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

Good morning and thanks to all of you for joining us today. I'm very honored to be presenting here today at my fourth CAGNY conference, including my third as CEO of this great company. Joining me today for her first CAGNY presentation is Brigitte King, who's our Chief Digital Officer. I spent a lot of time over the past few years highlighting the digital transformation that we have been undertaking. Brigitte joined Colgate-Palmolive almost 2 years ago and has worked tirelessly to accelerate this transformation with some truly impressive results that she'll share with you. The key message I would like to leave with you today is that Colgate is well positioned to drive shareholder value, and we are committed to doing just that. And while 2022 is shaping up to be another challenging year, we believe we have the right people, the right brands and categories and the right strategies to drive sustainable, profitable growth that will allow us to deliver total shareholder return at the high end of our peer group. In my comments today, I want to focus on 3 topics: leveraging our portfolio of leading global brands to drive growth, building capabilities across the organization and reimagine a healthier, more sustainable future. So I'll start off with a great portfolio of brands. As part of our strategy to reaccelerate growth at the company, a strategy outlined at CAGNY in 2019, we are driving broad-based growth, growth in all of our categories, growth in all of our divisions and growth in both volume and price. That growth starts with our brands. We have great brands like Colgate, Hill's, Suavitel, EltaMD, Filorga, Irish Spring and many others with strong brand equity, high market shares and good structural profitability. These brands compete in categories that are global in nature with everyday usage and strong brand loyalty. And most importantly, these categories are growing. In fact, we've delivered solid growth across all 4 of our categories over the past 3 years. Our net sales have grown by almost $2 billion over the last 2 years with all 4 categories contributing to that increase. We have seen 3 straight years of solid organic sales growth for Oral Care, our largest business with 2021 organic sales growth at the high end of mid-single digits. We think this improvement is reflected in our constant dollar market share for toothpaste where we have held share in a growing category. With our share gains in e-commerce and other non-measured channels and which, for the most part, is not included in our global market share calculation, we believe that, overall, we have gained share in toothpaste in 2021 on a constant dollar basis. You're familiar with the Colgate brand, which is the most penetrated consumer brand in the world in nearly 60% of the world's households, which gives us the potential to sell those consumers even more of our products. To be in that many households, a brand has to have real bond with consumers. And what consumers love about the Colgate brand is its optimism. We have tapped into this sense of optimism by adopting the Colgate smile across our packaging, our advertising, our point-of-sale materials and our digital content. The Colgate brand sense of optimism and action has become even more important during the COVID pandemic. And it's been a driving force behind our equity advertising, and it has become a major focus for us over the past 2 years. Here's a spot from Thailand to show what we mean. [Presentation]

But Oral Care is more than just Colgate. One of the biggest changes we made to our Oral Care strategy over the past several years has been our expansion of many of our Oral Care equities to new markets. For example, our anti-cavity and anti-sensitivity brand, elmex, has its legacy in the pharmacy channel in the Germanic markets. In the past 3 years, we have launched it in pharmacies in Brazil, e-commerce in China, and we have plans to expand this great brand even farther. And elmex's partner, meridol, is a leader in the gum segment in its own markets. We've expanded meridol to the Middle East, Turkey, South Africa and again, using the pharmacy channel, which offers incremental growth at superior pricing and margins. And you're probably more familiar with the American brands, Tom's of Maine and Hello. These brands are expanding internationally in markets such as Canada, Mexico, the U.K., China and Australia. By launching additional brands in all of these markets, we've been able to accelerate growth by tapping into faster-growth channels. elmex is gaining share in pharmacies across toothpaste, manual toothbrushes and mouth rinse and all at premium prices. Personal Care, which has broad-based geographic strength, saw a modest decline in organic sales growth in 2021 as we lap the COVID-19-related strength in liquid hand soap, but it's up on both a 2- and a 3-year basis and was able to hold on to much of the COVID-related demand. Naturals is a fast-growth segment in all of our categories, but particularly in our Personal Care business. We reformulated our Protex brand, which is primarily sold in emerging markets to use flaxseed oil to boost skin's natural defenses while continuing to deliver antibacterial efficacy. And here in the U.S., you probably saw our Irish Spring ad during the Super Bowl. While this is the first time Irish Spring has had an ad in the Super Bowl, this is about much more than just a 30-second commercial. We are completely relaunching the brand with new formulas, packaging and incremental pricing. We see lots of untapped potential for this brand. So let's take a look. [Presentation]

