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

Great. Hi, everyone. Really happy be back and doing the conference. So I wish we were in person. So we've got Colgate, you just watched the video, and we're really fortunate to have Noel Wallace, the company's Chairman and CEO, with us again. We're going to do a fireside chat. So we're going to jump right into it.

Noel, you are now about 2.5 years into your tenure as Chairman and CEO of Colgate. How would you assess the company's progress? How much would you say the strategy has changed versus when you first stepped into your seat?

Hi, Lauren, it's great to be here, and I likewise wish we were in person. I hope that will be the case next year. And it's an amazing 2.5 years, obviously, as a company. I think we're extremely pleased with the progress that we're making across the Board. When you look at the growth mindset that we put in place across the organization and getting very focused on driving sustainable, profitable growth, across all geographies and all categories, I think the team can reflect on the last 2.5 years, given the extraordinary volatility that we've seen and say we're quite pleased. That being said, we're not done. We have a lot of opportunities ahead of us. And part of that, in my view, is building capabilities across the organization. And that's been a big part of the strategic changes that I think the team is bringing to the table, and we're really putting a significant focus on things like innovation, things like digital, improving our online and our channel participation. Looking at the way we work across the organization, embedding technology and digital in everything we do. And the strategy as a result, I think, is playing out, and you see it in the numbers. If you would ask me I think 2 years ago, Lauren, given everything that's going on in the world, could I comp 5 with 5, I'd say, I love it. I'll take it, and we're doing exactly that. And across the P&L, things look pretty good, despite the tremendous volatility that we're seeing in the market today.

Yes. And one thing that I do think or I sense has sort of evolved from the beginning of your strategy is the way you're talking about innovation. I think back to one of the first presentations you gave, it was really about the focus on the core, focus on faster-growth segments. And now the wording that's built into your scripts is things about breakthrough, transformational. So is that actually a change? How far along would you say you are in your journey to kind of change the innovation strategy and capability at the company?

Yes. I think there are elements of that, that are more evolutionary and there are elements of that, that are quite significant in terms of how we think about the business. And if you distill it into our need to perform in the short term but transform the business in the long term, it really plays into how do we bring the growth mindset to life across the company. And a lot of that was changing the culture internally and getting people to think a little bit differently about our innovation process. And so core adjacencies and channels continue to be opportunities that we're being very choiceful against. And we see those in the short term as areas to continue to improve the health of the business. But we recognize long term that we have to expand the pie in the categories that we compete. And we're not going to do that with simply core adjacencies. We're going to have to think about breakthrough and transformational innovation across the Board. That doesn't just happen serendipitously. You really have to put a process and incentives in place and structure in place to make that happen. And I think you've seen it through some of the discussions you have with Pat Verduin at our R&D facility, you've seen it across our operating units, structuring themselves really differently. And to support that, we put new incentive structures in place likewise to really measure how we're getting incremental innovation and breakthrough innovation across the enterprise. That, in turn, really changes the culture of how people operate and how they think about the businesses. It changes the dialogue that we're having with our trade partners. It allows us to go in and have discussions about expanding the categories, driving value versus simply short-term opportunities that historically we were focused again. So I do think part of it is evolutionary, but part of it is really transform internally how we want to think about innovation and getting the organization and the capabilities to underscore that.

Is there something you might mention as an example where you've got something in the market today that you would describe as being -- fitting this bill being breakthrough transformational expanding the category?

Yes, a couple of things. Let's take whitening. We are one of the fastest-growing toothpaste globally in the whitening segment. And we have been historically focused on bringing this incredible technology through our peroxide base. And we recognize that there are certain markets in the world that don't allow peroxide and that we needed to come up with truly scientific breakthroughs to drive significant lightning benefits. And we have new technologies in the pipeline that will allow us to do that. We also recognize that it's just not toothpaste, we need to think about new forms in order to drive the category. And you've seen the launch of the Whitening Pen, which is a terrific product, driving incremental value to the toothpaste segment. So again, there is the transformational nature of it in terms of how people think about whitening and truly expanding the pie. Take the recent launches we've had in the U.S. on soft soap tablets. We've taken a clear focus on sustainability and where consumers are evolving there. And we're taking significant water and plastic out of the economy through our tablets launch. And so basically, it's a foam. You sell the dispensary, you put the tablet in, fill it up with water and you're ready to go versus shipping water all over the country. Keep, we needed to think about the manual toothbrush segment really differently. Obviously, we've seen some growth in the Electric segment, and we need to continue to bring real opportunities to the manual segment. Sustainability afforded us that opportunity. We've launched a brush with an aluminum handle that eliminates 80% of the plastic associated with using the toothbrush in the long term. So again, I think some new ways of thinking about the business that allow us to expand our horizons a bit and think about the categories very differently.

