Colgate-Palmolive Company (CL) Earnings Call Transcript & Summary

Hello, everyone. It's great to be here with you, at least via video. I'm joining you from Connecticut and hope all of you are healthy and safe. Of course, it's disappointing not to be enjoying some warmer weather in Florida given all the snow we've had up here in the north, but hopefully, we can all get together in person sooner rather than later. I'm Noel Wallace, Chairman, President and Chief Executive Officer of Colgate-Palmolive, and I'm excited to be here today to tell you about the great work of our team of 34,000 people around the world are doing to drive value for our shareholders. But first, our safe harbor statement. Joining me today for our discussion is Pat Verduin. Pat is our Chief Technology Officer, who is spearheading our efforts to change how we innovate at Colgate. This is a topic I discussed at the Barclays Conference back in September, and many of you have told me that you want to better understand our journey. Pat is an evangelist within the organization for breakthrough and transformational innovation, and I know you'll find her discussion enlightening. We'll begin with our strategy, which is focused on driving long-term sustainable, profitable growth in all 4 of our categories. Oral Care with great brands like Colgate, elmex, meridol, Tom’s of Maine and Hello; our Personal Care brands with Sanex, Protex, Softsoap, Irish Spring, Filorga, EltaMD and PCA Skin; Home Care, where we have strong equities like Fabuloso, Soupline, Suavitel, Ajax and Palmolive. And of course, Hill's, which has been a significant growth driver for us with Science Diet and Prescription Diet. Before I talk to you about how we intend to keep our momentum going through 2021, I want to talk a little bit about what we achieved in 2020, which was obviously a very difficult year for everyone. The most important thing for us in 2020 was working to keep our people safe, whether in our factories, our distribution centers or anywhere else in the world, we put processes in place to try and keep our employees safe and healthy. We implemented strict protocols, increased communication around COVID safety and offered additional resources like mental health and wellness offerings. This allowed us to keep our supply chain up and running with minimal disruption to our production over the course of the year. This concerted effort enabled us to deliver strong volume growth, which was a key -- which was key to delivering our best organic sales growth since the depths of the 2008 Global Recession. Despite all the uncertainty and significant foreign exchange headwinds, we delivered high single-digit EPS growth for the year. Importantly, we took advantage of the strong growth as well as our gross margin expansion to invest in our brands and build capabilities like digital, e-commerce and data and analytics that will enable us to deliver growth in the future. And while we obviously saw a benefit from COVID in 2020 in delivering our strong organic sales growth, I believe the trajectory of our recovery was apparent before quarter 1 of last year as we entered 2020 with 5 straight quarters of sequential acceleration in organic sales growth before we began to see the benefits from COVID-related consumption. I believe this indicates our strategy is working. And we've talked about how in order for growth to be sustainable and profitable, it needs to be broad-based. As you saw in our year-end results, we delivered both pricing and volume growth, organic sales growth in every single division, growth in developed and emerging markets and growth in 4 categories. As I said on our Q4 earnings call, I believe our investments are paying off in stronger growth. Our strategies are in place to sustain that growth, but we expect a lot of uncertainty going forward, whether from COVID, inflation in raw materials, logistics, primarily in North America or through movements in foreign exchange. In light of all that uncertainty, we provided our guidance for 2021. We expect organic sales growth in line with our long-term target of 3% to 5% with low single-digit benefit from currency. This gets us to net sales growth of 4% to 7%. We expect gross margin to be up in the year-over-year, which will help us fund increased brand building. We expect leverage through the P&L to help us deliver Base Business earnings per share growth in the mid- to high single digits. So how are we expecting to maintain our momentum in 2021 when the COVID tailwinds potentially become headwinds? First, we need to accelerate our average to deliver breakthrough and disruptive innovation. The key to driving category growth, which we think is the best way to drive market share is accelerating the transformation of our innovation process, which Pat will discuss. We also need to keep building our capabilities. We have made tremendous strides in all areas like e-commerce, digital marketing and data and analytics, but we still have work to do to ensure we become best-in-class. We're bringing in subject matter experts from the outside and training our entire organization in new ways of working. And given the factors that I mentioned previously, raw materials, logistics, potential foreign exchange swings, we know we need to drive efficiencies throughout our P&L to deliver on our earnings targets so we can deliver top-tier TSR versus our peer group. Our first discussion topic for today is how we are driving organic sales growth. Over the past several years, we have discussed these 5 key growth drivers with you: accelerating the core, innovating in high-growth segments and adjacencies, expanding into new channels and markets, maximizing growth online and growing penetration in lower development markets. There's one capability that's vital for us delivering all of these areas and that's innovation. So when I spoke to you at Barclays, I gave you the CEO's 10,000-foot view of how we're changing our innovation for growth model. But today, I want you to hear from the person who lives it every day, who is responsible for delivering the change we need to succeed. Here's Pat Verduin, our Chief Technology Officer.

