Colgate-Palmolive Company

Good day and welcome to today's Colgate Palmolive Company fourth 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, Orlando. Good morning and welcome to our 2021 full year and 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 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 full year in Q4 performance, as well as our outlook for 2022, before turning it over to Noel for his comments. We will then open it up for Q&A. We delivered solid results in 2021 despite a very challenging operating environment, which we believe provides further proof that our strategy is working. For the full year, we grew net sales 6%, adding nearly a billion dollars in revenue. We grew organic sales 4.5% at the higher end of our 3% to 5% 2021 guidance range, despite difficult comparisons. Importantly, our organic sales growth this year was led by our two most important categories, oral care, which delivered organic sales growth at the high end of mid-single digits, and pet nutrition, which delivered organic sales growth in the teens. Our second consecutive year with double-digit organic sales growth for Hills. Both of these categories saw an acceleration in organic sales growth in 2021, which we think bodes well for 2022. Personal care and home care organic sales growth were both down in the year as they lapped very difficult comparisons driven by COVID-related demand but we anticipate both categories will return to growth in 2022. But on a compounded basis, over the past three years, we've delivered organic sales growth across every division and every category with growth in both volume and price. And we are confident that our growth will continue into 2022. Our innovation pipeline is strong as we continue to shift our focus to more breakthrough and transformational innovation. We have raised our level of brand support, including increased advertising spending that is driving improved brand equity. Our digital transformation is paying off, with e-commerce market shares growing in key markets and strong e-commerce sales growth across all of our categories, including pet nutrition and, within personal care, premium skin. That said, the operating environment remains volatile, with COVID still very much impacting our business, unprecedented raw material inflation, and supply chain disruptions. As Noel will discuss, we believe our 2022 plans and our long-term strategic choices will allow us to continue to grow and improve our profitability as we move through the year. This includes significant pricing, increased advertising, breakthrough and transformational innovation, and stepped-up productivity. Our net sales grew 2% in the quarter, driven by 3% organic sales growth and a 1% negative impact from foreign exchange. Our organic sales growth in the fourth quarter was driven by pet nutrition and oral care, while personal care was down slightly and home care was flat due to COVID-19 comparisons. Organic sales growth in the quarter was negatively impacted by the factory closures related to COVID-19 lockdowns we mentioned on the third quarter call. As you have seen across many companies and industries, raw material pressure worsened in the fourth quarter, putting further pressure on our gross margins. Our gross margin was down 300 basis points in the quarter on both a GAAP and base business basis. Pricing was 120 basis point benefit to gross margin, while raw materials were a 670 basis point headwind. Productivity was favorable by 250 basis points. On a GAAP and base business basis, our SG&A was down 150 basis points on a percent to sales basis, driven by lower advertising spending, lapping record levels in the year-ago quarter, as well as lower overheads, excluding logistics. Our combination of net sales growth and productivity drove our overheads, excluding logistics, down meaningfully, which helped us offset a large increase in logistics costs, both on a dollar basis and a percent to sales basis. For the fourth quarter, on a GAAP basis, we delivered earnings per share of 18 cents. Our GAAP earnings per share includes a $518 million after-tax charge for impairment on our Felorga skin health business. We completed the Felorga transaction right before the beginning of the COVID-19 pandemic. The pandemic has had a significant impact on key channels in which Felorga competes, including travel, retail, and duty-free in China and pharmacies in Europe. While we have been unable to offset the continued weakness in these channels versus our projections when we announced the acquisition, we have full confidence in the Felorga brand and are forecasting double-digit growth going forward. Our two other skin health brands, PCA Skin and Elta MD, are performing well and should continue to deliver strong growth. On a base business basis, our earnings per share was 79 cents for the quarter, up 3%. Our full-year base business earnings per share was within our 2021 guidance range of up mid to high single digits. In order to accelerate changes to our operating structure that will allow us to reallocate resources to our strategic priorities and faster growth businesses and channels, drive