Colgate-Palmolive Company

Good day and welcome to today's Colgate-Palmolive Company Third Quarter 2021 Earnings Conference Call. This call is being recorded and is being semi-classed 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, Jennifer. Good morning and welcome to our 2021 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 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 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 Stan Satula, Chief Financial Officer. I will provide commentary on our Q3 performance, as well as our latest thoughts on 2021 guidance, before turning it over to Noel to provide his thoughts on how we will continue to deliver on our growth trajectory. 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. Our focus on innovation, premiumization, pricing, and productivity allowed us to deliver solid Q3 and year-to-date results despite a very difficult operating environment. We continue to deliver against our targets because we are executing consistently on the strategy Noel laid out at Cagney back in 2019. We are focused on delivering consistent, sustainable, profitable growth, both volume and pricing growth, growth in all of our categories, growth in all of our divisions emerging in developed markets. And this has enabled us to deliver 11 straight quarters with organic sales growth in line with or above our long-term target of 3% to 5%. This is despite very difficult comparisons and a challenging operating environment. The current operating environment is challenging in many different ways. Consumer mobility is limited in many markets, particularly in Asia, due to government restrictions to stop the spread of COVID-19, which is having a negative impact on category growth. These restrictions have also led to temporary closure of manufacturing facilities across many industries, as you have heard in the news, and from other companies. We are not immune to these restrictions, although given the essential nature of our categories, we produce products that people and their pets use on a daily basis to lead healthier lives, we have been able to resume production throughout our network, although sometimes at a lower than normal level. This did have a slight impact on sales in the third quarter, and we expect a modest impact in the fourth quarter, as we ramp production back up. We are fortunate to have a flexible and resilient global supply chain that has helped us to offset some of the effects of these supply chain challenges, albeit sometimes with additional logistics costs. Speaking of logistics, the stress on global logistics networks is creating shortages of raw materials, lengthening shipment times, increasing costs, and adding additional uncertainty. All of this is on top of the significant increases in raw material costs and continued movement in foreign exchange. These challenges will continue into next year, but we will continue to meet them head on. Our net sales grew 6.5% in the quarter, driven by 4.5% organic sales growth and a 2% benefit from foreign exchange. Our organic sales growth in the third quarter was led by oral care, where we were up mid-single digits, and pet nutrition, where we were up double digits. We delivered organic sales growth in home care despite a difficult comparison, which puts our home care business at double-digit growth on a two-year stack. As expected, organic sales and personal care declined mid-single digits as we lapped the COVID-related growth in liquid hand soap in the year-ago period, but sales remain above 2019 levels. We grew volume 1.5% in the quarter. Pricing grew 3% in the quarter, up sequentially from Q2, despite a more difficult 4.5% comparison. as we continued to layer in new pricing to try to offset accelerating raw materials costs. Pricing was up in every category and every division. Raw materials continued to increase in Q3, putting further pressure on our gross margins despite additional pricing and productivity efforts. Our gross margin was down 180 basis points in the quarter. Pricing was a 110 basis point benefit to gross margin, while raw materials were a 510 basis point headwind despite a slight benefit from transactional foreign exchange. Productivity was favorable by 220 basis points. On a GAAP and base business basis, our SG&A was up 50 basis points on a percent to sales, driven by significant increase in logistics costs as advertising was up on a dollar basis, but flat on a percent to sales basis. Excluding logistics and advertising, our overheads were down slightly on a dollar basis, and down nicely on a percent-to-sales basis. We continued to increase our investments and capabilities like digital, e-commerce, and data and analytics, but this was more than offset by sales leverage and tight expense controls. For the third quarter, on a GAAP basis, our operating profit was down 5% year-over-year, while it was down 3% on a base business basis. Our EPS was down 7% on a GAAP basis and up 3% on a base business basis. A few comments on our divisional performance. Net sales in North America grew 1% in the third quarter, with organic sales growth of 0.5% and 50 basis points of favorable foreign exchange. Volumes were flat in the quarter, despite a negative nearly 400 basis point impact from lower liquid hand soap volumes, while pricing was slightly favorable. We made significant progress on our North American business in the quarter, with solid oral care growth driven by mid-single-digit growth in toothpaste, which led to improved toothpaste market share performance through the quarter. Personal care and home care were both down as we lapped COVID benefits in the year-ago period, although Elta MD and PCA Skin delivered strong growth in the quarter. North