Home Care, which tends to be more geographically concentrated, has been a very solid growth business for us. On a compounded basis over the past 2 years, it has grown in line with our long-term organic sales growth target of 3% to 5%. We've developed a more entrepreneurial mindset in our Home Care business, which tends to be focused on big brands and key markets. For example, our Fabuloso business has strong markets in the U.S. as well as in Mexico and other Latin America markets. With social listening, the Mexico team noticed organic conversations on Fabuloso and overall cleaning among younger audiences. You may not know this, but there is a subgenre of TikTok called #cleantalk where people post-cleaning videos. Our team moved with agility to co-create a new concept with younger people using streaming media to engage and show that mopping can be fun. [Presentation]

On businesses like this, we need to move quickly to take advantage of opportunities when they arise. You're familiar with the strength of the Hill's business. Since the Science Diet relaunch, which started in Q4 of 2018, Hill's has delivered double-digit organic sales growth on a compounded basis. What we're most proud about is that we've been true to what the brand really represents, which is that science is the way to lead to healthier lives for pets. We have a new campaign on there called Science Did That, which continues to lean on the true essence of the Hill's brand. While the pet food category is obviously benefiting from underlying trends like the humanization of pets and premiumization, we believe it is also continuing to swing back towards science and expertise, and Hill's is perfectly positioned to take advantage of this trend. Here's our latest ad. [Presentation]

But we're also relaunching Prescription Diet this year, starting in Europe, rolling out soon in the U.S. and across the rest of the world. As with Science Diet, we see an opportunity to refresh the brand with new formulations and new packaging to further expand the therapeutic segment of the category. An important part of any Hill's relaunch is our Outreach, the veterinary profession. And this video shows how we partner with the vital constituency to enable them to better communicate with pet parents about the benefits of Hill's Prescription Diet. But just having great brands isn't enough. We need to build capabilities for a changing world within the organization that enables them to grow. The #1 capability that you've heard me talk about the most is our digital transformation. Along with ESG, which you'll hear me talk about later, digital is something that has to be built into everything we do. It's not about classes of trade or IT systems or a way to advertise to consumers, digital has to be part of the fabric of our culture. So as part of our quest to accelerate our digital transformation, we look to bring in a Chief Digital Officer who could raise our capabilities quickly, and she has done just that. So now I'll turn it over to Brigitte, so she can tell you all about our digital transformation.

Thank you, Noel, and good morning, everyone. I'm really excited to be here and to share the progress we've made at Colgate-Palmolive. Our digital transformation is progressing at warp speed. The digital landscape continues to change. And just like consumers who have adopted digital habits so rapidly as part of their lifestyle, what Colgate has been able to do to implement our digital transformation vision and execute it is nothing short of remarkable. It feels like we internally achieved in 2 years what would normally take 5. Today, we will cover these macro landscape changes, how we are embedding digital in all that we do and the big wins and strides we have made in digital marketing and digital commerce and, most importantly, how we are transforming our people and our culture to compete in this digital age. We know that COVID accelerated digital consumer behaviors across all regions of the world, reshaping consumer journeys and requiring brands to be present both physically and digitally. And we see that consumers across markets are blending their online and off-line shopping habits with 41% of shoppers globally preferring a mix of in-store and online, fully creating omnichannel moments. According to eMarketer, digital commerce continues to be the #1 growth driver and will continue to add growth to retail sales in the future even as shoppers migrate back to stores. And digital media as a percent of total ad spend continues to increase, representing 61% of all advertising spend this past year. So all of these trends are clearly shaping businesses and brands. And at Colgate, we have made strides to win in these important areas. In digital commerce, we increased our percentage of revenue by 230 basis points in 2021 with a growth of plus 27%. This comes on top of very strong growth in 2020. All-in, we have a 5-year CAGR of 42% for digital commerce. We had great market share performance on toothpaste in e-commerce in 2021 with gains in all 6 of our top e-com markets: the U.S.; the U.K.; France; Germany; India; and, of course, China. We have deployed dedicated resources to e-commerce and formed partnerships with important e-retailers around the world. We are now aiming for frictionless commerce and for every media to be inherently shoppable for the consumer. In digital media, we advanced our capabilities to measure and optimize our media dollars across markets with new tools and techniques and implemented these at scale, meaning, we are now able to harmonize and visualize our paid media data, buy our media programmatically where it matters in over 80 of our markets and extract maximum value with the right place, right price, right person and right delivery mindset. We continue to pursue excellence in search and social to capture the attention of our consumers and for our brands to be discovered and found, creating elements for successful engagement and selling moments, even for unexpected categories and products. [Presentation]