That's great. Another topic you talked a lot about in terms of transformation is digital. And in particular, I think you brought in a lot of outside talent to kind of get at that. Again, where are you on that journey? How would you talk particularly e-commerce, digital advertising and data analytics?

Yes, this is foundational for us. And I think as we grouped as a team 3 years ago, we recognized that we needed to really step change how we thought about digital engagement. I mean our consumers are out to market or their path to purchase was changing dramatically, and we weren't keeping pace with those changes. So we needed to ensure that the organization was aligned against the strategic focus areas that we set for ourselves and digital was an underpinning to that. Historically, Lauren, we have been very technology-focused. If you take all the work we've done with SAP and now with S/4HANA. So it's how do we interweave this technology foundation that we have and make everything that we do across all areas of the company, digital. To that end, we brought in some talent as a catalyst, but this is a clear example of a rising tide, that we need everyone in the organization, every function to be digitally savvy because the whole business needs to migrate that direction. And we're putting a big bet in terms of how we think about technology and digital applications to whether it's R&D and predictive analytics, whether it's sensor technology or forecasting technology on the manufacturing side, whether it's new ways of developing innovation with direct-to-consumer, whether it's how we buy media and target media to personalize it, which some of the Hill's operations are doing exceptionally well. All of that needs to come together to get people to think very differently. We -- in fact, to that end, we recently brought together about 3 weeks ago, 300 of our key operating leaders from all over the world for a 3-day immersion in our digital strategy. We were taking stock in how we were doing, educating and teaching the organization on the key focus areas, getting aligned on the choices that we are making in that digital field, which can be broad and expansive and making sure that everyone understood the priority that was across the organization to continue to: one, create resonance with our brands with consumers, but drive significant efficiency and productivity across the enterprises, make our media work harder, make our connection with the consumer more salient. So there's a whole litany of things that we're focused on, and it's exciting. I have to -- as you think about our winning on the ground mantra that we've had for so many years, this is the next evolution of that, so to speak. It's how do we take our winning on the ground and integrate it into a technical and digital world that we all live in today.

Okay. Great. And I'm going to switch gears a little bit. I apologize for being backward looking, but I think it's worthwhile to kind of go here. Your stock responded sort of negatively or, let's say, not positively to second quarter results. And yet, it felt like it was pretty solid organic sales growth, gross margin performance while below previous expectations, was it worse? No worse than what we're seeing across the industry. So maybe just to give you another shot, if you will, at talking about how you and feel about that second quarter performance?

Yes. Listen, obviously, disappointed and surprised at the stock performance, but my focus and the team's focus is unquestionably about creating long-term shareholder value. And when you think about the strategy and how we're executing and measuring ourselves against -- the progress against that strategy and being very honest with ourselves where we're making progress and where we're not. I think the second quarter clearly indicates that the strategy is on the right trajectory in terms of what we're trying to do, a 5 on 5, given the exceedingly difficult environment that we're exposed with in and what parts of Asia. We talked about the Latin America issue in Colombia. Bear in mind that Colombia is the hub for the entire Andean region. So it's not just the country of Colombia that was impacted by the political unrest, it was the fact that we manufacture in Cali and Cali is an export center for the entire region. So that obviously had an impact. The good news is those issues are behind us, but notwithstanding that great emerging market growth that you saw through the business, obviously, continuing to make progress across our China business, which, again, has been a long-term journey for us. And we see certainly some real green shoots in that business. And obviously, the cost environment that we're faced with that you're, I'm sure, hearing from everyone is quite significant. Costs have continued to move beyond where we anticipated throughout the year. And we're taking pricing in order to do that. But in many respects, costs are moving faster than we can take pricing. And that was certainly evident in the second quarter as well.

Okay. Specifically also in the quarter, North America, I think, performed a bit worse than expectations. And I know, at least in Q1, you already spoken to some of the sluggishness in that business getting to a point of saying it's turned. What do you think you need to do there to get back on track?

