DBRS Confirms Colgate-Palmolive at AA (low) & R-1 (middle)

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Colgate-Palmolive Company (“Colgate” or the “Company”) and Colgate-Palmolive Canada Inc. at AA (low) and R-1 (middle). The trends are Stable.

The confirmations reflect the strong status of the Company’s global brands in its core businesses. Almost all of Colgate’s products are number one or number two globally in their respective categories. Strong volume growth in every operating division over recent periods has led to a strengthening of its leadership positions and market share for its key products.

DBRS notes that historically strong and steady profit growth has recently been set back by higher input costs, increased marketing spending, and restructuring charges. Higher marketing spending has been necessary to defend and improve positions in core categories as the competitive environment has been intensifying. The combined cost increases and limited to negative price increases have resulted in reduced operating margins. The Company initiated a restructuring program in Q4 2004, which includes plans to close or reconfigure about one-third of its current facilities, reduce the workforce by 12%, add a global commercial effectiveness group, and expand and upgrade sales and marketing forces in high growth markets. The plan is budgeted to cost a total of US$550 million-US$650 million (after tax) over four years, and generate savings of approximately US$250 million-US$300 million (after tax) by the fourth year.

The negative effect of these factors on earnings and cash flow has also led to delayed improvement in financial leverage metrics following Colgate’s acquisition of GABA Holding AG in June 2004, which added approximately US$730 million of net debt. However, DBRS believes that the financial profile remains solid based on the Company’s strong and relatively stable free cash flow generating ability.

Colgate has strong credit ratios and has displayed a great deal of conservatism in terms of growth through acquisition. In fact, it has focused on disposing of smaller, non-strategic operations (e.g. the European detergent business, where its market positions were not strong), while GABA has been the one reasonably sized acquisition in recent years.

The outlook remains stable based on Colgate’s strong market positions and resilient free cash flow generating ability. DBRS expects input cost and marketing spend increases to moderate over time, and growth in earnings and cash flow is expected to resume within a reasonable time frame. Although Colgate has historically returned significant levels of cash to shareholders via stock repurchases, it has a track record of disciplined financial management, as it balances this objective with a committed effort to maintaining a credit profile in the current range.