Colgate-Palmolive Company

Good day and welcome to today's Colgate Palmolive Company first quarter 2021 earnings conference call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I would like to turn the call over to Chief Investor Relations Officer, John Fauché. Please go ahead, John.

Thanks, Ciara. Good morning and welcome to our 2021 first quarter earnings release conference call. This is John Poche, 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 2020 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 Table 6 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 Stan Satula, Chief Financial Officer. I will provide commentary on our Q1 performance, as well as our latest thoughts on 2021 guidance. before turning it over to Noel to discuss our 2021 priorities. 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 re-enter the queue. We started 2021 in positive fashion, with strong organic sales growth despite a very difficult comparison, which included some consumer pantry loading in March of last year. Our net sales grew 6% in the quarter, Organic sales growth of 5% was driven by 0.5% organic volume growth and a 4.5% increase in pricing. Foreign exchange was a 1% tail end in the quarter. While the tough comparisons particularly impacted our trends in developed markets, which were flat on an organic sales basis in the quarter, we delivered double-digit organic sales growth in emerging markets with volume up 5.5% and pricing up 6%. We also delivered organic sales growth in three of our four categories, oral care, home care, and pet nutrition, while personal care organic sales declined due to difficult comparisons. We believe our strategy to deliver more impactful premium innovation, which Noel and Pat Verdun talked about at Cagney, is bearing fruit, and we will continue to focus in this area to drive future growth. Our efforts on premiumization and pricing, along with our focus on productivity, like our funding the growth initiatives, drove improvement year over year in our gross margin, despite a worsening raw materials environment. This gross margin expansion was a key factor in allowing us to deliver base business earnings per share growth in line with our full year guidance, despite higher logistics costs, incremental advertising spending, and investment to build capabilities. In the first quarter, our gross profit margin was 60.7% on both a gap basis, where we were up 50 basis points year over year, and a base business basis, where we were up 40 basis points. For the first quarter, pricing was 170 basis points favorable to gross margin. while raw materials were a 310 basis point headwind. This is a large impact for a first quarter, and it was driven by increases in the cost of raw materials like resins, fats and oils, agriculture-related costs, and the transactional impact from foreign exchange. Productivity was a 180 basis point benefit. Our SG&A was up 90 basis points as a percent of sales for the first quarter on both a GAAP and base business basis. This was primarily driven by a 50 basis point increase in advertising to sales, as we drove strong activation on brand building, innovation, and e-commerce. Our SG&A ratio was also impacted by increased logistics costs, primarily in the US, and investments behind growth and innovation. Excluding advertising and logistics, our SG&A ratio declined year over year. For the first quarter, on a GAAP basis, our operating profit was up 5.5% year over year, while it was up 5% on a base business basis. Our EPS was down 4% on a GAAP basis, and up 7% on a base business basis. Our free cash flow was down year over year in the quarter against a very difficult comparison. The decline was primarily driven by the negative impact of accounts payable and other liabilities, which was mostly due to changes in the timing of payables and income tax payments. A few comments on our divisional performance. North American net sales were down 0.5% in Q1, with organic sales down 1.5%, a 50 basis point benefit from the Hello acquisition, and a 50 basis point benefit from foreign exchange. Our volume declines in the quarter were primarily due to a combination of category deceleration in the face of difficult comparisons as we cycled last year's COVID pantry loading, logistics issues related to a warehouse transition on our U.S. business that impacted our shelf availability and our market shares, and the winter storms in February. The logistics issues lessened over the last month of the quarter as service levels improved, and we expect service levels to return to normal by the end of the second quarter. Pricing grew mid-single digits in the quarter, as our efforts in revenue growth management drove pricing growth across all our categories. The combination of higher raw materials costs, higher underlying logistics costs, and costs related to remediating the company's specific logistics issues pressured margins in the North America division. Despite these headwinds, we continued to invest in advertising, particularly behind premium innovation like Colgate Renewal and the Colgate Optic White Overnight Teeth Whitening Pens, and behind the continued strength of Colgate Optic White renewal. Latin American net sales were up 2%, as 9.5% organic sales growth was mostly offset by the negative impact of foreign exchange. We continue to deliver broad-based organic sales growth in Latin America, with organic sales growth in all three categories and in every hub. As we highlighted at Cagney, our innovation in Latin America is driving growth in the premium segment of the toothpaste category. In Brazil, Colgate Total is gaining share behind Colgate Total anti-tarter, and our natural extracts line is gaining share, particularly behind charcoal. Our toothpaste value share is flat year-to-date in Brazil in measured channels and is up year-over-year in e-commerce. Europe net sales grew 6% in the quarter. Organic sales were down 2%. Volume declined 3.5% in the quarter as we lapped strong shipments in the year-ago period, which was driven by COVID-related demand and pantry loading. Pricing was plus 1.5% as we took pricing across all categories to help offset raw material inflation. We're launching equity campaigns across our core oral care equities, Colgate, Meridel, and Elmex. And we're excited about the launch of Sanex Microbiome, which Pat talked about at CAC. We delivered 16.5% net sales and 11% organic sales growth in Asia Pacific, led by volume growth across our biggest markets, greater China, India, and the Philippines. While China and India benefited from comparisons that included COVID-related shutdowns in 2020, our innovation continues to drive improved underlying performance, particularly in e-commerce. Over the next several quarters, we will begin to roll out more premium innovation in brick and mortar in China, like our Colgate enzyme whitening toothpaste, leveraging the success we have had online in transforming our portfolio. After Eurasian net sales grew 8.5%, as we delivered strong organic sales growth throughout the division. Volume grew 5% in the quarter, while pricing was up 8%. Foreign exchange was a 4.5% headwind. This growth was led by our toothpaste and manual toothbrush businesses, although we also delivered organic sales growth in personal and home care. Our business in Turkey delivered strong sales and market share performance and launched significant premium innovation in naturals, charcoal, and white Hill started the year with another quarter of strong net sales and organic sales growth, despite lapping significant growth in the year-ago period. Developed markets led the growth, particularly the US, Canada, and Europe, led by e-commerce. Emerging markets grew organic sales greater than 20% in the quarter through a combination of volume and pricing growth. We're very excited about our Hill's equity campaign addressing pet obesity. This global campaign is leveraging digital, in-store, in-office and traditional media assets to drive growth in our weight control products across both our prescription and wellness businesses. And now for guidance. We still expect organic sales growth to be within our 3% to 5% long-term target range. As we think about our current organic growth assumptions versus where we were three months ago, we're probably a little more cautious on developed markets. As you have seen from the scanner data, Our categories move negative more quickly than we had anticipated, and we expect that to continue in the short term. Hopefully, this allows for some of the volatility to play itself out sooner in the year, and we will see trends stabilize more quickly. Coming into this year, in categories where consumption rose last year due to COVID, we expected 2021 consumption levels to be below 2020, but above the levels we saw in 2019. That is the case so far across our developed markets businesses, although year-to-date these categories are slightly weaker than expected. Categories like toothpaste, where usage did not spike in relation to COVID, should normalize more quickly as we move past some of the aggressive pantry loading in March and April of last year, and we're beginning to see that happen, and scanner data has returned to growth in the last several weeks. We're encouraged by how we started the year in emerging markets. we saw broad-based organic sales growth in our emerging markets across all the divisions and with a good balance of volume and pricing. Comps will get more difficult as we go through the year, but we believe we have solid momentum. Please note that given widespread COVID outbreaks in countries like Brazil, Mexico, and India, we could still see an impact from government actions to stem the spread of COVID and other disruptions related to COVID, and this is not in our guidance. Using current spot rates, we expect foreign exchange to be a low single-digit benefit for the year, although slightly less favorable than when we gave guidance in January. All in, we still expect net sales to be up 4% to 7%. Our gross margin guidance remains unchanged, as we expect our gross profit margin to be up year-over-year in 2021 on both the GAAP and base business basis. As we mentioned on our 2020 year-end call, raw materials began the year moving higher and faster than we had expected. This trajectory has continued through the first quarter, as you all know. We are still laser-focused on driving our gross margin higher, but the significant increase in costs across our materials base obviously requires additional pricing and productivity. Advertising is still expected to be up on both the dollar and a percent of sales basis. Logistics also continues to be a headwind, particularly in the U.S., where costs also have risen faster than anticipated. We expect these costs to remain elevated in the near term, but to moderate later in the year. Our tax rate is expected to be between 23.5% and 24.5%. We point out that our guidance does not account for any changes in U.S. corporate tax rates, given the recent change in administration. On a GAAP basis, we still expect earnings per share growth in the low to mid single digits. On a base business basis, We continue to expect earnings per share growth in the mid to high single digits. The adverse moves in foreign exchange and raw materials have moved us slightly lower in that range over the past few months, but it is still early in the year. And with that, I'll turn it over to Noel.