Thanks, Noel. I am thrilled to talk to you about our team's focus on innovation and some changes we've made over the past few years. We are increasingly confident that these efforts are leading to incremental growth now and sustain growth into the future. We're keeping 3 fundamental goals on the forefront as we make choices on where and how to invest. Our first and most important is about consumers. The innovations we create need to delight our consumers, but they also need to enhance the tremendous trust and loyalty given the Colgate. Eye-catching designs, terrific product performance and wonderful user experiences have to be embedded into each innovation. We are far more discriminating about what innovations we choose to prioritize. We're shifting our resources to programs that drive incremental growth, but even more importantly, creating new platforms that establish our pipeline of opportunities. If you look at the innovations that we traditionally have introduced, they focus on line extensions of our Base Businesses. And while we need to keep our current portfolio vibrant with new news, we know that these programs do not drive significant incremental growth. Our goal is to put more of our efforts towards innovation that transforms our categories, expands our brands benefit and resonate in multiple channels. There are more unknowns associated with these types of programs and they often require more effort and external partnerships. So we've had to evolve, not just what we focus on, but how we innovate as well. We're building a culture and developing stronger capabilities to drive innovation. It starts with adjusting our portfolio to programs to create adjacencies, new channels and new benefits. We've always had cross-functional teams working on programs. But we realize that their level of empowerment, of autonomy had to be elevated. There were just too many people involved. We've invested in analytics, and we've applied this skill set throughout our innovation process, from identifying insights and trends, formulating with AI tools and developing in-market validation methods. As we move from line extensions to transformative innovations, things become a lot more fuzzier, less predictable. Attributes of products and packages and messages that we sometimes think are so important can fall flat with consumers, so we learned to pick these things up quicker and adjust on the fly. So let me provide a few specifics on our new approaches and how they are showing up on our launches. So we're improving the application of trends and insights. And I love this example. We have so much information about diabetic consumers because we know they have very specific oral health needs. We saw some starling statistics about the troubling rise of diabetes in India. We decided, based on that, to launch a very telegraphic product employing this innovative technology to help this population, but the real beauty of the product is that it respects the Indian culture of using ayurvedic medicine. The launch is not just about the product. But it's about empowering people to manage their health with trusted information from a trusted source like Colgate, both in the package like you see the pamphlet and online. We also recognize that many consumers are concerned about the source of their ingredients and their everyday household products like fabric conditioner. They want to know how the products are made. We're changing the way we formulate and using more naturally derived biodegradable ingredients as well as more recycled content in our packaging. Most importantly, we're telling consumers about it so they can make informed choices. You've seen the Optic White Overnight Pen, and hopefully, you're using it. We are so proud of this project because it's one of the first projects where we dedicated and empowered a team that drove the program from start to finish. They identified significant pain points with at-home whitening products on the market and they created innovative solutions. We're seeing great success in the market, and more importantly, we're seeing strong reviews for the product. Design-led innovation seems like a simple statement, but it is a huge change in our approach to innovation. In the past, our product development efforts were led by R&D. And as a result, we had kind of one-dimensional formula solutions for every problem. Even our packaging was developed post-formulation. Today, we have changed our approach completely. Our design and user experience team is involved from the beginning, helping us to develop a well-rounded product that fit our brand's purpose and deliver a great user experience. You can see this in our most recent launches, particularly those that we call our oraceuticals. We know consumers are open to new experiences and benefits for their skin health. Our goal is to extend this behavior to their oral health. To do this, we needed to elevate the entire product bundle beyond a functional tube of toothpaste. You can see this manifest itself in China with our new amino acid miracle repair serum and in our newest line, CO. by Colgate, which offers a wide range of beauty-like offerings for your teeth and for your gums. The 2 products on this slide could not be further away from one another. One is a highly technical execution of the hum connected toothbrush versus one of the oldest products known to man, a bar soap, but now packaged in iconic-driven use instruction label. The execution represents the same philosophical underpinnings for both products. It empowers the consumer to take charge of their health through the power of a well-designed product and real-time health information. In both instances, we've delivered excellent product, a great experience, and we've received strong reviews and great feedback. So you're talking to a scientist, I have to throw in a bit of science, but seriously, people do trust and expect Colgate to care for them, and provide high-performing products and trusted information at every price point. And we feel very obligated to live up to that promise. We never give up on improving even the most basic benefits like caries protection. Caries remains the #1 oral care disease. In fact, it causes the most missed school days around the globe. Our novel arginine plus fluoride technology