2020 included acquisition-related costs. Excluding acquisition-related costs in the first quarter of 2020, Operating profit increased to$1,004 in the first quarter of 2021 from$958 in the first quarter of 2020, as an increase in Gross profit was partially offset by an increase in Selling, general and administrative expenses. Operating profit margin was 23.1% in the first quarter of 2021, a decrease of 10 bps compared to 23.2% in the first quarter of 2020. Excluding acquisition-related costs in the first quarter of 2020, Operating profit margin was 23.1% in the first quarter of 2021, a decrease of 30 bps compared to 23.4% in the first quarter of 2020. This decrease in Operating profit margin was primarily due to an increase in Selling, general and administrative expenses (90 bps), partially offset by an increase in Gross profit (40 bps), both as a percentage of Net sales. Three Months Ended March 31, 2021 2020 % Change Operating profit, GAAP $ 1,004$ 952 5 % Acquisition-related costs - 6 Operating profit, non-GAAP $ 1,004$ 958 5 % Three Months Ended March 31, 2021 2020 Basis Point Change Operating profit margin, GAAP 23.1 % 23.2 % (10) Acquisition-related costs - 0.2 Operating profit margin, non-GAAP 23.1 % 23.4 % (30)
Non-Service Related Postretirement Costs
Non-service related postretirement costs were$18 in the first quarter of 2021, as compared to$21 in the first quarter of 2020. Interest (Income) Expense, Net Interest (income) expense, net was$29 in the first quarter of 2021 as compared to$36 in the first quarter of 2020, primarily due to lower average interest rates on debt. 28 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Income Taxes
The effective income tax rate was 23.9% for the first quarter of 2021 as
compared to 16.4% for the first quarter of 2020. As reflected in the table
below, the non-GAAP effective income tax rate was 23.9% for the quarter ended
The quarterly provision for income taxes is determined based on the Company's estimated full year effective income tax rate adjusted by the amount of tax attributable to infrequent or 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 24.0%, compared to 24.7% in the first quarter of 2020. See Note 10, Income Taxes to the Condensed Consolidated Financial Statements for additional details. Three Months Ended March 31, 2021 2020 Income Before Provision For Effective Income Income Before Provision For Effective Income Income Taxes Income Taxes(1) Tax Rate(2) Income Taxes Income Taxes(1) Tax Rate(2) As Reported GAAP $ 957 $ 229 23.9 % $ 895 $ 147 16.4 % Subsidiary and operating structure initiatives - - - - 71 7.9 Acquisition-related costs - - - 6 2 0.1 Non-GAAP $ 957 $ 229 23.9 % $ 901 $ 220 24.4 % (1) The income tax effect on non-GAAP items is calculated based upon the tax laws and statutory income tax rates applicable in the tax jurisdiction(s) of the underlying non-GAAP adjustment. (2) The impact of non-GAAP items on the Company's effective tax rate represents the difference in the effective tax rate calculated with and without the non-GAAP adjustment on Income before income taxes and Provision for income taxes. The provision for income taxes for the three months endedMarch 31, 2020 includes$71 of income tax benefits recorded on a discrete period basis, of which$45 relates to previously recorded foreign withholding taxes and$26 relates to a previously recorded valuation allowance against a deferred tax asset. As more fully described below, both items were previously recorded in connection with the charge recorded by the Company in 2017 and revised in 2018 related to the TCJA. As part of the previously recorded charge for the TCJA, the Company had provided for foreign withholding taxes expected to be paid on the remittance of earnings from certain overseas subsidiaries no longer deemed indefinitely reinvested. As a result of a reorganization of the ownership structure of certain foreign subsidiaries, the Company determined that no withholding taxes would be due on the remittance by certain subsidiaries of earnings previously deemed reinvested and, accordingly, reversed$45 of previously recorded foreign withholding taxes in the first quarter of 2020. Also as part of the previously recorded charge for the TCJA, the Company provided a valuation allowance against a deferred tax asset related to foreign tax credit carry-forwards that the Company did not expect to be able to use due to changes made by the TCJA. As a result of a new operating structure implemented within one of the Company's divisions, the Company believes the use of these foreign tax credit carry-forwards will not be limited in the future and, accordingly, reversed the previously recorded valuation allowance of$26 in the first quarter of 2020. 29
