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

Good afternoon, everyone. This is Robert Ottenstein from Evercore ISI's Global Beverage and Household Products team, and Javier Escalante is with me in the backdrop. Really excited today to have what is really emerging now as our top pick in both beverages and household products, Colgate. We think the company is in the middle or maybe even early innings of an important transition from what we've kind of called an efficiency-first mindset, more towards a more of an effectiveness-first mindset. With us today from Colgate and heading up pretty much everything in emerging markets, including China, is Panos Tsourapas, and obviously, nobody better to speak on those critical topics, which will drive a lot of Colgate's growth going forward; as well as John Faucher, who heads up Investor Relations. So thank you guys for joining us. Thrilled to have you.

So just to kind of sort of level set things for people who aren't as familiar with Colgate and haven't followed them, Colgate, for as long as others. Panos, can you talk about the nature of the business outside of China, but just a little bit about the business mix, the channel mix, any kind of key differences in the emerging markets in terms of how that business is run compared to the U.S. and Western Europe?

Okay. First of all, happy to be here, and thanks for the introduction. I would say, emerging markets are quite different. Our portfolio also has some differences for many reasons, mainly historical. We have been in these markets for many, many reasons, for many, many years, started in some places over 100 years ago. So it's how the business was developed. So China, as I think most know, it's an oral care business for us. And I will pick the big markets around the emerging markets space. I would say India is more or less the same. It's predominantly oral care with a little bit of personal care. Thailand, another big market, is oral care, but we have also a significant personal care business. Now moving, West Russia is oral care and personal care business. South Africa is oral care, personal care and significant home care business. And if we go to Latin America, which is one of our largest, if not the largest operation, our business is very well developed. In countries like Mexico, we have big businesses beyond oral care, in personal care and home care, where we have leading positions in nearly every category. And in Brazil and Colombia as well, where we have leading positions in oral care, but also in personal care and home care. So as you move, I would say, from east to west, we see a more diverse portfolio. Now to your question around channels, also there, there is a lot of diversity. Actually, markets are quite different in terms of channel mix. China is probably the country that e-commerce has the highest share in our categories. It's quite significant. India still is predominantly an indirect trade market. This is the majority of the business because of the social pyramid and the structure of the country. And I would say all the other big markets in developing world are mostly modern trade but different types of modern trade. If I take Russia, it's a lot of discounters and modern retailers. South Africa, it's a modern trade environment. Mexico also is -- Walmart is very big in Mexico, their biggest business outside the U.S., as I think many people know. And Brazil also, it's predominantly a modern market environment. What is changing, obviously, is the trends amongst retail environments are different. E-commerce is growing across the world, across developing markets, but contribution varies for many reasons: availability, infrastructure, credit card penetration, many, many things. And you see other retail environments like cash and carries, drug and pharmacy discounters also emerging in some places, just to give you a picture of what is happening around the world.

Great, great. And you tend to average more at an 80 type price index or so in emerging markets, let's say, outside of China. Is that about right?

I would say, by and large, it depends. And I would argue that in markets that -- I take Mexico for an example. In Mexico, our market share in toothpaste is 80%. In volume, I think, is 84%, 85%. So when you have 80% or 75% market share, I would say the notion of index is not so relevant because we are the market. You might have a company that has 2% market share and very high pricing or very low pricing, hence, distorting the index. I would say, in most markets, our average price, because we are the most penetrated brand and we have availability everywhere, and in developing markets, you have many poor people, so the average price is actually obviously below the market. If you take India, the rural India, the market is at 10, 20 rupee. If you compare this with the modern trade markets in New Delhi, which is much higher, obviously, your index is lower. I would say that something that is interesting and important for us that we have and we deploy, this strategy of premiumization across the board. So beyond looking at the index on average, we look at the index and our premiumization efforts in specific channels, and I will call 2 examples. If I take our China e-commerce portfolio, now has an index above 100. I think it's at the range 120, 125 because we have successfully premiumized the portfolio, and this channel is ideal for premium products. If I move to Brazil at the other side of the planet, we try to do the same in pharmacy channel. We have launched elmex, which is a highly therapeutic brand that has an index of 250, 300 versus the market. So I think these kind of comparisons are more meaningful, and they show the intent and the strategy behind the business rather than a simple number that cuts across the whole market.