delivers a significant improvement in caries progression, particularly at those early important stages. Given these strong results, we're in the process of introducing this in many, many markets outside the United States. Another example of strong science is the new EltaMD's skin recovery system, which helps your body's outermost shield, your skin. Our patented AA complex, or amino acid complex, helps repair and even protect damaged skin fast and effectively, and it visibly reduces that redness and irritation. We've widened our technical approach beyond chemical interventions and partnered with the body's natural protective and healing mechanisms. The microbiome or that bacteria present throughout your body helps keep you healthy. You probably heard about this relative to your gut health and yogurt, but microorganisms exist throughout your body and all over your body, which is a pleasant thought. We've learned how to support a healthy microbiome and applied this learning to our new Sanex biome protect product, which helps skin stay in a healthy balance and then our perfect digestive product from Hill's, which helps improve pet's digestive systems fast. Finally, we are putting significant resources on more sustainable approaches to product design, particularly the ingredients and package materials we use. We are particularly proud of these 2 examples because they provide advances in technology that will apply across our product portfolio. Our newest relaunch of Palmolive Dish contains 100% biodegradable cleaning ingredients, great fragrance, and it's packaged in 100% recycled plastic bottle, with no decrease in efficacy. We've also developed the first of its kind recyclable toothpaste, too. As global leaders in oral care, we felt responsible for delivering this technology to market and to share it with the world. Noel shared this track record earlier, showing a strong improvement in our organic growth. We believe that the changes we made to our innovation focus and the capabilities is underpinning this growth, and it's going to continue to drive growth going forward. We are committed. We will continue to foster an inspiring culture. Our goal is to elevate every experience consumers have with our brands. We will create innovations that deliver real benefits and real solutions. And we will continue to drive incremental growth through innovation. So with that, let me turn it back to Noel.

Thanks, Pat. So I think this gives you an idea of the depth of our commitment to changing how we do innovation at Colgate and helps you understand why we're excited about all the significant change that we've been implementing. And you're just seeing the beginning of the benefits of this process. Now we'll discuss how we're going to turn that organic sales growth into earnings growth. We know that the costs are moving higher. Raw materials, freight, warehousing, health and safety-related expenses and other costs. We need to use every lever of our income statement to drive our profitability. And that starts with pricing. We've talked about focusing on balanced growth, a combination of volume and pricing, and we have clear pricing plans in place this year. In 2020, we made good progress on pricing. And in 2021, we will see the benefit from the rollover of pricing actions we took in the second half last year. As we go through the year, we will look to take additional pricing, where appropriate, to offset inflation. In 2020, our pricing strength helped drive us to our highest annual gross margin ever. Pricing was more than 100 basis points benefit to gross profit over the year, but it's not just straight pricing. We are using our revenue growth management capabilities to step change how we deliver pricing to increase our margins. Brazil delivered strong pricing growth in 2020 with best-in-class revenue growth management execution, using premium innovation, pack sizes and promotional strategies to drive material increases in our average selling price and premiumize our toothpaste portfolio. But we know that pricing alone cannot offset raw material inflation, we need to drive efficiency on all of our costs. Funding the Growth is a core productivity driver for us. And as with pricing, we delivered our best Funding to Growth in recent history, with FTG representing more than 200 basis points of benefit to gross margin. And Funding the Growth also focuses on logistics and other overheads, savings that are crucial to driving our overall productivity levels. These savings are crucial to funding increased investment behind our brands in order to drive long-term profitable growth. We are focused on also driving increased efficiency in our brand-building support. One way we do that is by focusing on our incremental dollars towards digital advertising, which enables us to drive faster revenue growth through higher returns. Here's an example from Hill's, which is the division that has seen the biggest increase in brand building support over the past 3 years. Over that time period, our analysis shows that we have increased the ROI on our Hill's media spending by more than 141% through better creative and our focus on digital first. With low market shares, meaningful innovation, increased spending and increased effectiveness, you can understand why we're so optimistic about the future of Hill's. Another way to drive effectiveness of our spending is to increase focus on subscription through e-commerce, where we can amortize customer acquisition costs over multiple purchases, which in turn generates incremental profitability. And we're spending more money on equity advertising for the Colgate brand of many or more traditional product standard advertising. Because the Colgate brand is so strong when we advertise the Colgate equity as opposed to specific sublines like Triple Action, we see a benefit across the entire portfolio. Our analysis shows that in one of our largest markets, the ROI on equity advertising is much higher than that of our variant-based advertising. And encouragingly, some of the increased ROI comes through incremental growth at toothbrushes and mouthwash. But this isn't simply putting on an ad that says Colgate. We need a compelling message that conveys what Colgate stands for. And global effort was made to identify human attention that Colgate can address with a global equity campaign. Corrosive pessimism is so prevalent right now, and we discovered that it has a paralyzing effect on people. It stops them in their tracks. So we came up with a single mission, optimism and action, in order to propel people forward into -- to take positive action. This demonstrates that by being courageous and smiling strong every one, every day, can change the world for the better. Here's a spot from the Philippines to show what we mean. [Presentation]