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Net Income Attributable to
Net income attributable toColgate-Palmolive Company in the first quarter of 2021 decreased to$681 from$715 in the first quarter of 2020, and Earnings per common share on a diluted basis decreased to$0.80 per share in the first quarter of 2021 from$0.83 in the first quarter of 2020. Net income attributable toColgate-Palmolive Company in the first quarter of 2020 included acquisition-related costs and a benefit related to subsidiary and operating structure initiatives. Excluding the items described above in the first quarter of 2020, Net income attributable toColgate-Palmolive Company in the first quarter of 2021 increased 5% to$681 from$648 in the first quarter of 2020, and Earnings per common share on a diluted basis increased 7% to$0.80 in the first quarter of 2021 from$0.75 in the first quarter of 2020. Three Months Ended March 31, 2021 Net Income Net Income Including Attributable To Income Before Provision For Noncontrolling Colgate-Palmolive Diluted Earnings Income Taxes Income Taxes Interests Company Per Share As Reported GAAP$ 957 $ 229 $ 728 $ 681$ 0.80 Three
Months Ended
Net Income Net Income Including Attributable To Income Before Provision For Noncontrolling Colgate-Palmolive Diluted Earnings Income Taxes Income Taxes(1) Interests Company Per Share(2) As Reported GAAP$ 895 $ 147 $ 748 $ 715$ 0.83 Subsidiary and operating structure initiatives - 71 (71) (71) (0.08) Acquisition-related costs 6 2 4 4 - Non-GAAP$ 901 $ 220 $ 681 $ 648$ 0.75 (1) The income tax effect on non-GAAP items is calculated based upon the tax laws and statutory income tax rates applicable in the tax jurisdiction(s) of the underlying non-GAAP adjustment. (2) The impact of non-GAAP adjustments on diluted earnings per share may not necessarily equal the difference between "GAAP" and "non-GAAP" as a result of rounding. 30 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Oral, Personal and Home Care
North America Three Months Ended March 31, 2021 2020 Change Net sales $ 923$ 929 (0.5) % Operating profit $ 202$ 258 (22) % % of Net sales 21.9 % 27.8 % (590) bps Net sales inNorth America decreased 0.5% in the first quarter of 2021 to$923 as volume declines of 6.5% were partially offset by net selling price increases of 5.5% and positive foreign exchange of 0.5%. The Company's acquisition of hello contributed 0.5% to volume inNorth America . Organic sales inNorth America decreased 1.5% in the first quarter of 2021. An organic sales decline inthe United States was partially offset by organic sales growth inCanada . The decrease in organic sales inNorth America in the first quarter of 2021 versus the first quarter of 2020 was primarily due to a decrease in Personal Care organic sales. The decrease in Personal Care was primarily due to organic sales declines in the bar soap, underarm protection and liquid hand soap categories partially offset by organic sales growth in the skin health category. Operating profit inNorth America decreased 22% in the first quarter of 2021 to$202 , or 590 bps to 21.9% as a percentage of Net sales. This decrease in Operating profit as a percentage of Net sales was primarily due to increases in Selling, general and administrative expenses (390 bps) and a decrease in Gross profit (210 bps), both as a percentage of Net sales. This decrease in Gross profit was primarily due to higher raw and packaging material costs (510 bps), partially offset by higher pricing and cost savings from the Company's funding-the-growth initiatives (140 bps). This increase in Selling, general and administrative expenses was due to higher overhead expenses (280 bps), primarily driven by higher logistics costs, and increased advertising investment (110 bps). Latin America Three Months Ended March 31, 2021 2020 Change Net sales $ 907$ 889 2.0 % Operating profit $ 272$ 248 10 % % of Net sales 30.0 % 27.9 % 210 bps Net sales inLatin America increased 2.0% in the first quarter of 2021 to$907 , as volume growth