Thanks, Sean, and good morning, everyone. I'll keep my commentary brief since we have plenty of time for the Q&A. I think the results for the quarter really speak for themselves. Obviously, we're really pleased with our performance in the first quarter. Despite the significant volatility and headwinds, we delivered strong results around the world and up and down our P&L. While we've made progress on our strategic areas we've been discussing, we still have a lot to do in the balance of the year. Here are our key priorities for the remainder of 2021. Continue to drive broad-based growth. Our priorities here are the same as we've discussed for the past several years. We need to grow volume and pricing. We need organic sales growth in every category and in every division in both emerging and developed markets. In order to do this, we'll continue to ramp up our breakthrough and transformational premium innovation. We delivered high single-digit growth in toothpaste in the first quarter, despite lapping solid growth in the year-ago period, which helped us drive high single-digit growth in our oral care business. We're driving growth through innovation like Colgate Renewal in the US, Colgate Enzyme Whitening Toothpaste in China, and our natural extracts line and Colgate Total anti-tarter line in Latin America. As Pat and I discussed at Cagney, this is a marathon, not a sprint, but we're making good progress, which will continue as we shift our resources, continue to build new skills, and even adapt how we motivate our teams. Pricing is also an important element of growth, and behind our revenue growth management efforts, we continue to drive strong pricing as we look to increase our price index versus the market, as well as offsetting rising costs. You're hearing about rising costs from every company this quarter, and we're seeing inflation on pretty much every line of the P&L, but especially raw materials, warehousing, and logistics. Naturally, our pricing plans are focused. We just discussed we're battling the cost inflation across the board. We're also driving savings through funding the growth and other efficiency initiatives, which helped offset these headwinds, and Efresh Stan, our new CFO, is spearheading for us. We do not expect these headwinds to abate anytime soon, so we have to continue to invest in marketing and building capabilities for future growth while delivering on our earnings guidance. We know we need to be disciplined and efficient in this area. The third is maintaining our focus on building out the key pillars of our long-term strategy while simultaneously managing through all of the volatility. That includes building our capabilities on innovation, e-commerce, digital, and data analytics, progressing on ESG, including increasing our commitments on DE&I, and advancing our 2025 sustainability targets, and then ultimately navigating to return to work for most of our office-based employees. We are building a team and a culture at Colgate that is focused on adapting and changing to this volatile world. We're embracing new strategies and new ways of working, and it's paying off. We've had a good start to 2021, and we're looking to maintain our momentum through the rest of the year.