Colgate-Palmolive Company

Good day and welcome to the Colgate-Palmolive Second Quarter 2020 Earnings Conference Call. The call is being recorded and is being broadcasted live at www.colgatepalmolive.com. Now for opening remarks, I'd like to turn this call over to Chief Investor Relations Officer, John Fauché. Go ahead.

Thanks, Savannah. Good morning and welcome to our Second Quarter Earnings Release Conference Call. This is John Fauché, Chief Investor Relations Officer. 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 2019 annual report on Form 10-K and subsequent SEC filings, all available on Colgate's website, for a 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 on the call this morning are Noel Wallace, Chairman, President, and Chief Executive Officer, and Henny Jakobsen, Chief Financial Officer. I will discuss our Q2 performance and provide some context around 2020 before turning it over to Noel for his thoughts on our results and the current operating environment. We will then open it up for Q&A. As usual, we request that you limit yourself to one question so that as many people as possible get to ask a question. If you have further questions, you are welcome to reenter the queue. We are pleased with our second quarter performance as we delivered growth in net sales, organic sales, operating profit, earnings per share, and cash flow in Q2 2020, despite headwinds from foreign exchange, a worsening global economy, and impacts from the COVID-19 pandemic around the globe. We delivered growth in five of our six divisions, with Europe down slightly as consumers worked down some of the extra pantry inventory they purchased in the first quarter. Our gross profit margin was 60.8% on both a GAAP and a base business basis. On a GAAP basis, this was up 110 basis points year over year. On a base business basis, our gross profit margin for the quarter was up 120 basis points, our best year over year performance in several years. For the second quarter, pricing was 130 basis points favorable to gross margin, while raw materials were a 230 basis point headwind, primarily driven by the transactional impact from foreign exchange. Productivity added 220 basis points. On a GAAP basis, our SG&A was up 40 basis points as a percent to sales. On a base business basis, our SG&A was up 60 basis points in the quarter on a percent to sales basis. driven by a 50 basis point increase in advertising to sales, as our advertising spending was up 6% year over year on an absolute basis, and by an increase in logistics costs, as we worked to meet heightened demand due to COVID-19. Excluding logistics, our overheads were down slightly as a percent to sales, despite the FX headwinds in the quarter. On a gap basis, our operating profit was up 7% year over year, while it was up 2% on a base business basis. Our ETS was up 9% on a gap basis and up 3% on a base business basis. We delivered strong free cash flow growth in the quarter, up 67% year-over-year, due primarily to favorable working capital performance, particularly in accounts receivable, net income growth, and the timing of income tax payments. Year-to-date, our free cash flow is up almost 50%. A few comments on our divisional performance now. North America delivered strong growth in the quarter, aided by increased demand across toothpaste, personal care, and home care. As with Q1, growth was led by those categories where we believe we have seen sustained changes in consumer behavior, liquid hand soap, hand dish soap, and household cleaners. The performance of Optic White Renewal helped drive strong growth in toothpaste in the quarter, with share improvement for the Optic White franchise. Latin American net sales were down 13.5% in the quarter, as strong pricing growth was offset by significant foreign exchange headwinds and a mid-single-digit volume decline. Our team in Latin America has responded well to the crisis, working to keep our team safe despite rising cases of COVID-19 in many markets, implementing pricing to offset foreign exchange movements, and adapting promotional programs. While we were pleased with our pricing performance and the gross profit margin expansion it helped deliver, Our volumes were down. We expect the balance will improve in the second half of the year, driven by innovation, increased marketing spending, and a return to a more normalized promotional cadence. Organic sales growth was strong in Brazil, despite a very difficult operating environment. Europe delivered mid-single-digit net sales growth in the quarter, as the inclusion of Salorga more than offset the impact of foreign exchange and a modest organic volume decline. Consumers in Europe began their pantry destocking during the quarter, and this led to category softness across many of our categories, although liquid hand soap, dish soap, and bleach remained buoyant. We had planned for this weakness in Q2 and have shifted our marketing plan to take advantage of what we expect to be improved category growth in the second half of the year, as we believe consumers are well along in this destocking process. Net sales were down 3% in Asia-Pacific, with volume declines in negative foreign exchange partially offset by higher pricing, as the division returned to modest organic sales growth in the quarter. China returned to growth in the second quarter and continues to improve as e-commerce drives significant growth. While our net sales and organic sales in India were down in the quarter, trends have improved since the nationwide shutdown that negatively impacted March and April. There is still some disruption to the retail networks, consistent with what you have heard from other companies. In Africa or Asia, net sales