Great. So I want to just kind of talk about the impact of COVID on your business in general, probably not as much as a lot of other companies, probably not that much of an impact on oral care, but maybe I'm wrong in some countries. But big picture, sort of where in 2020 did you see benefits? Where did you have problems in 2020? And how is that playing out in '21 just in terms of the COVID impact?

Yes. Actually, what we did see in developing markets, we did see the same trend as in the developed markets, that is categories like handwashing products or cleaners also to grow to a lesser extent than in Europe or in the U.S., but these categories grew as well. We did see also in some markets, not in many, some sort of overstocking. I would say Australia is a characteristic example, but I would argue that Australia is a developed market, not a developing market, even though it's part of the APAC region. So we didn't see the level of overstocking as we did see in the U.S. or in Europe. For obvious reasons, people don't have money and, in many places, don't have even the space to stock our products. We did see external disruptions and still is the case. I'm here in New Jersey, and we just got that the mask mandate has been dropped entirely. New York was the same last week. So we go back to normalcy here. But if you see what is happening in developing markets, it's completely the opposite. The Guangdong province was again in lockdown because they had cases a couple of weeks ago. I was reading about Thailand. They have only 3% vaccination. Imagine where they stand. We all read what is happening in India, what is happening in Mexico, Brazil. So still, the countries are far from finding a solution to COVID problems, and these kind of disruptions have impacted us. I would say we didn't have any supply chain interruptions apart from a couple of cases that the countries went in total lockdown, so they shut down everything like India last year. So our operations do continue on uninterrupted basis. But when there is limited mobility, limited store opening hours, shopping malls closed, hence stores closed, people are not allowed to go from one region to the -- or one area to the other, this impacts, to an extent, the business, the overall demand. Now as regards to the oral care category, hasn't been impacted positively by COVID. In a few cases, people, as I said, in Australia, they overstocked, as they overstock everything. But consumption-wise, we did see in a few markets that mouth rinse consumption went up because people thought that mouth rinse can help protect them with COVID, but it wasn't anything major. Toothbrush category has been impacted negatively. Toothbrush, by and large, is an impulse purchase. So when people don't go to the stores or do not go to supermarkets because they are shut down, they tend to buy less. So this was more or less the picture across the markets.

So just very broad brush, because there's pieces going obviously in either direction, was COVID a net positive or negative for your business in 2020? And how does that compare this year?

I would say, in overall, putting all elements together, I would say it was more to the positive side. It was positive because some of our categories did benefit, as I said, what it had to do with handwashing with cleaners, dishwashing liquids. These categories were impacted. And the other thing that probably did benefit a business like ours, we have very strong distribution. The availability of our products, particularly in emerging markets is, I would say, top of the class, it's unmatched in some instances. So in an environment and in a period that there are disruptions of different nature, particularly external, companies with very strong operations like ours, very strong availability, logically do benefit because nobody else has the -- or very few have the same distribution infrastructure to maintain their business running. So for these reasons, I think was positive. And also in the developed markets, I think it's well documented, Europe, U.S., Australia, as I said, people did overstock our categories and many other categories.

Robert...

Yes. Go on, John.

Yes. So Robert, I was just going to say, we would say that about 20% of our category -- 20% of our sales is in categories, and this is a rough number, that benefited from COVID. So liquid hand soap, dish soap, household cleaners. We've got a couple of small bleach businesses in various places around the world, okay? In terms of ones that were negatively impacted by COVID, it's probably really our skin health business, right, which is a low- to mid-single-digit percentage of sales. And then you can make an argument, and it's sort of a secondary impact, the toothbrush, the manual toothbrush business around the globe was probably negatively impacted by some of the economic issues that happened. Toothbrushes as a category, it's more discretionary than you would think, and people probably pulled back on some sales there, but that kind of gives you the order of magnitude. Oral care, as you mentioned, probably not really impacted, but 20% of the business was favorably impacted on a global basis. We've said that those businesses are going to be down in 2021 versus 2020, but up versus 2019 as underlying demand is probably still a little bit stronger.