Digital is generating impact and value for our business. We are building capabilities in data and analytics, recognizing the shifting landscape of first-party, second-party and third-party data and efficiently scaling digital technology and dashboards to arm our marketers and digital specialists with what they need to succeed. We are revolutionizing brand experience planning, a new end-to-end process which desilos functions, uses data-driven decision-making as a norm and fundamentally connects all our marketing across channels and touch points. We are identifying our growth through the 3 mores: more people, clear audiences and refined segments to target, more dollars via premiumization in RGM and more innovation product, strategically planning our resources against these 3 objectives. Deeper insights on actual consumer journeys are helping us target the right consumer at the right time with the right message. By understanding toothpaste whitening touch points, for example, we can make sure to have the content, the messaging and the pathing we need towards conversion. And we have powered up and improved each and every digital ROI. In 2021, digital channels delivered 1.6x higher sales ROI when compared to traditional media with strong performance across key focus areas of paid search, programmatic, online video and social. We have now deployed market mix and data modeling to get us to frequent and real-time optimization scenario planning. And we will lean into the fast growth and closed loop attribution of retail media platforms, an important part and growing part of media transformation today. Digital is becoming a part of everything we do at Colgate, and striking the important balance and mix of ingredients is key with full enterprise solutions for scaling technology, creating new ways of working and processes to enable speed and agility and, of course, our people. One of the most important transformations is our culture and our people. First, investing in our people. We have 100% completion rates for 16,000 people at Colgate who took the basics of digital culture training last year. And only 14,000 people were assigned to the training, so another 2,000 took it on their own. And we provided deeper digital module trainings for another 3,000 professionals. The percent of people in our organization who are now in purely digital positions is up by more than 1/3 since 2020. We are finding the right talent and expertise to integrate into and build up our teams. Our work and our people are being recognized. This Digital IQ ranking, as benchmarked by Gartner for the U.S., shows Colgate's website rankings improving from average to gifted status year-over-year among a large group of peers. We know the new world is fundamentally phygital, a new blend requiring both physical and digital experiences with moments that come together to build brands. But our strategy is not just about digital transformation. It's fundamentally about results. We are impacting media, marketing, commerce and ROIs, driving results to ignite growth and future proofing our people, our talent and our brands to grow in the digital age. We have bold ambitions for continued digital transformation: our e-commerce shares to be above brick-and-mortar in all key markets; mastery of the digital shelf the same way we excel on the physical shelf; all of our media and creative campaigns to have a certain level of personalization and data-driven targeting; and optimizing our D2C footprint, especially in skin health, which is ripe for digital commerce growth and innovation; and finally, fully integrated omnichannel plans and budgets driving consumer demand around the world. We are indeed marketing in a digital age. We are here to build brands for healthier people, pets and our planet. And I could not be more excited to share the results to date and the continued progress at Colgate-Palmolive. Back to you, Noel.

