Colgate-Palmolive Company

Today's Colgate-Palmolive Company Third Quarter 2020 Earnings Conference Call. This call is being recorded and is being broadcast live at www.colgate-palmolive.com. Now, for opening remarks, I would like to turn the call over to Chief Investor Relations Officer, John Fauché. Please go ahead.

Thanks, Savannah. Good morning, and welcome to our Third 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 Foreign 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. The 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 Henning Jakobsen, Chief Financial Officer. I will provide commentary on our Q3 performance and full-year guidance before turning it over to Noel for his thoughts on how we are planning to sustain our growth momentum into 2021. 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 delivered very strong results in the third quarter, consistent with our focus on generating sustainable, profitable growth. We delivered both volume and pricing growth. We delivered growth in all four of our categories, oral care, personal care, home care, and pet nutrition. And we delivered organic sales growth in every division. Developed market organic sales growth was 6.5%, and emerging market organic sales growth was 8.5%. The choices we have made in terms of revamping our innovation processes, continuing to drive our digital transformation, and investing in our brands are paying off. And as Noel will discuss, we have further opportunities ahead of us. Importantly, this growth is driving our P&L. Our ability to expand our gross margin helped us deliver a double-digit percentage increase in base business earnings per share, despite continued increased investment in advertising, negative foreign exchange, costs associated with the COVID crisis, and headwinds from higher logistics costs. Our net sales grew 5.5% in the quarter. Organic sales growth of 7.5% was driven by 3% organic volume growth and a 4.5% increase in pricing. The acquisitions of Falorga, Hello, and the Nigerian joint venture added an additional 200 basis points to volume growth, while foreign exchange was a 4% headwind. Our gross profit margin was 61.2%, up 220 basis points year-over-year on both a GAAP and a base business basis. On a base business basis, this was our best year-over-year performance in several years. For the third quarter, pricing was 170 basis points favorable to gross margin, while raw materials were a 230 basis point headwind, driven by increases in raw materials like fats and oils and the transactional impact from foreign exchange. Productivity was a 250 basis point benefit, while other was plus 30 basis points. On a GAAP basis, our SG&A was up 20 basis points as a percent to sales. On a base business basis, our SG&A was up 90 basis points on a percent to sales basis, driven by a 70 basis point increase in advertising to sales, as our advertising spending was up 13% year over year on an absolute basis, and by a moderate increase in logistics costs as a percent to sales, as we work to meet heightened demand due to COVID-19. On a GAAP basis, our operating profit was up 19% year over year, while it was up 11% on a base business basis. Our EPS was up 21% on a GAAP basis, and up 11% on a base business basis. We continued to deliver free cash flow growth in the quarter, up 5% year-over-year, and up 29% year-to-date. And we resumed share repurchases during the quarter as well. And now I'll have a few comments on our divisional performance. North America delivered strong growth in the quarter, driven by a combination of pricing and volume growth. Oral care growth was driven by toothpaste and improved performance in toothbrushes, aided by the launch of our Hum by Colgate electric brush later in the quarter. The focus on premium innovation, like Hum by Colgate, Colgate Optic White Renewal Toothpaste, and the Colgate Optic White Overnight Teeth Whitening Pen, helped to drive strong pricing growth in oral care. Our personal care and home care businesses continue to benefit from COVID-related demand, particularly in liquid hand soap and dish soap, although our skin health businesses were a drag on growth in the quarter. Overall, we are seeing promotional levels in our categories returning to normal, and we have planned for that to continue going forward. We were very pleased with our performance in Latin America in the third quarter. Latin American net sales were down 5% in the quarter, as 2% volume growth and 9.5% pricing growth were offset by significant foreign exchange headwinds. We delivered organic sales growth in every hub in the division, including strong growth in Mexico and Brazil. Volume performance for the division improved sequentially as we returned to a more normalized promotional cadence due to higher consumer foot traffic, and we saw a benefit from a strong innovation calendar and increased demand for personal and home care products due to COVID. Our innovation in naturals and whitening across the division is helping to drive premiumization in toothpaste as part of our revenue growth management strategy. Our Protex brand is benefiting from heightened consumer interest in antibacterial products the relaunch of Protex with a new flaxseed oil formula, and the entry into new segments with products like Protex Space in Brazil. Protex is a great example of driving growth in both the core and in higher growth-adjacent segments. Europe delivered double-digit net sales growth in the quarter. Organic sales growth of 3% was primarily driven by volume growth, as retail foot traffic improved and slightly positive pricing. Net sales also benefited from the inclusion of Talorga, and favorable foreign exchange. Organic sales growth benefited from strong performance in personal care, driven by COVID-related demand, and strength of the Sanex brand behind Sanex 0% and Sanex Dermo product lines. Oral care performance improved sequentially as we saw less pantry destocking and also through increased brand support. We returned to net sales growth in Asia Pacific in the third quarter. Organic sales growth of 4.5% was driven by a mixture of volume and pricing growth. The organic sales growth was driven by our biggest hub, with Greater China, India, and South Pacific all growing year over year. Our Colgate China business continues to benefit from the premium innovation Noel talked about at the Barclays Conference in September, while our South Pacific business delivered continued