Yes.

Great.

And the other thing in the skin care business, obviously, is the dramatic decline of the travel retail business. which is significant in these categories. And with no travel around the world anywhere, all this has been effectively disappeared in 2020.

And so 2020, a moderate net positive in your markets from COVID. And how would you assess that in terms of 2021? Is it continues to be a modest net positive? Or is it kind of awash at this point or a little bit of a headwind?

Yes. But I would say, first of all, it's hard to predict. And I'm saying this because if we had this discussion in February, I would tell you personally that I would expect that regions like Asia would go back to normal season. And what we did see suddenly, Asia COVID cases, lockdowns, disruptions to boom. So there is a lot of unpredictability. I would say, as John said, the categories that did benefit, okay, we could see, obviously, to decline versus last year. But still, the running consumption rates are above 2019. When we see our core oral care business, I would say we'll continue to expand and to grow driven by consumption growth and by our initiatives in a -- I wouldn't say normal pace, in a pace that it is not impacted by these external factors. So -- and if travel comes back, obviously, the skin care business is going to benefit. So it's hard to say because it is very volatile and very challenging to predict.

Great, great. So I want to kind of move on to what's kind of been the real question of the day or the year, right, is inflationary pressures, pricing power, that kind of general topic. We had Ambev on, the Brazilian beer company, recently Heineken. They're talking about sequential acceleration in inflation in Brazil and kind of third price increase in less than 12 months. And actually, strong consumer demand. And so the ability to actually take pricing at least in the beer side in Brazil. So I'm wondering maybe you could kind of walk around your key markets, Mexico, Brazil, Colombia, India, over to Asia in terms of the key markets and what you're seeing in terms of the cost inflation that your team is having to manage against and the strategies that you're using to offset those cost increases, whether it's changes in package, pricing, promos, whatever, and roughly how successful you've been. So kind of country by country, just obviously the key regions.

Yes. I would say, I think we have discussed it publicly, and everybody talks about is that we are subject to the same raw and packing material increases. Resins are increasing, tallow, PKO, all the input commodities are increasing substantially across the world, and this is impacting every region. Obviously, the impact is different, depending on the product mix. Okay, there are businesses that we have, big bar soap businesses. Because of tallow, obviously, they are impacted more than businesses that we have only toothpaste, which is not so much affected. So we are subject to the same pressure as mentioned. What we do, I think we are leaders in pricing, and we have talked a lot about it in our markets. We lead, we are market leaders, so we have to lead in pricing. We have taken price increases at the beginning of the year. We are taking more price increases as we speak to mitigate for this cost. I think InBev talked about Brazil. I think the number of our price increases were at the same range as InBev talked about, and probably I don't know this business, but I would be surprised if their percentages are lower than ours. Probably, we're on the higher side. So we are very bold on pricing to mitigate the cost increases. We have also a very strong toolkit around revenue growth management. So we work with -- in areas like mix, like promotional strategies, like sizing to mitigate, to the possible extent, for the commodity increases. The other element that, I would say, impact the whole discussion is that inflation is picking up in some of the emerging markets. So in the past, we're pricing primarily for FX, and inflation was very low. Now we do price for inflation and for commodities as everybody else. So I would argue that the task at hand under these conditions, probably it's easier to explain to our trade partners or even to the consumers, and it's a general trend. So we have taken pricing everywhere, and we will do more, depending on the impact of the commodities based on the mix of the business.

Yes. And I think you've been very vocal that it's been successful in Latin America. Are there any important regions where just because of the competitive dynamics that you're not getting pricing? We've done some work. It looks to us that Unilever has been lagging on pricing in a number of markets. Procter has been more in line with maybe inflation or lagging a little bit, but more in line where you guys have really taken a leadership position on that, as a leader should. But are there any situations in important markets where your local guys are really getting beaten up because of you guys taking that leadership and maybe you have to rethink things? And perhaps, talk about some of the bigger markets, whether it's India or China or anything in Africa that's relevant.