We've also spent a lot of time talking to you about our digital journey and how we're transforming the entire organization. This will also be a tremendous driver of efficiency as we free up time and money spent on legacy processes. Our move to SAP S/4HANA is continuing and is raising our analytical capabilities, while allowing us to look more seamlessly at our business. Colgate business planning has always been a vital tool for our customer development teams to build their commercial plans. Our new system allows for a 95% reduction in time spent in the program. This is time our sales team can now spend collaborating with our customers or using improved analytics to develop revenue growth management opportunities. 4 Colgate-Palmolive vendors received a U.S. patent and won a 2020 Edison award for developing a predictive tool to analyze toothpaste formulas, taking massive amounts of clinical data and using artificial intelligence to predict possible outcomes. This approach means cutting out weeks, months, and possibly even years of work, while still maintaining incredibly high standards. And now we'll look at our priorities for our cash flow. We delivered 18% free cash flow growth in 2020, and we remain laser-focused on generating cash flow and using it efficiently. Our priorities for use of cash remain the same: capital expenditures for growth and productivity, M&A where we can find strategic assets that will assist in our growth journey and dividends and share repurchases to make sure we are returning cash to our shareholders. After a decline over several years as we ended our restructuring program, our CapEx to sales rose in 2020. We would expect a further increase in 2021 to around the historical 3% range as we increase capacity to meet heightened long-term growth opportunities across our business and deliver on our sustainability goals. As part of our commitment to returning cash to our shareholders, we have paid an uninterrupted dividend for 125 years and have increased our dividend for 58 consecutive years. Historically, the final section of our investor presentation is focused on sustainability, but our focus needs to be more than just sustainability. We need to start with our purpose. We are Colgate, a caring, innovative growth company, reimagining a healthier future for all people, their pets and our planet. This purpose highlights the broader responsibility we shoulder for our employees, their families, our communities and all of our stakeholders. This extends to our new human capital and D&I strategies, our social programs like Bright Smiles, Bright Futures, the Hill's Food, Shelter and Love program and, of course, sustainability. And let's discuss how we're living our purpose. We have a strong commitment to sustainability, and we continue to invest in this vital area. Importantly, we have been able to embed it throughout our organization. So it's become a part of how we operate every day, from marketing to sales to finance and to product development, as Pat talked about. And our mission is not only to do our part to create a sustainable future, but help all of our customers and consumers around the world to do their part. Just to remind you that the Colgate brand is in around 60% of the homes around the world, more than any other brand. And in brands like Hill's, Palmolive, Protex, Suavitel, Softsoap, elmex, eltaMD and all of our other brands, we are in more than 1 billion homes. We recognize that we have the opportunity to -- actually we have the responsibility to build a healthier, sustainable future for all. In November, we launched our comprehensive 2025 sustainability and social impact strategy, which reflects our broader commitments to our employees, their families, our communities and all of our stakeholders. It consists of 3 core ambitions: driving social impact, helping millions of homes and preserving our environment. And we have specific targets and actions in place for 2025. I will focus on 3 of them today. The first is designing sustainable products, which Pat talked about. We will innovate our products to help our consumers to live more sustainable lives. We will improve the environmental footprint of all of our products we market and develop. We developed the first of its kind recyclable toothpaste tube and have begun rolling it out around the world. We started, not surprisingly, with the Tom’s of Maine brand, but now our Smile for Good in Europe and Natural Extracts in Latin America will also be converted. Our goal is to have all of toothpaste and recyclable tubes by 2025. Just launched in North America is the new Colgate Keep, designed with a snap-on replaceable brush head and a reusable aluminum handle. It contains 80% less plastic compared to similarly sized Colgate toothbrushes. Another target is to lead TRUE Zero Waste facilities, and this is an area we are setting the pace. We lead in the number of and geographic breadth of 0 waste facilities. We have TRUE Zero Waste in 5 continents and have recently added our 20th facility, Huangpu China, to the growing list. We have a plan to be fully 0 waste by 2025. And finally, I want to touch on Bright Smiles, Bright Future, which is a pillar in our social impact strategy to help people build healthy, sustainable habits for life. This is a worldwide program focused on underserved markets where we provide oral hygiene lessons, professional dental checkups and free toothbrushes and toothpastes to children. We've reached over 1 billion children with this program, and we're just getting started. [Presentation]

I hope that our comments today helped you understand the journey that we're taking at Colgate as we look to deliver on our purpose and drive growth for our shareholders for the long term. Thanks for your time, and I'll see you in the Q&A.