strong performance through COVID-related demand and innovation. Africa Eurasia also returned to net sales growth in the quarter, as mid-single-digit volume and pricing growth were only partially offset by a low double-digit foreign exchange headwind. Organic growth was broad-based, with growth in all three categories and across every hub. Turkey continues to benefit from strong growth across all categories. Hills once again delivered stellar results, with double-digit net and organic sales growth led by the U.S., Europe, Australia, and Canada. Higher consumer demand in e-commerce continues to be a significant driver of growth, although brick-and-mortar growth in the U.S. improved sequentially in the third quarter as foot traffic increased. Bills continues to benefit from increased brand support, which is driving higher brand awareness and market share gains on our wellness products. The vet channel remained subdued due to COVID headwinds, but prescription diet sales growth was robust given the shift to e-commerce. And now I'll move to guidance. We are providing annual guidance, despite the fact that rising case rates are rising in many of our markets. We still believe that government actions to control the spread of COVID-19 are the biggest risk to delivering on our financial plan, and shutdowns like we saw in China and India earlier in the year, meaning significant impacts to our ability to manufacture and distribute our products, are not built into our forecast. I want to note that we will not be providing any discussion of 2021 guidance at this time. We expect net sales to be at mid-single digits for the year. Organic sales are expected to be up at the high end of mid-single digits. Foreign exchange is expected to be a mid-single digit headwind for the year, with current spot rates putting us towards the lower end of that range. We expect gross margin expansion for the full year, and advertising as a percent of sales is expected to be up for the year, with an even larger increase in advertising year over year in the fourth quarter. On a GAAP basis, our tax rate is expected to be in the range of 21.5% to 22%. On a base business basis, our tax rate is expected to be in the range of 23.5% to 24%. Our share repurchase plans remain unchanged as we plan for less benefit from share repurchase this year as we pay down debt. On a GAAP basis, we expect earnings per share to be up double digits. On a base business basis, we would expect earnings per share to be up 6% to 7%. And now I'll turn it over to Noel.

Thanks, John, and good morning, everyone. I hope everyone is doing well and staying safe. I'll keep my comments quite brief this morning so we have plenty of time to get to the Q&A. You know, clearly we're pleased with the results in Q3 and obviously the progress we've made throughout the year. You know, I think the results speak to the tremendous work of Colgate people and our partners. When you think about it, from our labs to the production lines to our DCs to getting product in stores and the incredible work our teams are doing, working virtually all over the world. In that regard, our teams continue to show incredible strength. Their compassion for driving the business forward, the collaboration they're showing, and importantly, the discipline and professionalism behind the strategy is clearly reflected in the results. So my immense gratitude from all of us to the teams on the ground and their families. So John summarized the results, I think, quite well. And because the quarter, to some extent, speaks for itself, I'll keep my comments quite brief again, and I'll focus on where we're going next. You've heard me say many times that our growth mindset is really about delivering sustainable, profitable growth, and you clearly saw that. While the trends related to COVID have certainly boosted our sales, our organic sales growth turnaround was well on its way as we headed into 2020. So as we look at 2021 and beyond, we'll continue to evolve our strategies to deliver this type of growth that you expect, and obviously growth that drives superior shareholder value. To that point, I want to expand on three areas this morning, revamping our innovation process. You've heard me talk about that quite a bit. Our digital transformation, which is well underway, and then clearly investing differently to build our brands in the current environment. So first, let me start off by revamping our innovation process. You'll recall we talked quite a bit about that at Barclays, and we focused on delivering that strategy through the quarter. It's about delivering transformative and disruptive innovation across our entire portfolio. So to do this, we need to become less reliant on line extensions by pursuing innovations that really build incremental category growth and market share gains, which is ultimately vital for us to continue to drive gross margin. And we see incredible opportunities, quite frankly, across the megatrends all over the world that we're seeing on the ground. Naturals and sustainability, to give an example, the urbanization that we're seeing in big markets, aging population in developed markets, or younger population and per capita consumption opportunities in developing countries. And clearly the rapid growth and channel focus that we have as we've seen channel expansions, particularly in e-commerce and pharmacy for us. But you can imagine these demands new skill sets, new incentives, new structures, and new processes to get it right. We brought in outside talent to help us change how we think about innovation. And we're really encouraged by the risk taking and collaboration that the teams are showing. We're encouraged by the new financial models and approach they're taking to innovation and empowering our teams, importantly, on the ground to take action. So not surprisingly, Colgate people are clearly stepping up and embracing the change that we're trying to implement. In the last six months, we've launched the HumSmart toothbrush, the Miracle Repair toothpaste line and serums, the Colgate Optic White whitening pen, and the Hill of Science Diet Perfect Digestion, just to give you a few examples of that. John mentioned Protex, another great example of how we're changing the way we innovate. While it's a brand you're probably less familiar with, it has a strong antibacterial skin health credential. Before COVID, we felt the segment was becoming highly commoditized and