No, I cannot recall any major market that we have taken. You mentioned India, Mexico, Brazil, the big markets that we have a case like that. And indeed, Unilever, not only now, it is amongst our competitors are the ones that they are follow in pricing. It's very rare to see them taking a leading pricing posture. I think a few quarters ago, they communicated the thesis that their objective is to drive growth via volume and lower pricing. So it's not a pricing leader. But at some point, I think with these commodity price increases, people have to follow. Managing a business, particularly in developing markets, is inherently volatile. You have FX risks. You have input cost increases. You have inflation. You need to take price. Irrespective what the competition does, you need to drive pricing to drive and deliver your numbers. And this is what we are doing, and we haven't seen any major negative elasticity. You did see our results in the first quarter. We had very strong pricing and very strong volume growth. So I have to say I'm not concerned that we are overpriced or we have any major issue to this respect.

Given the strength that you have in the overall supply chain, right, where you're a market leader, you probably are the low-cost manufacturer for most of what you do. You're so important to retailers and very efficient supply chain and manufacturing. Is it -- would it be fair to say that, in fact, a little bit of inflation is actually probably good for your business, gives you more operating leverage because you can basically have more control of your costs and just drive more operating leverages in the business?

Yes. I would say there is an argument that, in general, a little bit of inflation is healthy for the economy in general, helps economic growth. Economists could say that it's better to have 2% inflation than 0% inflation or minus 1%. So I think moderate inflation, to your point, by and large, could be positive for our business. I think it would stimulate economic growth, it could stimulate consumption. Because when there is the expectation that prices will go up, people consume today, okay, and that would give us more opportunities to price. I would argue that it's better to have, okay, I make up the numbers, inflation of 4% to 5% so you can price rather than inflation of 1% and a devaluation that you need to take the same price increase but it's much more difficult. So to this point, I would -- only probably slightly positive for us, by and large.

And Robert, if I can just add another point on this, which is -- and this kind of goes back to Panos' point on pricing for foreign exchange. When we price for foreign exchange, let's say, our exposure to resin in reais goes up by BRL 20 million. In that scenario, we will just price for the BRL 20 million. We won't price at the gross margin level. So what that means is we're always struggling to sort of catch up on the gross margin from the pricing. Now if you did inflation, right, and all of a sudden, the entire -- the cost basis goes up, and to Panos' point, it's not just foreign exchange headwinds, everyone's in kind of the same boat. We're at a disadvantage when it's just pricing for transactional foreign exchange. So I think you could argue that the inflation situation creates a more consistent need across the industry for pricing, which leaves us in a slightly better competitive situation.

No, exactly. And one of the other things that we heard from Ambev, ABI, a little bit Heineken, is that because of the commodity inflation, a lot of these emerging markets are commodity-based. And so they are starting to see in the local -- some of the local economies in South America and Africa, the emerging markets that are not tourist-based, which have issues, as you discussed, in terms of COVID and transportation, but they are starting to see stronger local economies. Are you seeing that also, Panos? And could we kind of be moving into a situation where you've got kind of a really nice scenario? I mean the last 5, 6 years have been horrible for emerging markets, and you've had a very tough job. Maybe we have a situation where you get some price, currency helps you when you translate, so John can pay a higher dividend, and the growth engine can actually reaccelerate to what it was in the golden days.

Could be. The -- many of the emerging markets, particularly in Latin America, are driven by commodities. You recall in the previous boom, the period 2010, 2014, '15, all the economic growth in Brazil and many countries was commodity-driven. So -- and indeed, the -- we see already that, that the increase of our commodities helps significantly the local economies. So there will be more economic growth. And what we read about countries like Brazil and others is that the 2021 economic growth, as projected, GDP growth, it's higher than what was anticipated. And commodities, it's part of that. So point number one, it will help the economic growth. Now to your point, indeed, if inflation picks up, could help our pricing efforts. If FX improves because of more exports or other reasons, then we could be able to translate our strong results in U.S. dollar results in a better way. Because I would argue that the previous years, we were delivering very strong organic sales growth. But because of the massive devaluations, I still remember, and it was not long ago, the Brazilian real at 2. I remember I was debating with the team, do you think that we're going to be at 1.9 or 2.1. And last year, we were at 6. So this could be indeed absolutely a very good scenario. But as I said, the thing that I think we all learned last year is that we need to be very careful with our expectations and predictions because they are mostly wrong.