of 1.0% and net selling price increases of 8.5% were partially offset by negative foreign exchange of 7.5%. Organic sales inLatin America increased 9.5% in the first quarter of 2021. Organic sales growth was led byBrazil ,Mexico ,Argentina andColombia . The increase in organic sales inLatin America in the first quarter of 2021 versus the first quarter of 2020 was due to increases inOral Care , Personal Care and Home Care organic sales. The increase inOral Care was primarily due to organic sales growth in the toothpaste, manual toothbrush and mouthwash categories. The increase in Personal Care was primarily due to organic sales growth in the bar soap and liquid hand soap categories. The increase in Home Care was primarily due to organic sales growth in the fabric softener, liquid cleaner and hand dish categories. 31 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Operating profit inLatin America increased 10% in the first quarter of 2021 to$272 , or 210 bps to 30.0% as a percentage of Net sales. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross profit (180 bps), partially offset by an increase in Selling, general and administrative expenses (80 bps), both as a percentage of Net sales. This increase in Gross profit was primarily due to higher pricing and cost savings from the Company's funding-the-growth initiatives (330 bps), partially offset by higher raw and packaging material costs (490 bps), which included foreign exchange transaction costs. This increase in Selling, general and administrative expense was due to higher overhead expenses (120 bps), partially offset by decreased advertising investment (40 bps).Europe Three Months Ended March 31, 2021 2020 Change Net sales $ 717$ 675 6.0 % Operating profit $ 180$ 154 17 % % of Net sales 25.1 % 22.8 % 230 bps Net sales inEurope increased 6.0% in the first quarter of 2021 to$717 due to net selling price increases of 1.5% and positive foreign exchange of 8.0%, partially offset by volume declines of 3.5%. Organic sales inEurope decreased 2.0% in the first quarter of 2021. Organic sales declines inGermany and theUnited Kingdom were partially offset by organic sales growth in the Nordic region andSwitzerland . The decrease in organic sales inEurope in the first quarter of 2021 versus the first quarter of 2020 was due to decreases inOral Care , Personal Care and Home Care organic sales. The decrease inOral Care was primarily due to organic sales declines in the toothpaste category, partially offset by organic sales growth in the mouthwash category. The decrease in Personal Care was primarily due to organic sales declines in the bar soap, body wash and underarm protection categories, partially offset by organic sales growth in the skin health category. The decrease in Home Care was primarily due to organic sales declines in the bleach and liquid cleaner categories. Operating profit inEurope increased 17% in the first quarter of 2021 to$180 , or 230 bps to 25.1% as a percentage of Net sales. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross profit (100 bps) and a decrease in Selling, general and administrative expenses (80 bps), both as a percentage of Net sales. This increase in Gross profit was primarily due to cost savings from the Company's funding-the-growth initiatives (160 bps), higher pricing and favorable mix (40 bps), partially offset by higher raw and packaging material costs (140 bps). This decrease in Selling, general and administrative expenses was primarily due to lower overhead expenses (70 bps). Asia Pacific Three Months Ended March 31, 2021 2020 Change Net sales $ 739$ 633 16.5 % Operating profit $ 224$ 161 39 % % of Net sales 30.3 % 25.4 % 490 bps Net sales inAsia Pacific increased 16.5% in the first quarter of 2021 to$739 due to volume growth of 10.5%, selling price increases of 0.5% and positive foreign exchange of 5.5%. Organic sales inAsia Pacific increased 11.0% in the first quarter of 2021. Organic sales growth was led by theGreater China region,India ,the Philippines andThailand . The increase in organic sales inAsia Pacific in the first quarter of 2021 versus the first quarter of 2020 was due to an increase inOral Care organic sales. The increase inOral Care was primarily due to increases in organic sales in the toothpaste and manual toothbrush categories. 32