America operating margins were negatively impacted by raw materials and higher logistics costs. The impact of plant closures on our global supply chain required us to incur additional air freight charges to fulfill customer orders in the quarter. We also incurred some additional manufacturing costs in the quarter that should help improve the long-term profitability of the division. Latin America net sales were up 11%, with 8% organic sales growth and a 300 basis point benefit from foreign exchange. All three categories delivered organic sales growth in the quarter, with oral care organic sales growth in the high single digits. Volume was plus 2.5% in the quarter, while pricing was up 5.5%. Brazil and Mexico led the growth in the quarter, while Colombia delivered double-digit growth following last quarter's political unrest. The natural segment continues to be a key driver of growth for us across Latin America, particularly Colgate Natural Extracts Charcoal, and we recently launched Colgate Zero Toothpaste in Brazil. Our strong Latin America pricing growth highlights the success of our revenue growth management program with a combination of list price increases, premium innovation, and trade promo adjustments. Europe net sales grew 1% in the quarter, with organic sales minus 1%, and foreign exchange adding 2%. Volume was down 1%, and pricing was flat. Oral care organic sales grew high single digits, while personal care organic sales were down sharply, driven by difficult liquid hand soap comparisons due to COVID-related consumption in the year-ago period, and a decline in Philorga duty-free sales. Colgate Elixir toothpaste continued to drive growth in the quarter, along with strong contributions from LMEX and Meridel. Asia-Pacific net sales grew 1%, and organic sales declined 0.5% in the quarter, with volume down slightly and pricing in foreign exchange both slightly positive. Oral care saw low single-digit organic sales growth in the quarter, while personal care and home care were down due to difficult COVID comparisons. We did see government-imposed mobility restrictions negatively impacting category volumes in several markets, including many in Southeast Asia. India and the Colgate China business both delivered strong volume growth behind robust innovation in the Ayurvedic segment in India and in e-commerce in China. Our Holly and Hazel JV saw significantly improved performance in Q3 versus Q2, with trends also improving sequentially through the quarter. Africa-Eurasia net sales grew 1% in the quarter, with an organic sales decline of 1%, lapping double-digit organic growth in the year-ago period, more than offset by a 2% positive impact from foreign exchange. Volumes were minus 4.5%, while pricing was plus 3.5%. The organic sales growth decline in the quarter was driven by personal care, as we lapped double-digit growth in the year-ago period due to COVID-related demand and pricing. Oral care organic sales in the quarter were flat, as disruptions in the global supply chain had a negative impact on product availability. Hill's strong growth continued in the third quarter, with 20% net sales growth and 19% organic sales growth, with strong growth in both emerging and developed markets. Organic sales growth was driven by double-digit volume growth and high single-digit pricing through list price increases and our premiumization strategies. Our focus on the microbiome, which Pat Verdun talked about during our Cagney presentation this year, continues to pay dividends with the ActiveBiome Plus technology, including in Hill's prescription diet, Gastrointestinal Biome, and Hill's science diet, Perfect Digestion, both of which are driving sales growth and share in this important segment. And now for guidance. We still expect organic sales growth for the year to be within our 3% to 5% long-term target range. As I mentioned previously, we have seen an impact from government actions to stem the spread of COVID-19, including reduced consumer mobility and supply chain interruptions. We are managing through these issues, but we would expect modest headwinds from this to continue in the fourth quarter. 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 July. Please note that at current spot rates, foreign exchange would have a negative impact on Q4. All in, we still expect net sales to be up 4% to 7%. Given the continued pressures from raw materials, we are projecting a greater decline in gross margin than when we last gave guidance in July. Fourth quarter gross margin is expected to be roughly in line with the third quarter, although the raw material situation remains very difficult. We continue to take additional steps to mitigate the impact of these cost headwinds, including additional pricing, optimizing trade spending, accelerating FTG where available, and many others. We are focused on recouping the gross margin we have lost due to cost inflation over time and are planning to take the actions necessary to do so. Advertising is still expected to be up on a dollar basis, but flat on a percent to sales basis. Given the issues surrounding logistics networks on a global basis, our logistics costs will continue to be a headwind, particularly in the U.S. and Africa-Eurasia. Our tax rate is now expected to be between 22% and 23% for the year, on both a GAAP and base business basis. On a GAAP basis, we still expect earnings per share growth in the low to mid single digits, and as we said on the second quarter call, towards the lower end of that range. On a base business basis, we continue to expect earnings per share growth in the mid to high single digits. Again, we would expect to land at the lower end of that range. And with that, I'll turn it over to Noel.