were down in the quarter as foreign exchange more than offset low single-digit organic sales growth with strong performance in South Africa, which was driven by volume growth. We took pricing in many markets, including Russia, to offset the foreign exchange headwinds. Growth at Hills remained strong, driven by a combination of underlying category growth, market share gains due to the Hill Science Diet relaunch, e-commerce strength, and a rebuild of retail inventories following a very strong first quarter. Once again, Hill's e-commerce business grew more than 50% in the quarter. As we said in the press release, due to the continued uncertainty surrounding the potential business impacts from COVID-19 and the related macroeconomic volatility, we are not providing guidance. However, as we did on the first quarter call, we want to provide some context around certain factors that you should consider as you work on your models for 2020. We believe that consumption for certain of our categories, like liquid hand soap, dish soap, bar soap, and household cleaners, remains elevated, and that this should continue going forward. In other categories, like toothpaste and pet nutrition, we believe that consumption rates are stable and that some of the first half growth that resulted in increased pantry inventory may need to reverse in certain geographies in the back half of the year. As we mentioned in the press release, we still expect foreign exchange to have a negative mid-single-digit impact on net sales for the full year. Based on current spot rates, we would expect the impact to be at the low end of that range. We continue to expect our tax rate to be in the range of 21% to 22% on a gap basis. On a base business basis, we continue to expect our tax rate to be in the range of 23.5% to 24 and a half. We continue to plan for less benefit from share repurchase in a year, as we focus more of our cash flow on reducing the debt from the Felorga and Hello transactions. While we pause share repurchases under our repurchase program in the second quarter, our full year share repurchase plans have not changed. And now, I'll turn it over to Noel.

Thanks, John, and good morning, everyone. Let me start by saying I hope everyone is staying safe and healthy despite the challenging circumstances. I thought I'd start off by giving a couple thoughts on the quarter, and then I'll provide you a quick update on where we stand relative to the focus areas that we laid out on the Q1 call. So, good quarter. We continue to deliver in what I would say a very difficult operating environment in the second quarter. Despite the uncertainty around COVID, which is quite substantial, particularly including the accelerated case rates that we're seeing in many of our largest markets, And the impact that John mentioned, the economic activity that we're seeing around the world, we delivered very strong organic sales growth above our long-term target of 3% to 5%. Importantly, strong gross margin expansion. You saw that obviously delivered through strong funding, the growth and productivity measures, and some really good pricing that was broad-based across our categories and geographies. That allowed us to increase advertising, which has been a consistent theme for us, over the last couple quarters, and importantly, expand our operating margins in the end. And again, and that's despite dealing with significant headwinds on foreign exchange, particularly in Latin America. You saw the foreign exchange hit. It was around 6%. Unfortunately, the headwinds from the crisis, we see them continuing, and the rising number of COVID cases, particularly in some of our key markets, means that the possibility of a larger disruption will continue to exist. whether it be by the virus itself or what we've seen in some markets, government actions to stem the virus, and those continue to be quite elevated, and that remains our number one concern as we look at the back half of the year. That said, underlying demand for our products remains solid, particularly in certain categories like liquid hand soap and dish, bar and cleaners, those with a health and hygiene orientation to them where we compete quite successfully across the world. We're delivering premium innovation in the quarter as well. You'll hear me talk a little bit about the success of Optic White Renewal, which is our highest price point toothpaste here in the US. It's been a great success. We continue to focus on high growth channels. We've had substantive growth in our e-commerce business and some of our discounters and club business as well. And we're obviously dealing with a digital environment where consumers aren't leaving homes and quite successful. and how we're delivering content in our advertising. That's consistent with the strategy that we've been discussing for the last 18 months, that strategy about focusing on our core business, a strategy that's focused on adjacencies, particularly in the premium side of the business, and a strategy that's focused on truly elevating our participation in faster-growing growth channels like e-commerce. And that's what's enabling us, as you've seen, to deliver consistent top-line growth, which is necessary, absolutely necessary for the long-term health of our business. And we're delivering that growth, which is broad-based across our categories and broad-based across geographies, and we need to do that with volume and pricing consistently throughout the year. It's that broad-based organic sales growth that allows us to expand the gross margin. We've been particularly focused on that this quarter, doing that despite the significant headwinds that we've seen from foreign exchange and the