efficiencies in the company's operations, and streamline our supply chain to reduce structural costs, this morning we also announced the Global Productivity Initiative. We intend to execute the majority of the productivity program in the current calendar year and, once the projects are implemented and finalized, It is expected to result in cumulative pre-tax charges totaling between $200 and $240 million and annualized pre-tax savings in the range of $90 to $110 million. We would expect the benefits to begin to flow through in the second half of 2022 and then accelerate into 2023. We returned $3 billion to shareholders in 2021 with our net share repurchase up almost 50% year over year. A few comments on our divisional performance. North America net sales declined 1% in the fourth quarter, with organic sales down 1.5% as the division lapped high single-digit growth in the year-ago period, with liquid hand soap providing a greater than 3 percentage point headwind in the quarter. In toothpaste, our consumption was ahead of shipments, as our all-outlet market share was up 50 basis points in the quarter. We have announced significant pricing across all of our categories in North America, which will be implemented throughout Q1 and into Q2. Latin American net sales were up 3.5%, with 6% organic sales growth. Oral care grew high single digits, while personal care and home care grew mid-single digits. Brazil led the growth in the quarter behind strong pricing and premium innovation across whitening and naturals. Europe net sales declined 6% in the quarter, with organic sales minus 3.5%, lapping 4.5% growth in the year-ago quarter, and a 2.5% foreign exchange headwind. While the pricing environment in Europe is normally very difficult, we expect to see pricing across the portfolio. We gained market share in Europe in Q4, with particular strength behind LMAX, and we have significant innovation planned for 2022. Asia Pacific net sales grew 0.5%, and organic sales grew 1.5% in the quarter, with volume and pricing up slightly, and a modest negative impact from foreign exchange. Our Asia e-commerce business continued its strong growth in Q4 and for the year. We gained nearly 400 basis points of toothpaste market share in e-commerce in China in 2021, combined on our Colgate and H&H businesses. Africa Eurasia net sales grew 2% in the quarter, as organic sales growth of 3% was partially offset by negative foreign exchange. The organic sales growth was driven by oral care, despite impacts from the supply chain disruption from COVID-19 restrictions I mentioned previously. Volumes were also negatively impacted by political volatility in Eurasia. Hills finished another great year with a strong fourth quarter. Net sales grew 12% and organic sales grew 13% for the quarter. The U.S. continued to lead Hills growth performance with strength across the gamut of brick and mortar and e-commerce retail partners. We expect another strong year for Hills in 2022, with strong levels of advertising support, best-in-class e-commerce execution, innovation, and pricing growth. And now for guidance. We expect organic sales growth for the year to be within our 3% to 5% long-term target range, driven primarily by continued growth in oral care and pet nutrition. Using current spot rates, we expect foreign exchange to be a low single-digit headwind to revenues, operating profit, and earnings growth for the year. All in, we expect net sales to be up 1% to 4%. We expect gross margin to be up for the year, but we highlight that just as we saw in 2021, there will be significant swings in year-over-year performance as we go through the year. The biggest raw material headwinds year-over-year are in the first quarter, and we expect that they will moderate as we go through the year. On top of the productivity program I mentioned above, we will continue to take additional steps to mitigate the impact of logistics and raw material cost headwinds, including additional pricing, optimizing trade spending, accelerating FTG where available, and many others. Advertising is expected to be up on both a dollar basis and 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 or Eurasia. Our tax rate is expected to be between 23% and 24% for 2022 on both a GAAP and base business basis. At this point, we have not incorporated any proposed changes to U.S. corporate tax rates. We expect double-digit earnings per share growth on a GAAP basis. On a base business basis, we expect earnings per share growth in the low to mid single digits. Here are a few factors that will determine where we fall in that range. We have budgeted We have budgeted modest sequential declines in some raw material prices as we go through the year. If those raw materials stay at current levels, this will be above what we're currently budgeting. For an exchange, the dollar has been trending higher more recently. If that continues, it will be an additional headwind. We assume that raw materials and logistics cost increases are not unique to us, and our plans do not include significant manufacturing downtime due to COVID-related lockdowns. And with that, I'll turn it over to Noel.