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Operating profit inAsia Pacific increased 39% in the first quarter of 2021 to$224 , or 490 bps to 30.3% as a percentage of Net sales. This increase in Operating profit as a percentage of Net sales was primarily due to an increase in Gross profit (320 bps) and a decrease in Selling, general and administrative expenses (160 bps), both as a percentage of Net sales. This increase in Gross profit was primarily due to cost savings from the Company's funding-the-growth initiatives (170 bps), lower manufacturing costs (70 bps) primarily related to benefits of higher manufacturing volume, higher pricing and lower raw and packaging material costs (10 bps). This decrease in Selling, general and administrative expenses was primarily due to lower overhead expenses (150 bps).Africa /Eurasia Three Months Ended March 31, 2021 2020 Change Net sales $ 272$ 252 8.5 % Operating profit $ 54$ 56 (4) % % of Net sales 19.9 % 22.2 % (230) bps Net sales inAfrica /Eurasia increased 8.5% in the first quarter of 2021 to$272 , as volume growth of 5.0% and net selling price increases of 8.0% were partially offset by negative foreign exchange of 4.5%. Organic sales inAfrica /Eurasia increased 13.0% in the first quarter of 2021. Organic sales growth was led byTurkey ,Nigeria ,South Africa andRussia . The increase in organic sales inAfrica /Eurasia in the first quarter of 2021 versus the first quarter of 2020 was primarily due to an increase inOral Care organic sales. The increase inOral Care was primarily due to organic sales growth in the toothpaste and manual toothbrush categories. Operating profit inAfrica /Eurasia decreased 4% in the first quarter of 2021 to$54 , or 230 bps to 19.9% as a percentage of Net sales. This decrease in Operating profit as a percentage of Net sales was due to a decrease in Gross profit (160 bps) and an increase in Selling, general and administrative expenses (70 bps), both as a percentage of Net sales. This decrease in Gross profit was primarily due to higher raw and packaging material costs (610 bps), which included foreign exchange transaction costs, partially offset by higher pricing and cost savings from the Company's funding-the-growth initiatives (160 bps). This increase in Selling, general and administrative expenses was due to higher overhead expenses (190 bps), primarily driven by higher logistics costs, partially offset by decreased advertising investment (120 bps). 33
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Hill's Pet Nutrition Three Months Ended March 31, 2021 2020 Change Net sales $ 786$ 719 9.5 % Operating profit $ 215$ 203 6 % % of Net sales 27.4 % 28.2 % (80) bps Net sales for Hill's Pet Nutrition increased 9.5% in the first quarter of 2021 to$786 due to volume growth of 3.0%, net selling price increases of 4.0% and positive foreign exchange of 2.5%. Organic sales in Hill's Pet Nutrition increased 7.0% in the first quarter of 2021. Organic sales growth was led bythe United States ,Europe andCanada .
The increase in organic sales in the first quarter of 2021 was primarily due to organic sales growth in the Science Diet and Prescription Diet categories.
Operating profit in Hill's Pet Nutrition increased 6% in the first quarter of 2021 to$215 , while as a percentage of Net sales it decreased 80 bps to 27.4%. This decrease in Operating profit as a percentage of Net sales was primarily due to a decrease in Gross profit (40 bps) and an increase in Selling, general and administrative expenses (20 bps), both as a percentage of Net sales. This decrease in Gross profit was primarily due to higher raw and packaging material costs (230 bps), partially offset by higher pricing and cost savings from the Company's funding-the-growth initiatives (90 bps). This increase in Selling, general and administrative expenses was due to increased advertising investment (250 bps), partially offset by lower overhead expenses (230 bps). During the quarter endedMarch 31, 2019 , Hill's announced a voluntary recall, which was subsequently expanded, of select canned dog food products due to potentially elevated levels of Vitamin D resulting from a supplier error. Inthe United States , the voluntary recall was conducted in cooperation with theU.S. Food and Drug Administration . Following the announcement of the voluntary recall, and as ofMarch 31, 2021 , Hill's and/or the Company have been named as defendants in 37 putative class action