Why is GAAP EPS growth (84%) so much higher than Base Business EPS growth (18%)?

The Q1 2023 GAAP results included a $267 million ERISA litigation charge (recorded in non-service postretirement costs), which depressed that period's earnings. Because the charge is absent in Q1 2024, GAAP EPS growth looks dramatically higher. Base Business EPS excludes this and other one-time items, so its 18% growth better reflects underlying performance.

How much of the sales growth came from price versus volume?

Most of it came from pricing. Organic sales rose 9.8%, of which pricing contributed 8.5 percentage points and organic volume just 1.3 points. The heavy reliance on price increases, including a 19.7% pricing contribution in Latin America, raises questions about whether volume growth can keep pace in future quarters.

What changed in the 2024 outlook?

Management raised organic sales growth guidance to 5% to 7% from 3% to 5%, and reported net sales growth guidance to 2% to 5% from 1% to 4%. The reported figure now includes a mid-single-digit negative FX impact, versus low-single-digit previously. Earnings guidance was not raised in the release: GAAP EPS is still expected to grow at a double-digit rate and Base Business EPS at a mid to high-single-digit rate.

Are there any weak spots in the business?

Asia Pacific had modest organic growth of 1.5% and a 2.9% organic volume decline. Africa/Eurasia had strong organic growth of 16.2%, but operating profit fell 3% and reported net sales declined 4.5% because of a 20.7% FX headwind. Hill's organic volume also declined 3.9%, though its pricing and organic sales growth were positive.

How is the company's cash position and capital allocation?

Operating cash flow was $681 million, down from $735 million a year earlier, mainly due to a $252 million increase in receivables. Free cash flow before dividends was $555 million. The company paid $394 million in dividends and repurchased $509 million of shares, funded in part by $336 million in proceeds from stock option exercises. Total debt rose to $8.7 billion, and net debt (debt less cash and marketable securities) was $7.4 billion.

CL 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed April 26, 2024. Cited figures are marked; the original filing is the authoritative source.

Colgate-Palmolive reported first quarter 2024 results on April 26, 2024, with broad-based strength.

Net sales rose 6.2% to $5,065 million^a, and organic sales (a non-GAAP measure excluding foreign exchange and M&A) grew 9.8%, with growth in every division and category. Pricing contributed 8.5 points while organic volume added 1.3 points and foreign exchange subtracted 3.6 points. GAAP diluted EPS increased 84% to $0.83, while Base Business (non-GAAP) EPS rose 18% to $0.86.

The year-over-year GAAP comparison is flattered by a $267 million^b ERISA litigation charge in Q1 2023, so the 18% Base Business EPS growth is the more representative measure of underlying earnings momentum. Gross margin expanded roughly 310 basis points to 60.0%, and operating margin rose to 20.7% on a GAAP basis (21.4% Base Business). Management raised full-year 2024 guidance: net sales growth to 2% to 5% (from 1% to 4%), now including a mid-single-digit FX headwind, and organic sales growth to 5% to 7% (from 3% to 5%).

GAAP EPS is now expected to grow at a double-digit rate, and Base Business EPS at a mid to high-single-digit rate. Management also plans higher advertising investment, which rose 16% in the quarter to $672 million^c, and signaled strong brand investment for the balance of the year. Cash generation was solid, with operating cash flow of $681 million and free cash flow before dividends of $555 million, though receivables build and a $509 million share repurchase weighed on cash.

Growth was led by Latin America (organic sales +25.9%^d, operating profit +29%) and was supported by North America, Europe and Hill's. Asia Pacific (organic +1.5%) and Africa/Eurasia (organic +16.2%, operating profit -3%) were weaker.

Total as-reported volume grew only 1.3%, so the top-line expansion relied heavily on pricing, a point investors may want to monitor for sustainability. Investors should also note that FX remains a material headwind to reported results.

02—Key points

Key Highlights

Net sales grew 6.2% to $5,065 million; organic sales grew 9.8%, with pricing contributing 8.5 points and organic volume only 1.3 points.
GAAP diluted EPS rose 84% to $0.83, but this is inflated by a $267 million ERISA charge in Q1 2023; Base Business EPS grew 18% to $0.86.
Gross profit margin expanded about 310 basis points to 60.0%, and Base Business operating margin rose 170 basis points to 21.4%.
Full-year 2024 guidance raised: organic sales growth to 5% to 7% (from 3% to 5%) and reported net sales growth to 2% to 5% (from 1% to 4%), with a mid-single-digit FX headwind.
EPS guidance unchanged in direction: GAAP EPS growth expected at double-digit rates and Base Business EPS at mid to high-single-digit rates; advertising spend is expected to rise.
Latin America was the standout division, with organic sales up 25.9% and operating profit up 29%; Asia Pacific organic sales grew only 1.5%.
Operating cash flow was $681 million and free cash flow before dividends was $555 million; the company repurchased $509 million of treasury shares in the quarter.

03—Questions

Frequently Asked Questions

Why is GAAP EPS growth (84%) so much higher than Base Business EPS growth (18%)?
The Q1 2023 GAAP results included a $267 million ERISA litigation charge (recorded in non-service postretirement costs), which depressed that period's earnings. Because the charge is absent in Q1 2024, GAAP EPS growth looks dramatically higher. Base Business EPS excludes this and other one-time items, so its 18% growth better reflects underlying performance.
How much of the sales growth came from price versus volume?
Most of it came from pricing. Organic sales rose 9.8%, of which pricing contributed 8.5 percentage points and organic volume just 1.3 points. The heavy reliance on price increases, including a 19.7% pricing contribution in Latin America, raises questions about whether volume growth can keep pace in future quarters.
What changed in the 2024 outlook?
Management raised organic sales growth guidance to 5% to 7% from 3% to 5%, and reported net sales growth guidance to 2% to 5% from 1% to 4%. The reported figure now includes a mid-single-digit negative FX impact, versus low-single-digit previously. Earnings guidance was not raised in the release: GAAP EPS is still expected to grow at a double-digit rate and Base Business EPS at a mid to high-single-digit rate.
Are there any weak spots in the business?
Asia Pacific had modest organic growth of 1.5% and a 2.9% organic volume decline. Africa/Eurasia had strong organic growth of 16.2%, but operating profit fell 3% and reported net sales declined 4.5% because of a 20.7% FX headwind. Hill's organic volume also declined 3.9%, though its pricing and organic sales growth were positive.
How is the company's cash position and capital allocation?
Operating cash flow was $681 million, down from $735 million a year earlier, mainly due to a $252 million increase in receivables. Free cash flow before dividends was $555 million. The company paid $394 million in dividends and repurchased $509 million of shares, funded in part by $336 million in proceeds from stock option exercises. Total debt rose to $8.7 billion, and net debt (debt less cash and marketable securities) was $7.4 billion.

04—Continue

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