Let me focus, I guess, on the positive in the quarter. In North, I had significant acceleration in its Oral Care business. It was up nearly high single digits. Our Oral Care business in its entirety across the world was up high single digits, with most divisions growing double digits. So again, playing back to the second quarter, that was certainly a positive sign. North America, likewise, it's getting that toothpaste in Oral Care business back on track. As we talked about in the first quarter and second quarter, we had distribution logistics issues through the quarter. That prevented us from executing our promotional strategies. As a result, we had to pull back and do some things. Those issues are now behind us. We're now getting the promotional cadence back on. In fact, the recent shares that we have seen on an all-outlet basis, which includes club and e-commerce so our shares flat and toothpaste, which is terrific, where we obviously had been down based on Nielsen, that shows that we're getting good growth in the nontracked channels, and that's offsetting some of the Nielsen channels. That being said, we have a lot of work to do there still. We've got good innovation coming. Back to the discussion we had earlier, that team is very focused on working closely with our trade partners on breakthrough innovation in the Oral Care space. We've identified some real growth opportunities that we are very excited about relative to the business. and we're executing against that. So I think in the balance of the year, you'll continue to see good share progress, particularly in the Oral Care business, notwithstanding the fact that North America has been heavily penalized by the headwinds we've seen around costs and logistics issues and -- but we're doing what we need to do to continue to work through that.

Okay. All right. Great. And then you also touched on emerging markets when I first asked about the quarter. And I think there's been my sense a real discussion -- a more optimistic discussion of the emerging markets business from you guys. I mean I hosted -- was lucky to host Thanos in May, and he's always enthusiastic, but was particularly enthusiastic about the market backdrop. So what could you tell us kind of about your multiyear view on the emerging markets, the businesses where Colgate has sizable shares, the macroeconomic backdrop opportunities for growth? And how does that factor in maybe to your total company view on revenue growth potential, if emerging markets are, in fact, healthier than they've been in the last 5 to 10 years?

Yes. Not that I like to look to the past, I'd rather look to the future. But if you take the last 10 years, emerging markets have been tough. I mean brutal foreign exchange. You haven't seen the inflationary environment in emerging markets, which ultimately drives GDP. And as GDP goes, certainly, you see per capita consumption in our ability to price against inflation, a better element in our P&L than pricing against foreign exchange. That being said, if there's any silver line to the significant headwinds we see around the world on cost is that it tends to benefit GDP in emerging markets, particularly relative to raw materials and other input costs. And we're starting to see that. If you look at just the category growth that we've seen this year in emerging markets, it's certainly accelerated. You've seen our business likewise and take the second quarter back on that, Lauren, we had double-digit growth in Brazil, double-digit growth in Mexico, double-digit growth in India and great acceleration of our share progress in China. And so 4 of the key emerging markets that we're focused on, we continue to see good progress. I think as you see GDP improve, that really bodes well for the company. We're adopting our strategies. We're taking pricing where we can and making sure that we have the innovation stream in place. And I think, likewise, as we start to get much better sophistication in our digital engagement, that will play well for emerging markets as well. So by and large, I think we're quite pleased. That being said, we have tough comps ahead of us to be sure relative to where we were last year. If you remember, we did 11 -- I think 11 in the third quarter and -- 8, 3 in the third and 8, 3 in the fourth. So they're tough comps moving forward, but we're doing everything we can and feel quite good about our ability to continue to sustain growth there.

Okay. Great. And you mentioned Colombia, I think that detail on Cali was very helpful, right, the impact on the broader region. China, you also mentioned, I think that was also a bit of a laggard. I know you talked about better improving shares but was a little bit of a laggard last quarter. Can you just speak about that? And if I think it was a distributor dynamic, if that's also -- if that's in the past at this point, if it's straightened out?