lawsuits, one putative class action filed on behalf of aEuropean Union class and one individual action, all related to the voluntary recall and filed in various jurisdictions inthe United States . In addition, two putative class actions related to the voluntary recall have been filed inCanada . Eight of the putative class actions lawsuits inthe United States and one of the putative class action lawsuits inCanada have been voluntarily dismissed. During the quarter endedDecember 31, 2020 , the parties to the putative class action lawsuits inthe United States (other than the class action filed on behalf of aEuropean Union class) entered into a settlement agreement, which was preliminarily approved by the court inFebruary 2021 . The amount of the settlement is not material to the Company's results of operations for the quarter endedMarch 31, 2021 . Hill's is indemnified by the supplier related to the voluntary recall. Sales of products voluntarily recalled represent less than 2% of Hill's annual Net sales. The sales loss and other costs associated with the voluntary recall and its subsequent expansion did not have a material impact on the Company's Net sales or Operating profit for the quarter endedMarch 31, 2021 and are not expected to have a material impact in future periods. Corporate Three Months Ended March 31, 2021 2020 Change Operating profit (loss) $ (143)$ (128) 12 % Operating profit (loss) related to Corporate was ($143 ) in the first quarter of 2021 as compared to ($128 ) in the first quarter of 2020. In the first quarter of 2020, Corporate Operating profit (loss) included acquisition-related costs of$6 . 34 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q discusses certain financial measures on both a GAAP and a non-GAAP basis. The Company uses the non-GAAP financial measures described below internally in its budgeting process, to evaluate segment and overall operating performance and as a factor in determining compensation. The Company believes that these non-GAAP financial measures are useful in evaluating the Company's underlying business performance and trends; however, 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. Net sales growth (GAAP) and organic sales growth (Net sales growth excluding the impact of foreign exchange, acquisitions and divestments) (non-GAAP) are discussed in this Quarterly Report on Form 10-Q. Management believes the organic sales growth measure provides investors and analysts 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, as applicable. A reconciliation of organic sales growth to Net sales growth for the three months endedMarch 31, 2021 is provided below. Worldwide Gross profit, Gross profit margin, Selling, general and administrative expenses, Selling, general and administrative expenses as a percentage of Net sales, Other (income) expense, net, Operating profit, Operating profit margin, Non-service related postretirement costs, Interest (income) expense, net, effective income tax rate, Net income attributable toColgate-Palmolive Company and Earnings per share on a diluted basis are discussed in this Quarterly Report on Form 10-Q both on a GAAP basis and excluding, as applicable, acquisition-related costs and a benefit related to a reorganization of the ownership structure of certain foreign subsidiaries and a new operating structure implemented within one of the Company's divisions. These non-GAAP financial measures exclude items that, either by their nature or amount, management would not expect to occur as part of the Company's normal business on a regular basis, such as restructuring charges, charges for certain litigation and tax matters, gains and losses from certain acquisitions, divestitures and certain unusual, non-recurring items. Investors and analysts use these financial measures in assessing the Company's business performance, and management believes that presenting these financial measures on a non-GAAP basis provides them with useful supplemental information to enhance their understanding of the Company's underlying business performance and trends. These non-GAAP financial measures also enhance the ability to compare period-to-period financial results. A reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP financial measures for the three months endedMarch 31, 2021 and 2020 is presented within the applicable section of Results of Operations.