Thanks, Brigitte. So on top of digital, we need to deliver on other capabilities. So I'm going to start with innovation. At last year's CAGNY, Pat Verduin discussed dramatic changes we have implemented to our innovation processing capabilities. We have changed the scope of how we look at innovation and the resources that we allocate to different projects. We continue to refresh our core portfolio. And while we've talked to you about this for several years, it becomes even more important during times of raw material inflation. A great example of this is Colgate Total 12 in Brazil, which we are relaunching this quarter with additional pricing. But as Pat discussed last year, we need to deliver more breakthrough and transformational innovation. These launches may be smaller, particularly in the beginning stages, but they can be much more incremental, and as we see them, they provide significant growth over the long term. I think what's most impressive about the shift in focus is how we are thinking about many different ways to deliver the benefits that consumers are looking for. As we get older, our teeth get yellow and we may have gum problems. These are genuine issues for consumers that we are looking to address with different types of products beyond just another toothpaste SKU. We can experiment with new forms like serums, gels, powder, sprays. We need to expand beyond the tube. To address consumers who want whiter teeth, we've transformed the at-home whitening category by developing a portfolio of options for the consumer that have significantly better user experience. For example, in the U.S., our Optic White professional take-home kit is available through dental professionals and features a quick-dry whitening serum and a rechargeable LED whitening device and shows results in 5 days. We are working with the profession to deliver whitening benefits through both in-office and at-home whitening trays. We have the Optic White Overnight Teeth Whitening Pen, which is the #1 tooth whitening pen on Amazon in the U.S. We've launched this initially through e-commerce but are rolling it out further in brick-and-mortar this year. But we haven't stopped innovating on toothpaste as well. We are launching Optic White Pro series in the U.S., the first 5% hydrogen peroxide toothpaste, again, with demonstrated efficacy to white and teeth. We're very excited about this launch, which you will see on the shelf next month. This is our first $10 suggested retail price toothpaste in the U.S. For consumers with gum problems, we have many different options around the world that can deliver either anti-aging or therapeutic benefits. For anti-aging in China, Colgate Miracle Repair serum continues to be one of our top e-commerce SKUs. This concentrated product infused with arginine works as a film on the gums. We launched Colgate Miracle Repair serum and toothpaste to create a regimen for consumers to relieve their gum problems in multiple ways and all at premium prices. In other markets, we've been able to expand our gum franchise through meridol, which competes in the therapeutic segment. A great example of this is Turkey where meridol doubled its share in 2021 in the pharmacy channel in toothpaste, toothbrushes and mouth rinse with meridol driving incremental share for our total franchise. A few years ago, many companies probably wouldn't have considered pricing a capability. As a company with significant emerging market exposure and thus susceptible to foreign exchange headwinds, we have always viewed the ability to drive pricing in our markets as a key capability. But over the past 5 years, we have significantly expanded our pricing strategy to a broader revenue growth management capability. Premium innovation, as I just discussed, is a vital cog in delivering pricing through RGM. In this period of high raw material inflation, we've used our RGM strategies to help us with pricing in Europe, which can be a difficult market to take price. We've relaunched Sanex Zero% across Europe with a new formula with 0% soap, 0% micro plastic, 0% colorants and an HDPE bottle made with 100% recycled content. These upgrades to our existing businesses allowed us to relaunch with additional pricing in place. RGM has been a big part of our turnaround of the Colgate business in China. Previously, the Colgate 360 represented the high end of our toothpaste portfolio in China and a suggested price point roughly in line with the category average. In Q4 of 2019, we launched Colgate Miracle Repair in e-commerce only. This product came in at a 350 Index to the category. Now we have taken the amino acid technology of Colgate Miracle Repair and launched a brick-and-mortar version at a 245 Index to the category. It's a new way for us to launch differentiated innovation and premiumize our portfolio. And finally, I want to spend a few minutes on our ESG strategy where we are reimagining a healthier, more sustainable future. Colgate has long been a leader in sustainability. Last year, we launched a new sustainability and social impact strategy with new targets and actions that will advance our sustainability efforts through 2025 and beyond. We also laid out targets for our social impact programs, which include programs like Bright Smiles, Bright Futures and Hill's Food, Shelter & Love campaigns. Last year, we also released our first-ever DE&I report, which focused on our multipronged effort to shape how we look at DE&I across our organization. As a global company, it's important for us to look at DE&I through multiple lenses. We can increase our representation everywhere around the world, whether that's by race, by gender, socioeconomic status or people with disabilities. You will hear even more from us on ESG this year as we will release our first-ever TCFD and SASB reports. But what is most important is that we're truly integrating ESG into our business strategy in ways that drive shareholder value and growth. Our Bright Smiles, Bright Futures program is truly vital to the communities it reaches. Remember that cavities are the most common chronic disease in children around the world. We've taught over 1.4 billion children how to brush their teeth with a target of reaching 2 billion. We've given kids free toothpastes and toothbrushes so they can continue to build the habit. We often provide them with an extra toothbrush so they can take it home and give it to one of their family members. As the leader in oral care, it's our responsibility to advance oral health. But this effort also provides a long-term business benefit as children who learn proper oral care techniques are more likely to continue those habits as they age. Another example is Colgate Keep, which is our replaceable head toothbrush in the U.S., and we've launched under other names around the world. Colgate Keep comes with a reusable aluminum handle and 2 replaceable brush heads. Compared to other similarly sized Colgate toothbrushes, this reduces plastic waste by 80%. That's obviously better for the environment, but it's also a positive for our retail partners who are looking for ways to drive more sustainable behavior for their shoppers. So the message I would like to leave you with is that we have strategies and the plans in place to deliver long-term value creation to our shareholders. And while the operating environment in '22 will remain challenging, we are taking the steps necessary to deliver in the short term through pricing, revenue growth management and productivity to drive earnings growth despite significant headwinds for raw materials and logistics. As I discussed on the fourth quarter call, we are taking steps to layer in additional productivity to help offset these incremental cost headwinds. To support our delivery on funding the growth, we have put together new teams to focus on additional opportunities and speed and execution. We have also announced our global productivity initiative, a 1-year program designed to deliver savings that can be both reinvested for growth and apply to the bottom line. But the key for us is to sustain momentum that I talked about at the beginning of this presentation. We are leveraging our portfolio of strong brands in growing categories to drive growth through increased advertising support. We are building capabilities across the organization to allow us to drive this growth more broadly and more efficiently going forward through innovation, digital and RGM. And finally, we're reimagining a healthier, more sustainable future in ways that benefit our business, our employees, our shareholders and all of our stakeholders. And now I look forward to seeing you in the breakout to take your questions.