Yes. So let's move over to China. You guys have had some notable success premiumizing the business in e-commerce, both for the Darlie brand and the Colgate brand, I believe. Can you be -- kind of just switch over to brick-and-mortar and maybe talk about the 2 different business models, right? So there's a Colgate business, a Darlie business, maybe kind of talk about the differences between those 2. And then kind of what is the plan to kind of pick things up on the brick-and-mortar side in China in oral care?

Yes, yes. First of all, we feel very good about the momentum of business in China. Indeed, the last couple of years, we did focus a lot on e-commerce. This is where we were lagging behind. So we put people, structure, money, product, everything, and it pays off. We are amongst the fastest growing, if not the fastest-growing brand in terms of market share in e-commerce space. We have totally changed and premiumized our portfolio. And this has been recognized by our largest partners there, which is very pleasing. So we are in a very good, I believe, in a very good point there. Now as regards to brick-and-mortar, also, we went to a period of transitioning our portfolio. We have simplified significantly our portfolio, and it was necessary because we had a lot of legacy items in our portfolio, and we had to focus a bit more. And this impacted the business in the short term. As we speak, what we do, we are focusing there, as we did e-commerce. We are upscaling our innovation in the brick-and-mortar space. And if you were in stores in China, you would see many new exciting items from the Colgate brand in the market, who already do very well in the therapeutic space, in the whitening space. And we have been able, also something that we don't talk a lot, to premiumize our portfolio. Our Colgate 360 product was sold a couple of years ago RMB 10, now it's probably RMB 20 or RMB 22. So my expectation is that the business now has been stabilized, I think with the rolling of the innovation. I expect that in the quarters to come, it's going to start growing again as the e-commerce business is growing. And finally, what we try to do now is to operate and to activate the brand in an omnichannel basis. So far, we had an innovation stream in e-commerce, an innovation stream in brick-and-mortar. Now we are bringing them together, creating synergies behind ingredients, platforms and concepts. So I have to say, I feel personally very rather optimistic about the prospects of our business in China.

Great. And just to close things up, kind of a very broad question in terms of how Colgate manages in emerging markets. So over the past few years, looking backwards, there were a number of cases where you, for lack of a better word, we're caught maybe a little bit off guard in India with local and the speed of premiumization in China, the move maybe to drug stores in Brazil. So kind of a little bit caught off guard in the past and some of it having to do with the nature of the portfolio. Have there been any cultural or structural changes at Colgate so that doesn't happen in the future?

No, absolutely. And I would comment that we were not the only ones that were caught off guard. As I say frequently, we went -- many years ago, we were doing one-to-one innovation and marketing, then we went to centralized structures. And us and many other people, they missed some important trends in some markets that were very relevant there but irrelevant in broader scale. I think we have realized that, and we have adjusted our processes and also the way we do and we plan our business, and we innovate. China is an example. We have China for China innovation, and we do well. India, it's the same. We caught the trend on ayurvedic products. We're doing extremely well there. Russia is another example. We are doing more innovation specific to the market. Brazil is the same. I think this realization is now embedded to our thinking, and I think we are pleased that we have been able to do it in a way that hasn't compromised the efficiency and effectiveness of our business model. I think we have become more competitive in the marketplace, and we are still as efficient as we were before. So I don't think that this will happen again in the future, and we will see probably more successes in this space.

Well, that's a terrific way to close things up. Panos, John, thank you so much. Javier and I are big believers. Again, one of our top stocks, if not the top 1 now. And looking forward, hopefully, to see you guys soon and in person and hopefully next year. Thank you very much.

Absolutely. Thanks for your questions. Thank you for having us.

Thanks, Robert.

Thanks. Bye-bye.