No, your memory serves you well. I mean let me talk China first, Colgate China. Colgate China has been the drag on our Asia business for the better part of the last 5 years. And I've talked about it since I came on that we are in the midst of really transforming the strategy in China and taking a very different approach, moving the business to premiumization, focusing on e-commerce, which is the fastest-growing channel in the market, making sure that we have better allocation of resources across the cities that we want to address and making sure that we have an organization that is digitally savvy as any in the world, and we brought in some terrific talent to do that. The good news is, for the first time in many, many years, our brick-and-mortar and e-commerce share as a combined is up for the Colgate business. If you take just our focus online, our shares year-to-date online are up 390 basis points in China. And that's a combination of both the Colgate business and the Darlie business. The sluggishness that you've seen on the shipment because it's not a consumption issue, has been just a redistribution of inventory in the market. And the fascinating aspects to China, as you probably know, is that things change there overnight relative to go to market. And in this case, you have community buying networks that have emerged all over the country. And the community buying network is basically an independent mom-and-pop or someone in a large apartment complex who aggregates a purchase for a significant number of people. And what they do is they bypass the wholesaler network and they buy directly from a distributor. And so what happens in businesses that have very strong wholesaler networks like Darlie, that tends to be a reduced distribution of the inventory away from the wholesaler to the distributor. So what happens is you have an inventory misallocation of where the inventory needs to be. Now we'll see where these community buying groups go over time, we're putting all sorts of different strategies in place to ensure that we capture our fair share of that growth and the share of market would certainly indicate that we are. But the short-term aspects of it is you have inventory moving from wholesalers where they're stuck with more inventory to online distributors and to brick-and-mortar distributors.

Okay. That's news.

It's fascinating to see what happens in China. And most people, I think, are encountering that depending on how big the distributor and wholesaler network is.

Okay. And just when you look at second half of the year, does it feel like that's cleaned up? Or should we still think about that being a little bit of pressure as we kind of move through the next 6 months?

I think there's still going to be a little bit of pressure in terms of that, and we're working through it. And we've got some very aggressive plans on Darlie for a pretty significant relaunch that will come in, in the back half of this year, and that's the first time that business has really gone through a pretty major change in a long, long time. So we think we've got the innovation stream in place, and we're clearly zeroed in on where the inventories are and what we need to do to make sure we balance that out in the year to go.

Okay. Great. Happier story, Hill's, right? The growth continues to just be remarkable where it feels funny to model in the numbers, I think, that we're modeling in. How do you keep it going?

It's about a brand, building a brand. And what's been so exciting about this business is that we have this highly differentiated bundle supported by incredible science and biology that delivers an incredible impact on pet nutrition. And if you look at just the ratings you see online in terms of the incredible power and the love the brand gets when you have a pet that's suffering from kidney problems or dermatitis or other things, and you see the impact that our products have on them, it creates an incredible emotional engagement. Obviously, we're benefiting from a growing category and we're benefiting from the fact that we only have a 3 share in the U.S., a 3 share in a business that's growing double digits. So it indicates, obviously, the investment that we're putting behind that business to continue to grow it, we see a good runway ahead of us. So a combination of phenomenal digital engagement, where we've really learned how to personalize. We're now making the next -- I think the next step in our strategy, which is much more data-driven decisions in terms of how we think about the category and how we work with our trade partners. We've got great distribution opportunities, both here in the U.S. and globally and an incredible pipeline of innovation. So by and large, it's about continuing to build the brand, invest behind the growth that we're seeing, be choiceful in the segments that we go after and likewise be choiceful in how we expand the brand internationally, given the significant opportunities we still see here in the U.S.

Okay. Great. Personal and Home Care -- sorry, switching gears a bit here. But Delta-variant COVID cases, obviously rising. So in that business, obviously had significant to say, but benefits, right, in the beginning of all of this and then you've got the comparisons. Where do we stand now? Are you seeing those businesses tick up again, particularly in the U.S.?

Not to the extent that you saw it through the first wave of COVID, obviously. I mean the dish liquid category and the liquid hand soap category have been impacted the most. Levels have dropped down quite meaningfully off of 2020 levels, but still marginally ahead of 2019 levels, which indicates that behaviors are sticking. I think as consumers stay home or obviously, the disliked category will benefit from that. Liquid hand soap, likewise, I think the behavior seems pretty sticky there. But you're going to see still a lot of movements up and down in those categories right now. There's significant amount of entries that came into the category. I think the trade is looking to simplify and consolidate their portfolios against the bigger brands when they were pulling in other brands that they needed to meet demand with. So overall, we like the categories. They're up versus '19, but remain quite volatile.

All right. Great. And another kind of closer-in question. Raw materials environment has worsened through the year, right, you've now talked about gross margins down modestly. I guess any -- whether it's updates, how are you kind of coping with that? And just any real change in the environment, you'd say, over the last 6 or so weeks?