headwinds we've seen for mixed, particularly the mixed on some of the categories that are elevated in the quarter. That's allowed us to expand our gross profit pool, and it's allowed us to both fund the increases in marketing, spending, and capabilities, and deliver the marketing, excuse me, the operating margin expansion to drive the EPS growth. So that's the quarter. So I thought I'd now spend the rest of my opening comments around the balance of 2020 and looking a bit more into 2021. So let me come back to the three focus areas we discussed in the first quarter call. And they were staying true to our values and purpose, which is going to help us navigate through this environment. How we as a company are adapting a strategy that we have been consistently deploying for the better part of 18 months. And how we're executing that strategy with more agility, and that's been a capability that we've integrated across the company. and how we're managing through the crisis with an eye, importantly, towards the future. And I'm most pleased, quite frankly, with how the company's dealing with the short-term issues that come weekly around the crisis, but more importantly, very focused on ensuring that the long-term health of the business and how we deploy our strategy over the next year or two is being executed. So let me start with how we're staying true to our values and how that's helping us navigate through the challenges of this environment. Our number one priority, as you've heard, continues to be the health and safety of Colgate people and their families all around the world. We continue to enforce home policies across the board where possible, although some of our offices have began to open up. Our global supply chain team has delivered remarkably well, given the volatility they've seen in spikes of demand for our products and the challenges with suppliers all over the world. sustaining our manufacturing capacity, in many cases elevating that. And we're dealing with increased demand of products that have been excessive in certain categories and doing that exceedingly well. And importantly, coming back to values and purpose is making sure that we're giving back to the communities that we serve. Through our hashtag safe hands program that we talked about in the first quarter, our partnership with the World Health Organization, we've distributed free bars of hand soap to over 28 different countries now. to promote hand-washing techniques, which is obviously the first line of defense in fighting COVID-19, and our teams are extraordinarily proud of the efforts that we put in place in that regard. The second focus area is how we're adapting our strategy and executing with agility. The current strategy I've outlined is working core adjacencies, faster growth channels. We've been seeing consistent performance across our categories and geographies against that strategy, but we realize in the current environment that we need to continue to be agile and we need to adapt our marketing strategies where necessary. For example, you've seen the continued success we've had on our Hills business. We've been partnering with some of our lead specialty retailers. We're moving money from in-store promotions to digital content to help elevate not only the brand itself across all e-commerce platforms, but to drive foot traffic back into their stores. That's helped us obviously drive shares during the quarter and continue to have very successful growth on the e-commerce business for the Hills category. As we look at the back half, we're obviously getting much more data as we build our digital capabilities. We're using that to supplement our RGM efforts. You saw significant pricing in the quarter, and I'm Very pleased with how the team has really brought on RGM tactics and using data and analytics to drive pricing. We'll use that as we think about redeploying more money in the back half into a promotion environment that will likely be more competitive. So all consistent with the strategy that we've talked about and enabling us to obviously deliver the balanced growth that you've seen. So let me move on to the third area of focus, managing through the crisis with an eye towards the future. Obviously, we want to emerge from this stronger than we went in, so we'll continue to invest quite aggressively in the back half of this year. We've got strong plans, both on above the line advertising as well as in-store promotions in the back half. That will complement a good innovation grid that we've adjusted to deal with the current behaviors that we're seeing in the market. We'll be particularly focused on digital, which has helped obviously drive another very successful quarter of e-commerce, which you heard John say up 50% in the quarter, driven by hills, but more importantly, driven by our U.S. business, which was up over 200% in the quarter. So, again, very successful, not only driving top-line growth in that RE, but driving share growth as well. And as I mentioned on the last quarter, productivity will continue to be key for us. Our funding to growth over-delivered in the quarter for us. We continue to offset some of the incremental costs we've seen from COVID. So, so far, so good. But productivity is the never-ending journey for us and will continue to be a key focus as we move forward. So, those are our priorities. And although there's tremendous amount of uncertainty right now, I'm confident that we have the right priorities, the right strategies, and most importantly, an incredibly engaged organization deploying and executing the strategy to navigate through this crisis and ultimately emerge stronger on the other side. So with that, I'll open it up to questions.