Colgate-Palmolive Company

Ladies and gentlemen, please stand by. We're about to begin. Good day and welcome to today's Colgate-Palmolive Company Fourth Quarter 2019 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgate-palmolive.com. Now for opening remarks, I'd like to turn the call over to Senior Vice President of Investor Relations, John Fauché. Please go ahead, John.

Thanks, Aaron. Good morning and welcome to our Fourth Quarter Earnings Release Conference Call. This is John Fauché. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and our most recent filings with the SEC, including our 2018 annual report on Form 10-K and subsequent SEC filings, all available on Colgate's website, for discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in tables 8 and 9 of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website. Joining me this morning are Noah Wallace, President and Chief Executive Officer, and Henning Jakobsen, Chief Financial Officer. I will begin with some thoughts on our performance in 2019 before moving to our 2020 guidance. We made meaningful progress in 2019 on our path to returning to sustainable, profitable growth. As we said at the beginning of 2019, we increased investment behind our brands and in the capabilities that are required to deliver growth in our changing global markets. We also implemented changes in how we work to streamline our processes and drive empowerment to make us faster. Those strategic choices have started to pay off, as in 2019, we delivered net sales growth in excess of our initial guidance and organic sales growth at the high end of our initial 2019 guidance range of 2% to 4%, and within our long-term target range of 3% to 5%. On a non-GAAP basis, we delivered earnings per share within the guidance range we gave you at the beginning of the year, while our GAAP earnings per share were in excess of our initial guidance. Our free cash flow is up 7% in 2019 due to improved working capital performance and discipline on capital spending. We delivered this performance despite some headwinds from economic uncertainty in markets like Mexico, Brazil, and India. And importantly, we delivered on our commitment to return to growth in China, delivering organic sales growth in both the third and fourth quarters. So how do we drive better growth in 2019? Our continued focus on innovating around the core of our business, driving growth in adjacent segments, and expanding our availability in faster growth markets and channels is paying off. We successfully relaunched several of our core franchises. On Colgate Total, we delivered that brand's fastest organic sales growth in several years. led by key markets like the U.S., Brazil, and Mexico. Hills continues to deliver strong growth, with major contributions coming from the Science Diet relaunch. In North America, Hills delivered double-digit growth in Q4, while cycling a double-digit comparison in the year-ago period. We have more core innovation to come in 2020, especially on key oral care and personal care brands. Our performance in faster-growing adjacencies has been a significant contributor to our improvement in 2019. We delivered growth with new products that appeal to consumers' preferences for products that are more natural and sustainable. We have driven sales and market share growth with our charcoal toothpaste and bamboo toothbrush launches around the world. And Sanex 0% continues to grow as well. In skin health, Elta MD and TCA Skin both achieved double-digit sales growth for the year. We acquired Philorga in Q3, and we are excited to announce that earlier today we closed our acquisition of the Hello Oral Care brand. These acquisitions should also contribute to growth going forward. A quick note on Felorga. We are currently reporting Felorga on a one-month lag, so the fourth quarter includes Felorga results only from the closing of the deal in mid-September through the end of November. When we transition Felorga to SAP, we will line up our reporting calendars. Our focus on availability in the faster growth markets and channels has seen us deliver very strong growth in pharmacy, club, cash and carry, and especially e-commerce. Our e-commerce organic sales grew 30% in 2019, and we established a new direct-to-consumer business with Hills to Home, which provides a fast and easy way for veterinarians to sign patients up for prescription diets. It's a new subscription model that increases compliance. We are leveraging the learnings from Hills' new venture into our direct-to-consumer efforts across the rest of our businesses. We also made significant inroads on sustainability during the year. We launched the first of its kind recyclable toothpaste tube, certified by the Association of Plastic Recyclers, which is now available in both Europe and North America. As of 2019, we have received true zero waste certification on 16 facilities. And we earned our highest recognition ever from the Dow Jones Worldwide Sustainability Index, taking the lead in our industry sector for the first time. Our fourth quarter performance reinforces the progress that I just laid out. We delivered our fifth consecutive quarter of sequential acceleration in organic sales growth, and we returned to gross margin expansion and delivered leverage on our overheads. On a GAAP basis, our gross profit margin in the fourth quarter was up 100 basis points. Excluding the impact of charges from our global growth and efficiency program and acquisition-related costs, our gross profit margin was up 80 basis points. For the fourth quarter, Pricing was favorable to our gross margin by 60 basis points. Raw materials were unfavorable by 270 basis points, almost entirely offset by productivity from our Funding the Growth initiatives of 260 basis points. Other, primarily mixed from Philorga, was favorable by 30 basis points. Our advertising spending was up 13% for the fourth quarter, finishing up 6.5% for the full year. In the fourth quarter, excluding the charges from our global growth and efficiency program and advertising, our SG&A was down 70 basis points year over year, as we benefited from operating leverage, productivity savings, and lower logistics costs. So as we close the door on 2019, our focus is to advance on this progress through 2020. For 2020, we expect net sales growth of 4% to 6%, driven by organic sales growth in the 3% to 5% range, consistent with our long-term targets. a 1% to 2% benefit from the acquisitions of Falorga and Hello, and a modest negative impact from foreign exchange. We expect gross profit margin expansion in 2020, driven by the underlying business, as well as the mixed benefit from Falorga. We expect positive pricing and the continued strength of our productivity initiatives to more than offset modest raw materials inflation. We will continue to invest behind our brands to maintain organic sales growth, not just in terms of advertising, which we expect to be up year over year, but also in building key growth capabilities in areas like innovation and data and analytics. We expect to drive leverage through the rest of our cost base through a combination of top-line growth, cost discipline, productivity, and mix. These investments are crucial not only to sustain organic sales growth, but also to get our market shares growing again. Our growth in non-measured channels is very strong, And this is a key part of the strategy we've talked about all through 2019. We are focused on improving our overall share performance. This is particularly true in North America, where we think a share turnaround in track channels is still a few quarters away. Accelerating our innovation efforts, particularly in premium segments, will be the key factor in delivering better market shares. Interest expense should be up slightly in the air due to the increased debt from Florida and the hello transactions. We expect our tax rate to be between 24.5% and 25.5% on both a GAAP basis and excluding acquisition costs. On a GAAP basis, based on current spot rates, we are planning for a mid to high single-digit increase in earnings per share, excluding charges resulting from the Global Growth and Efficiency Program, acquisition-related costs, the benefit from a value-added tax matter in Brazil, and the benefit from Swiss income tax reform in 2019, based on current spot rates, we are planning for a low- to mid-single-digit increase in earnings per share. At this point, it seems certain that there will be a negative impact from the coronavirus on our businesses in China and the total company for at least the first quarter. While we expect it to be temporary, it is still too early to quantify the impact, and therefore this has not been included in our guidance. We expect to be in a position to provide an update at CAGNI as well as on our first quarter call. We believe our plan for this year appropriately balances our improved performance, our need to sustain organic sales growth, our focus on driving costs out of our P&L, and the uncertainties that exist in a fairly volatile world. And here to give you his thoughts on 2020 is Noel.

