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

Great. Well, good morning, good afternoon to everybody. Robert Ottenstein from Evercore ISI. Very happy to have John Faucher from Colgate. John heads Investor Relations as well as M&A. And he's joined with -- by Hope Spiller and Lauren Kreinik from the Investor Relations team.

So John, a lot of ground to cover. I just want to jump right into it with one of the questions that we're getting the most from investors. And that is, over the last few years, you've done a lot to premiumize the Oral Care business in the U.S. and China most notably, but globally as well. But just kind of focusing on the U.S. market with the increased pressure on some consumers, at least due to higher gasoline prices, higher food prices. Are you starting to see any trade down in your portfolio itself on the Oral Care side?

Well, first off, Robert, thanks for having us. We appreciate it. Always nice to meet with you. So, so far, I would say we're not seeing much in the way of trade down. What -- your point, I think, was well made, which is you said some consumers, right? So the key factor as you look at a difficult economic time, which seems to be what we're heading into. And I would go back to 2007, 2008, 2009 as a corollary. You need to focus on the marginal consumer and where those changes are happening. So the high-end consumer is most likely going to continue those habits. So as I like to say, people still buy Mercedes and BMW in a recession. So we will continue with our premium innovation. And as you can see in the standard data, Colgate Optic White, we launched our new Pro series this year. It continues to do incredibly well, gaining share, driving the high end of our portfolio. So we're excited about that. So there still is room to premiumize at the high end. I would say we're not yet seeing a big trade down from consumers. And that's true both, I think, from a channel standpoint as well as from a brand standpoint. We're not seeing increases in private label market share really in our categories at this point. That said, it's a little bit early days. We did say on the Q4 call and then on the Q1 call that our North American pricing was going in, in February and March and April, and that's what we executed. So the pricing in our categories is still relatively new. But that said, I think so far, we're looking at consumer behavior roughly in line with expectations. One of the things that we have as an advantage, and I don't want to overstate this both our ability to do premium innovation and the breadth of our portfolio because it's not a heads, I win, tails, you lose situation. But we do have greater breadth than most of our competition. We have a bigger base business, right, which is one of the reasons why overall, our business, our toothpaste business only indexes at about an 89, 90 versus the category globally. So if consumers do trade down, we have the products that are most likely going to look to trade to. And then also, we have very good businesses within the dollar channel, which we think could also be beneficiaries. So I think we're well prepared if it starts to happen. But so far, we are not seeing material trade down at this point.

So let me kind of restate this a little bit and tell me, John, if this makes sense. So you premiumize the portfolio. Those products that are the most premium are marketed and directed to consumers who are probably doing reasonably well and less vulnerable, whereas those consumers that are more vulnerable to pressures are -- never traded up perhaps in the first place. They are sticking in your basic core brands. And so you've kind of segmented things in a sense from the beginning. Does that make any sense?

I mean it's common sense. I mean it's not quite that simple because if you are going into -- so most stores, you go into a Walmart, right? So Colgate is going to be a red block. And then you'll have a blue block and maybe a white block within the category, okay? So the consumer who is buying Colgate Total or buying Colgate Anticavity is still exposed to Optic White, okay? And they may say to themselves, "Okay. I'm feeling like I could use my teeth being a little bit whiter. I'm going to go ahead and buy Optic White." We have a good, better, best strategy on Optic White. So you can buy 2% hydrogen peroxide, 3% hydrogen peroxide, 5% hydrogen peroxide. So we have price points even within that. And then consumers will trade up and down depending, are you looking for sensitivity? Are you looking for Tartar Control? Are you looking for White? So it's less structural than that because of the movement, both within brands and within price segments. So the key factor is to have those opportunities, that breadth of price point. So another example I gave is in the U.K., we have price points that range from anywhere from 50p a pound up to 20 pounds, right? So it's really offering all those different options. So if consumers change their habits, they can still reach for something in your portfolio that provides great science, great efficacy and good value. And then the other piece of this is, if we start to get into a situation where retailers are saying, "Okay. We're seeing greater sales in the first week of the month and the third week of the month when paychecks clear," because these people are under more pressure, paycheck to paycheck, you want to make sure that your merchandising strategy is aligned when those weeks when consumers are a little more strapped. Do you have the right products that you're merchandising, again, in order to deliver value to consumers who may have a little less money in their pocket.