The following table provides a quantitative reconciliation of Net sales growth
to organic sales growth for the three months ended
Foreign Acquisitions and Organic Net Sales Growth Exchange Divestments Sales Growth Three Months Ended March 31, 2021 (GAAP) Impact Impact (Non-GAAP) Oral, Personal and Home Care North America (0.5)% 0.5% 0.5% (1.5)% Latin America 2.0% (7.5)% -% 9.5% Europe 6.0% 8.0% -% (2.0)% Asia Pacific 16.5% 5.5% -% 11.0% Africa/Eurasia 8.5% (4.5)% -% 13.0% Total Oral, Personal and Home Care 5.5% 1.0% -% 4.5% Pet Nutrition 9.5% 2.5% -% 7.0%Total Company 6.0% 1.0% -% 5.0% 35
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Liquidity and Capital Resources
The Company expects cash flow from operations and debt issuances will be sufficient to meet foreseeable business operating and recurring cash needs (including for debt service, dividends, capital expenditures, share repurchases and acquisitions). The Company believes its strong cash generation and financial position should continue to allow it broad access to global credit and capital markets. Net cash provided by operations decreased 22% to$598 in the first three months of 2021, compared with$768 in the comparable period of 2020, primarily due to higher tax payments and higher working capital. The Company continues to be tightly focused on working capital. The Company's working capital was (4.4%) as a percentage of Net sales as ofMarch 31, 2021 as compared to (3.5%) as ofMarch 31, 2020 . The Company defines working capital as the difference between current assets (excluding Cash and cash equivalents and marketable securities, the latter of which is reported in Other current assets) and current liabilities (excluding short-term debt). Investing activities used$142 of cash in the first three months of 2021, compared with$459 in the comparable period of 2020. Investing activities in the first three months of 2020 included the Company's acquisition of hello for cash consideration of$351 . This acquisition was financed with a combination of debt and cash. Capital spending was$107 in the first three months of 2021 compared to$82 in the comparable period of 2020. Capital expenditures for 2021 are expected to be approximately 3.0% to 3.5% of Net sales. The Company continues to focus its capital spending on projects that are expected to yield high aftertax returns. Financing activities used$334 of cash during the first three months of 2021, compared with$308 used in the comparable period of 2020. This reflects higher share repurchases associated with the share repurchase program and lower proceeds from the exercise of stock options in the first three months of 2021 compared with the comparable period of 2020. This use of cash was partially offset by proceeds from the issuance of debt and increase in short-term borrowing in the first three months of 2021 compared with the comparable period of 2020. As previously disclosed, during the year endedDecember 31, 2020 , the Company moderated its share repurchases, net of proceeds from the exercise of stock options, to reduce incremental debt levels related to acquisitions. During the first quarter of 2021, the Company's share repurchases, net returned to historical levels. Long-term debt, including the current portion, increased to$7,579 as ofMarch 31, 2021 , as compared to$7,343 as ofDecember 31, 2020 , and total debt was$7,833 as ofMarch 31, 2021 , as compared to$7,601 as ofDecember 31, 2020 . The Company's debt issuances support the Company's capital structure objectives of funding its business and growth initiatives while minimizing its risk-adjusted cost of capital. Domestic and foreign commercial paper outstanding was$1,716 and$858 as ofMarch 31, 2021 and 2020, respectively. The average daily balances outstanding for commercial paper in the first three months of 2021 and 2020 were$1,903 and$1,694 , respectively. The Company classifies commercial paper and certain current maturities of notes payable as long-term debt when it has the intent and ability to refinance such obligations on a long-term basis, including, if necessary, by utilizing its unused lines of credit (including under the facilities discussed below) or by issuing long-term debt pursuant to an effective shelf registration statement. InNovember 2018 , the Company entered into an amended and restated$2,650 revolving credit facility with a syndicate of banks that was scheduled to expire inNovember 2023 . InAugust 2019 , the term of the facility was extended by one year, and it now expires inNovember 2024 . InAugust 2020 , the Company entered into a$1,500 364-day credit facility with a syndicate of banks that is scheduled to expire inAugust 2021 . Commitment fees related to the credit facilities are not material. Certain of the agreements with respect to the Company's bank borrowings contain financial and other covenants as well as cross-default provisions. Noncompliance with these requirements could ultimately result in the acceleration of amounts owed. The Company is in full compliance with all such requirements and believes the likelihood of noncompliance is remote. Refer to Note 6, Long term Debt and Credit Facilities, on the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for further information about the Company's long-term debt and credit facilities. In the first quarter of 2021, the Company increased the quarterly common stock dividend to$0.45 per share from$0.44 per share previously, effective in the second quarter of 2021. 36 --------------------------------------------------------------------------------
COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts) Cash and cash equivalents increased$107 during the first three months of 2021 to$995 atMarch 31, 2021 , compared to$888 atDecember 31, 2020 , the majority of which ($923 and$832 , respectively) was held by the Company's foreign subsidiaries. During the three months endedMarch 31, 2021 , COVID-19 did not have a significant impact on the Company's liquidity for its continued operating and cash needs. For more information regarding the anticipated impact of COVID-19, see "Executive Overview" and "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 .