Well, thanks, John, and good morning, everyone. So what I take away from our performance, I guess both in the third quarter and on a year-to-date basis, is that we continue to make good progress on our strategic and operational journey, despite the significant volatility we are encountering across our entire business. At the heart of this is our strategy to deliver broad-based, sustainable, profitable growth, every division, every category, both volume and pricing. That's our aspiration, and over the past few years, we have changed our mindset about how we drive growth. We're more proactive in attacking the opportunities for growth. Think core, premium adjacencies, faster alternative channels and markets. And of course, we've talked a lot about building capabilities. Think digital, data, e-commerce, innovation. All of these are helping us mine these important areas of growth. While lapping our most difficult comparisons in over a decade, We've delivered organic sales growth at the high end of our long-term target range of 3% to 5%. And on a two-year basis, both pricing and volume growth increased sequentially in the quarter. Importantly, this growth is being driven by our two most important categories, oral care and pet nutrition. Oral care organic sales were at mid-single digits in Q3 against the mid-single-digit comparison and are at high single digits year-to-date. We're driving this growth through more impactful innovation, share growth and faster growth channels like e-commerce and pharmacies, and hire more efficient marketing spending. Our premiumization strategy is paying off with our focus on breakthrough and transformational innovation, changing how we interact with the people who use our products. A great example of this is how we've changed our approach to whitening. In the U.S., you're familiar with optic white renewal, which has done incredibly well. Outside the U.S., the story needs to be more about just hydrogen peroxide levels. In China, it's about enzyme-based whitening. In other markets, we have whitening products targeted towards consumers who love tea or coffee or consumers who love wine or tobacco. We're targeting the whitening opportunity much more broadly with new technologies, formulations, and delivery systems expanding our growth potential. Pet nutrition organic sales growth was up 19% in the quarter against an 11% comparison and is now up 14% year-to-date through quarter three. This growth is driven by Hill's science-based equity messaging behind our core. It's driven by meaningful premium innovation and the continued expertise of our digital and e-commerce teams. The launch of Prescription Diet Derm Complete shows breakthrough therapeutic nutrition for both food and environmental sensitivities has led to share gains in the category and is being rolled out internationally over the next few quarters. Hill's goal of ending pet obesity, where studies show over 50% of pets are overweight, It's the impetus for our Hills Master Brand campaign. This campaign has been rolled out globally and has driven growth in both our therapeutic and wellness anti-obesity products. In this type of environment, we couldn't deliver the results this year without the amazing work done by Colgate people every day. Our customer development organization is reacting quickly to the changing cost environment so we can take pricing as part of the revenue growth management initiative. Marketing and R&D are working together to accelerate the launch of premium innovation to drive mix and profitability. And most importantly, our global supply chain team has delivered these results despite freight and logistics disruptions, plant closures, congested ports, and supplier outages. Importantly, all the efforts we have put into building capabilities over the past few years is not just about driving growth. It's also about creating an organization that can respond more rapidly to all these challenges we face around the world. For example, our focus on data and analytics is helping our revenue growth management program pinpoint the best opportunities for incremental pricing as costs continue to rise. We're getting this pricing out in the market more quickly, and the data that drives the process gives our people on the ground more confidence in their decisions. Our investment in e-commerce and digital marketing continues to pay off. In our six largest e-commerce markets for oral care, we finished the third quarter with year-to-date net sales already ahead of 2020 net sales. And toothpaste share growth in five of the six markets. We've implemented new media buying strategies to drive efficiencies, both online and offline, and launched a four-tier training program to enable 14,000 of our employees to help drive our digital strategies. As I've said, the key to all of this is that we recognize that the strategy is working, and while we address the pressing issues of raw materials, logistics, and supply chain, we can't lose sight of our long-term areas of focus. Our innovation calendar for 2022 will show an increase in the percentage of innovation that is breakthrough and transformational. We've announced our new sustainability and social impact strategy this year, which includes 11 new targets and actions in areas like zero waste, climate change, using less plastic, as well as bright smiles, bright futures, and our diversity, equity, and inclusion efforts. And we will continue to build our people and capabilities through new ways of working that are truly changing how Colgate people do their jobs. 2021 has been a very challenging year for us, and many of these challenges will continue in 2022, but I'm confident of the changes that Colgate people have put in place over the past several years, which will allow us to continue to deliver our goal of sustainable, profitable growth. And now I'll open it up for questions.