Great. So let's -- sticking with the U.S., sticking with Oral Care. If -- I think we understand you've got the various pricing tiers. So you've got -- you can capture any kind of trade down and excuse us if it's competitively sensitive information. But what -- is there a particular strategy or tactics that you then shift to if you are starting to see a lot of trade down? So for instance, in the last -- the really big recession, the beer industry actually raised the prices on economy brands more than mainstream to kind of mitigate any trade down. That was one particular strategy that was done there. So any kind of sense of how you would actually react or change in terms of either marketing or promos if you did start to see major trade down?

So again, what I would say is I go back to what I said in the last question, right, which is you may change your merchandising strategies, again, both in terms of the channels that you go to, the stores that you go to, but also the timing within the month to align your price points with what consumers need in specific purchasing patterns based on their economic situation, right? So again, you may say, well, beginning of the month, paychecks have cleared. People may have more of an ability to pay for a higher-end product. So you may merchandise higher-end products there then. And later in the month, you may say, "Okay. Look, we're going to go with more of our entry-level price points." I think the key thing here, and I think this is -- it's going to be true across all of consumer staples is the growth of revenue growth management as a capability, which we have spent a ton of time and effort on over the last several years. And we brought a ton of people in from the outside because -- I mean, you've been a beverage analyst for a long time. Coke and Pepsi have done a great job. They were really the leaders in terms of driving this behavior in emerging markets. You bring people in from other consumer companies to incorporate this. You bring people from data and analytics so that you understand your relative price points where they need to be, promo versus on shelf, and you work with those. And again, what you want to have is options so that anybody comes in and you can sell them a product that suits their needs, but you can still make a good margin on. So I think it's the... And so what that may involve, going back to your previous example, we may say, okay, we've got 2 brands that are in the lower end, maybe take pricing up on one, okay? But maybe we leave the price point for the other the same. So that low end price point is that entry level price point is still there, but we're getting pricing overall in the base business. And you can figure out using data and analytics, what the elasticities are going to be, et cetera. And that also shows your retail partners that you're looking to work with them to drive their overall basket and so they're not losing consumers who maybe are struggling a little bit more.

Got it. Got it. So as we were talking earlier before we got started, some great scanner data today. Optic White looks quite strong. Can you kind of give us a little bit more sense of what is going on with Optic White, where you are in the rollout, the consumer response, kind of what's going on underneath the scanner data numbers that we see?

Sure. So Whiting is a segment of the category that we think is relatively underdeveloped given the desire for these benefits and you look at Google searches, it's such a huge topic within Oral Care as people look to have wider teeth and people are willing to pay more for that benefit. So we have done a very good job, as I mentioned before, premiumizing our portfolio, sort of good, better, best, different levels of hydrogen peroxide. And this is a U.S. discussion. There's also a global discussion on whitening that's a little bit different given the rules around hydrogen peroxide outside the U.S. But in the U.S., we've done great work premiumizing our portfolio, again, making sure consumers have options at all different levels, even those who don't want hydrogen peroxide because sometimes that can cause sensitivity. And we think this continues to be a great opportunity for us. Again, it's our highest price point toothpaste in the U.S. and the demonstrated efficacy is working very well for us. The advertising is strong. So we've been very pleased with that. I think the -- it's not just Optic, the overall portfolio is doing well. We've been gaining share in more of our categories and segments. Some of that is the innovation that we brought across our portfolio. Some of that is the pricing that we've taken. Some of that is some of the easing of supply chain issues, and we talked about this on the first quarter call, we said volume got better as we went through the first quarter because the supply chain factors, some of the global as well as some of the regional supply chain factors were easing. When I spoke previously publicly, I talked about supply chain pressures abating. And so I think you're seeing that as well. And then also, we had some, I think, some favorable shelf set movements this year that have helped us and made us more competitive in some of the tracked channels.