Thanks, John, and Happy New Year, everyone. As John discussed, we made meaningful progress in 2019. We grew volume in organic sales in every division, We delivered organic sales growth in all four of our categories, oral care, personal care, home care, and pet nutrition. In our oral care business, we grow organic sales mid-single digits in the year, led by our toothpaste business. And we closed out the year with our highest quarterly rate of organic sales growth in more than three years. But we know we're in 2020 now, and we have more work to do. So here are my thoughts on our top three priorities for this year. The first is premium innovation to drive growth. We delivered successful innovation last year by focusing on our core, adjacencies, and new channels. But markets, categories, consumer preferences are changing, and premium is winning. Still a lot of opportunity for us in whitening, lifestyle, therapeutic, new forms in pet like wet, and importantly, products that are more sustainable and more natural. We're deeply excited about the Hello acquisition, given the potential we see for that brand on top of our core business. And obviously skin health is a big area of opportunity for us. Lastly, while we've improved our speed of innovation, we need to get faster. We are aggressively cutting the time it takes innovation to reach the market, and you'll see that play out over 2020. Our second priority is becoming more digital and data-driven in everything we do commercially. Continuing on innovation to get faster, we need to use digital tools to replace our traditional testing methods in order to speed up our innovation. We're using analytics to more effectively target our digital spending and drive a higher ROI. We're accelerating our e-commerce business by becoming more data driven. We're sharing learning across our businesses and geographies and we're co-locating Colgate and Hills businesses to share best practices and drive efficiencies. And finally, delivering productivity across the P&L through new ways of working. Digital plays a part here as well. Projects like our global move to S4 HANA will allow us to simplify and standardize processes and move resources toward areas that drive real growth. In our supply chain, we have opportunities for more automation and robotics to drive more savings. And we're enhancing our productivity culture so our COVID employees can continue to deliver our best-in-class funding the growth program, along with tackling other cost opportunities to drive efficiencies. So those are our top three priorities we're focused on for 2020. More premium innovation to drive our growth, digital and data to make us faster and smarter, productivity to drive our margins. And now I'll be happy to take any questions.