Yes. As I said, the costs have continued to increase throughout the year and into the third quarter. We're responding as we always do around the world. Obviously, as I mentioned earlier, sometimes the costs move quicker than you can take pricing. But as you know, in the long term, Colgate has done an extraordinary job at recovering whether it's foreign exchange or significant inflationary environments that we're exposed to. Our RGM process just gets better and better every quarter and every year, where we can take pricing and list price increases. We're doing that. We still have a significant upside on premiumization across our portfolio. Our innovation is skewed towards margin-accretive bundles, and we're very focused on mix now in a way to continue to contain some of the inflationary pricing that we've seen there. So I think we're addressing what we can, but it's a tough environment.

Okay. And Noel, how do you think about protecting margins and gross margin has been such a huge focus for the company for decades, right, and to great end. But now I think in the industry, there's much more conversation about gross profit dollars, right, being what really drives the full P&L. So how are you thinking about that as you manage through this cost environment?

I think you have to do both, Lauren. You can't be single-mindedly focused on one or the other. And there's no question right now, the top line growth that we're seeing, the sustained top line growth is the most important aspect for our business, right? That generates more leverage through your P&L, obviously generates the gross margin dollars to your point. And so we're very focused on ensuring that we drive sustainable, profitable growth moving forward. That being said, given the cost environment and our ability to kind of catch up, you will see some as we talked about in the second quarter, you'll see some erosion on the margin line. But long term, we will ultimately be focused on getting that margin percentage up, and we need to do it in combination. You can't do 1 or the other, in my view. Over the longer term, it comes back to bite to. So it's a balanced approach, and that's the way we address the current business that we have.

Okay. And advertising to sales has been up significantly over the last several years. How do you think about the right level of advertising? And given there was such a big increase last year in dollars as well, is there a flexibility in advertising if raw materials and logistics continue to trend negatively?

Good question. I mean it's always a balance, Lauren. We look at a lot of inputs relative to the effectiveness in the ROI of our advertising. You take a business like Hill's, we can't advertise enough in that business in terms of just continuing to fuel the top line. There are other businesses where we have better data that we feel like we reach certain levels, and we don't get incremental value for it. So we're constantly assessing where we are. And the intent is, obviously, how do you get more bang for the buck. That's ultimately the underlying objective for. So it's not just to spend more for the sake of spend more. It's spending more where we're seeing a real return. And I think we're getting better as a company, making choices and not being as democratic as we were in the past that everyone will get a little bit and spend it as you see fit. We're much more strategic on where we want to spend the money and that's key to driving sustainable growth for the long term to ensure that we're building our brands, but have the flexibility to adopt and change our advertising investment as we see fit, but that's based on inputs that we see in the markets and where we see the ROI coming from.

Okay. Great. With our last 2 minutes, I did want to ask about sustainability. Particularly, there were sustainability-focused innovations discussed in the video. You mentioned Colgate Keep earlier. So what are some of your top investments in the areas of sustainability right now?

If you take the sustainability goals that we've said externally and maybe I'll communicate a couple of them which you've probably read about, which is obviously zero carbon by 2040, zero waste by 2025, 100% renewable energy by 2030. And the other key aspect is net zero water by 2025. Think about those in context, they drive a tremendous amount of behavior change. And what ultimately has to happen is that every product that we launched today we need to be talking about is it more sustainable for the environment long term. And then we have products that we think we can transform behavior with. We talked about Keep earlier. We talked about Softsoap tabs earlier. We talked about -- we've shown you in the past, some of the new chemistry that we're using in our fabric softeners around the world. So all those goals that we've set for ourselves that we take very, very seriously, and we constantly measure ourselves against how we're doing, are embedded into our growth strategies and embedded into our purpose of reimagining a healthier future for all and that aspect has to play out in how we develop the innovation and how we run our facilities and think about innovating for the future. And all of it seems to be coming together quite nicely. It's an area we don't talk about a lot, but we recognize that consumers are very, very interested in knowing what's behind the company. And our communication team is very active in starting to talk about some of the wonderful things that we do around the world in order to provide a better environment for our kids in the future. And that's a powerful part of our purpose and important part of our growth strategy.

Okay. We have to wrap it there. But Noel, thank you so much. John, off-camera, thank you as well. It's great to see you. And again, I really look forward to seeing you in person soon.

Thank care. Have a great conference.

Okay. Thanks. Bye.