Thanks, John, and good morning, everyone. Before I get into my remarks, I want to wish all of you a safe and happy New Year. Of course, I'll be speaking to you all again in just a few weeks for Cagney, and I'm very much looking forward to that. Over the last three years, we have revitalized our core businesses, innovated in adjacent categories, and expanded our availability in faster growth markets and channels. All these efforts have helped us deliver three straight years of organic sales growth in or above a long-term targeted range of three to five percent I believe our company is well positioned to continue our momentum and drive shareholder value in this year and beyond despite the difficult operating environment we compete in growing categories with high purchase frequency daily usage and high levels of brand loyalty and we have strong brands that are well positioned to take advantage of these category dynamics Colgate is the most penetrated consumer brand in the world with strength across emerging and developed markets. Hill's Prescription Diet and Hill's Science Diet have strong health credentials with vets and pet parents. Elmex and Meridol are leading premium brands in therapeutics in the markets in which they compete. And other brands like Irish Spring, Protex, Suavitel, and Fabuloso all deliver tremendous value to consumers and our retail partners. This also includes our skin health businesses, Elta MD, PCA Skin, and Filorga. John discussed the impact of COVID-19 on Philorga, which resulted in performance below our targets. We have plans in place to revitalize our Philorga business in those key channels, along with building out distribution in other growth channels and accelerating innovation. We are confident that Philorga will be a strong contributor to future top and bottom line growth. Trends on L2MD and PCA skin remain very strong. We have and are building capabilities that will allow us to compete in all types of markets and channels. Our global operating model, including our supply chain, allows us to operate effectively and profitably in more than 200 countries and territories around the world. Our transition to our new innovation strategy has enabled us to deliver a better mixture of global and local innovation, including increased levels of breakthrough and transformational innovation. This has had a direct impact on accelerating our growth, particularly in oral care, our rebound in Chinese e-commerce, for example, and accelerated growth in pet nutrition. Our digital transformation, which will be an important topic when we present to you at Cagney, has allowed us to accelerate our e-commerce efforts across all of our markets. We delivered another year of robust e-commerce growth and grew share in all six of our largest e-commerce toothpaste markets in 2021. And we are truly integrating ESG into our business strategy in ways that drive value. Bright Smiles Bright Future not only teaches children in underserved markets how to brush their teeth, but also will help drive per capita consumption over time. And our recyclable toothpaste tube, which we share the technology with our competitors, is helping to drive the entire category to be more sustainable, which is a requirement for any category to deliver growth in the future. We also issued our first sustainability bond in the fourth quarter. We will use the funds to invest in our sustainability and social impact strategies while benefiting from a lower interest rate. So I firmly believe we are well positioned to deliver long-term, sustainable, profitable growth to our shareholders and all of our stakeholders. But we also need to balance managing through the teeth of a very difficult operating environment while still delivering on that long-term strategy. If we stay committed to our strategy, we will emerge from the next few quarters with sustained organic sales growth and a structurally more efficient company that will allow us to grow profits while still investing in our brands. Obviously, you all know about the headwinds that companies are facing in today's operating environment in terms of raw materials. COVID and higher costs are putting significant pressure on supply chains, including unprecedented impacts on logistics, both in terms of efficiency and costs. And recently, the dollar has strengthened. The key for us to deliver against our targets in the shorter term is to continue to execute on pricing and revenue growth management. We have already taken pricing in many markets, and we will have further significant pricing planned for the first half of this year, including moving some pricing that we anticipated for later in the year in 2022 into the first half. We all know our funding to growth is well ingrained and a key component of offsetting rising raw material costs. We have put together new cross-functional teams that are focused on ensuring we are bringing additional opportunities to our funding to growth and that we are executing them as rapidly as possible. So we're accelerating short-term actions to drive improved profitability, but we know the key to shareholder value creation is to remain committed to the long-term. To that end, we will continue to invest in brand building. As I said a few minutes ago, it all starts with strong brands. We have turned our growth trajectory around over the past few years, and a key component of this has been additional advertising spend. Our guidance for 2022 includes an increase in advertising to make sure we are able to sustain volume growth as we exit a period of very strong pricing. At Cagney, you'll hear even more about how we've increased the return on marketing spend through our digital transformation. We will continue to focus on innovation, providing added value to our consumers through innovation that supports increased pricing. Our innovation pipeline is very strong for the year and heading into next. We have innovation across our categories with a particular focus on premium innovation that brings new benefits and forms to our brands. We're also investing in capacity. Our CapEx rose in 2021, primarily because we're investing in incremental capacity for growth, along with investments to advance our sustainability efforts. Our need to build capacity across the business, mostly in pet nutrition, shows that the rebound in organic sales growth is real and one we expect to continue. This investment won't preclude us from continuing to return cash to shareholders through share repurchases and dividends. And finally, today we announced the productivity initiative that is focused on aligning our costs and investments with our long-term strategies. This program is designed to deliver savings that can both be reinvested for growth and applied to the bottom line. Importantly, this program, along with the pricing and funding the growth, should allow us to exit this inflationary cycle with more leverage to drive growth and profitability and keep our strategy on track. So 2022 will be another volatile year, with all the headwinds you heard me describe, but we intend to execute to deliver growth and drive shareholder value, all with delivering against our long-term strategies, which makes me very excited about the future for our company. And with that, I'll open it up to your questions.