overly promotional. And we were highly dependent on line extensions. So what did we do? We focused on real differentiation for the brand. We launched the entire core line of Protex Barso with a flaxseed-based antibacterial formula. That flaxseed oil boosts your natural skin defenses, which is a really interesting idea in the current environment, particularly in Brazil. And it's truly differentiated us in this environment and we think positions us well for growth moving forward. We also, at the same time, launched a line of Protex face products, which is positioned in the premium anti-acne segment, a high growth adjacency for sure, and we're driving incremental sales, share, and margin for the brand with that innovation. So while in the short term, we're benefiting from some of the COVID-related demand in the space, I believe this innovation leaves us well-positioned to continue to drive incremental category growth and share for our business. So next, we're continuing to drive our digital transformation. You've heard me talk a lot about that over the last six to nine months. And we're making great progress. So what do I mean when I talk about digital? It's about changing how we work every day across the company. We've discussed our move to SAP S4 HANA, which is allowing us now to analyze our business all over the world effectively with one global standard. We're also now installing new systems to accelerate our revenue growth management efforts. It's about changing how we interact as well with our customers and consumers. We're generating much better insights through data and analytics, which allows us to better understand the consumer path to purchase. As an example in Hills, from pet adoption to the first vet visit, to their ability to buy product ultimately in store. So really understanding that entire journey is allowing us to drive far more growth and efficiencies with our media as well as with our partners. It's about changing how we execute our communication as well. We're improving our digital marketing through programmatic media buying, through more personalized content, and we're doing testing that allows us to more accurately predict the effectiveness of our media, driving higher ROI in the end. So starting small and scaling rapidly is a big mindset that we've adopted in our digital strategy. Channel-wise, the biggest beneficiary of our digital media investments is clearly e-commerce, and we're developing much more sophisticated content to draw attention, increase consideration for our brands, ultimately secure the purchase, and importantly, earn loyalty for our brands going forward. And that's driving share gains in key markets, particularly in the U.S. and in China, as we've increased our investment in that area. We'll also continue to build the digital muscle across the entire enterprise. That's really important for us. And if you think about marketing to a consumer on Amazon or Alibaba, it's not the same. Or marketing to a consumer on Tesco.com or through the last milers in Latin America. This is where the focus on deeply understanding the consumer journey will truly pay off for us. So we need to make sure we build flexibility into our model and win across all the different platforms. While e-commerce requires some specialization and we brought in the talent to do that, we need to ensure that we have training across the entire organization to raise the skill level to ensure that we build that muscle for the long term. I've talked about innovation and I've talked about digital transformation, so let me talk a little bit about brand investment. We're spending behind ideas now and capabilities that will broaden the growth in our portfolio in terms of the brands, the categories, Likewise, the channels which we just spoke about and the geographies. Our innovation will be more successful if we invest in marketing that lets consumers know what's truly different. And we're very focused on that. We'll also win in e-commerce if we're more consistently at the top of the first page and delivering the right personalized content. In our revenue growth management strategy, in driving premiumization, we'll also be more successful if our advertising clearly demonstrates how products are delivering excellent value. And we'll continue to keep Colgate as the most penetrated brand in the world at over 60% of households by consistently keeping our brand top of mind and preferred. So these changes I've discussed today are already helping us deliver the better results that you've seen throughout the year. The success of Optic White Renewal we talked about is a great example of pairing the right innovation with the right digital strategy with increased brand levels of support. The Hill Science Diet relaunch that has fueled a lot of the growth at Hill is likewise a good example of that. So all these efforts are paying off for us as we head into 2021 and building the momentum throughout the year. And we believe that we'll continue to drive the growth, particularly as we build those skill sets across the organization for the longer term. So before we move into the Q&A, I want to offer a word about our announcement this morning that Stan Satula will be joining the company on November 9th as our Chief Financial Officer. Stan joins us from Pitney Bowes and previously IBM and brings a wealth of experience in finance and strategy to this role. We're excited to welcome Stan to Colgate and think his experience in building technology-related businesses will add a tremendous value to our digital transformation while underway. Henning Jakobsen will retire from Colgate on December 31st and we are grateful that he is going to stay with us to ensure a smooth transition with Stan throughout the balance of the year before returning to his family in Denmark. Henning has been with us for 25 years and the service to our company has been exceptional. Henning has served in a number of general management and finance roles throughout the globe. Henning has contributed to much to Colgate, not just in the finance function, as an executive, but also a thoughtful business leader across the leadership team. Most recently, he has been instrumental in our efforts to drive organizational efficiency. I especially want to thank him for his help in my transition to CEO over the past few years. On behalf of all of us at Colgate, we wish him and his family all the best. And with that, I'll open it up to questions.