For additional information regarding liquidity and capital resources, please
refer to the Company's Annual Report on Form 10-K for the year ended
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COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
Market Share Information
Management uses market share information as a key indicator to monitor business health and performance. References to market share in this Quarterly Report on Form 10-Q are based on a combination of consumption and market share data provided by third-party vendors, primarily Nielsen, and internal estimates. All market share references represent the percentage of the dollar value of sales of our products, relative to all product sales in the category in the countries in which the Company competes and purchases data (excludingVenezuela from all periods). Market share data is subject to limitations on the availability of up-to-date information. In particular, market share data is currently not generally available for certain retail channels, such as eCommerce or certain discounters. The Company measures year-to-date market shares fromJanuary 1 of the relevant year through the most recent period for which market share data is available, which typically reflects a lag time of one or two months. The Company believes that the third-party vendors we use to provide data are reliable, but we have not verified the accuracy or completeness of the data or any assumptions underlying the data. In certain limited circumstances, the COVID-19 pandemic has impacted the ability of our third-party vendors to provide the Company with reliable updated market share data. In addition, market share information calculated by the Company may be different from market share information calculated by other companies due to differences in category definitions, the use of data from different countries, internal estimates and other factors.
Cautionary Statement on Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 or by theSEC in its rules, regulations and releases that set forth anticipated results based on management's current plans and assumptions. Such statements may relate, for example, to sales or volume growth, net selling price increases, organic sales growth, profit or profit margin growth, earnings per share levels, financial goals, the impact of foreign exchange volatility, the impact of COVID-19, cost-reduction plans, tax rates, new product introductions, commercial investment levels, acquisitions, divestitures, share repurchases, or legal or tax proceedings, among other matters. These statements are made on the basis of the Company's views and assumptions as of this time and the Company undertakes no obligation to update these statements whether as a result of new information, future events or otherwise, except as required by law or by the rules and regulations of theSEC . Moreover, the Company does not, nor does any other person, assume responsibility for the accuracy and completeness of those statements. The Company cautions investors that any such forward-looking statements are not guarantees of future performance and that actual events or results may differ materially from those statements. Actual events or results may differ materially because of factors that affect international businesses and global economic conditions, as well as matters specific to the Company and the markets it serves, including the uncertain economic and political environment in different countries and its effect on consumer spending habits, foreign currency rate fluctuations, exchange controls, tariffs, price or profit controls, labor relations, changes in foreign or domestic laws, or regulations or their interpretation, political and fiscal developments, including changes in trade, tax and immigration policies, increased competition and evolving competitive practices (including from the growth of eCommerce and the entry of new competitors and business models), the ability to operate and respond effectively during a pandemic, epidemic or widespread public health concern, including COVID-19, ability to manage disruptions in our global supply chain and/or key office facilities, ability to manage the availability and cost of raw and packaging materials and logistics costs, the ability to maintain or increase selling prices as needed, changes in the policies of retail trade customers, the emergence of alternative retail channels, the growth of eCommerce and the rapidly changing retail landscape (as consumers increasingly shop online), the ability to develop innovative new products, the ability to continue lowering costs and operate in an agile manner, the ability to maintain the security of our information technology systems from a cyber-security incident or data breach, the ability to address the effects of climate change and achieve our sustainability and social impact goals, the ability to complete acquisitions and divestitures as planned, the ability to successfully integrate acquired businesses, the ability to attract and retain key employees and integrate diversity, equity and inclusion initiatives across our organization, the uncertainty of the outcome of legal proceedings, whether or not the Company believes they have merit, and the ability to address uncertain or unfavorable global economic conditions, disruptions in the credit markets and tax matters. For information about these and other factors that could impact the Company's business and cause actual results to differ materially from forward-looking statements, refer to the Company's filings with theSEC (including, but not limited to, the information set forth under the captions "Risk Factors" and "Cautionary Statement on Forward-Looking Statements" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and subsequent Quarterly Reports on Form 10-Q). 38 --------------------------------------------------------------------------------COLGATE-PALMOLIVE COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Millions Except Per Share Amounts)
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