That's great. Just kind of following up on that, one of the things that you mentioned last year was due to supply chain issues, you couldn't -- you had to step away from the usual cadence and intensity for your promos that, that had some negative impact last year. Are you kind of back to the full promotional calendars that you would want? Is that kind of where it needs to be.

I think we're very competitive promotionally. I think we're in very good shape with our on-shelf availability, as Noel talked about on the first quarter conference call. So I think we feel good about where we stand. Now obviously, with COVID, things are unpredictable or what have you. But right now, we're not seeing anywhere near -- we're not really seeing, as I mentioned, supply chain pressures seem to have abated, which has allowed us to take a more normal competitive posture.

Great. Let's move over to China quickly. So a lot of progress in China, premiumizing the portfolio, particularly online, kind of standing back now kind of what needs to be done the most in China? You've changed the local name, right, on the Darlie brand. Colgate was as a last look, if I remember right, was still not where it needed to be on brick-and-mortar. So kind of where would you assess where you are in China at this point? And what you think you'll be able to or hope to accomplish during the rest of the year?

Sure. So overall, we believe we are gaining share in China, and that is driven by significant gains in market share in e-commerce. -- the Colgate brand being the fastest grower in market share in e-commerce in China and H&H also growing market share. And so we feel very good about the state of our e-commerce business, to your point, significant premiumization. Basically, our strategy was what we call a hero halo strategy, which is because China is the most penetrated e-commerce market in the world for Oral Care with about 30% of the category being done through e-commerce, you actually can -- and because of the nature of digital advertising really driving the vast majority of the advertising in China, you can marry your e-commerce business in China with your brick-and-mortar business in China more fluidly than you can in other markets. So our strategy was to launch ultra-premium innovation in e-commerce, right? So if you look at the Colgate brand, we would sell to a pace let's say, we'd have brand selling for RMB 8 to RMB 10 in brick-and-mortar. Our innovation in China e-commerce over the last several years has been at RMB 40, RMB 50, RMB 60 even higher, okay? And there's our whitening products, these are gum products, high end, very strong benefits, again, high efficacy, great packaging, really designed with China e-commerce in mind, very focused on the local consumers. And that's really what's driven our market share improvement in China e-commerce. So we now actually over-index on Colgate and e-commerce versus brick-and-mortar in China. So what we are now doing is, again, this hero halo strategy is we are taking those high-end success stories that we had in e-commerce, and we are launching them in brick-and-mortar. So let's say, there's RMB 40, RMB 50 versions in e-commerce, we will launch 20 RMB versions in brick-and-mortar. And that is a more effective way to premiumize our business in brick-and-mortar as opposed to straight innovation. So we are seeing those products roll out. We are seeing an impact beginning to impact our brick-and-mortar business. Obviously, with China, there's concerns about COVID disruptions to brick-and-mortar what have you, but we are very enthusiastic about the opportunity on those brands, those halo brands that we think can raise our overall price points in brick-and-mortar. For H&H, which, as you mentioned, has a new local name [indiscernible]. And what we are seeing there is we are very optimistic about the relaunch that we have in place. We are very much in line with our expectations, as Noel talked about on the Q1 call. And we think that we have a big increase in advertising there to fund the relaunch. And so we're very excited about the opportunity there, and we think it's going to bring new news to a very big brand that again is doing well in e-commerce, and we think we can bring that momentum back to brick-and-mortar.

And just -- I think you had mentioned that the sort of the Colgate brand in terms of the premiumization in brick-and-mortar would be at RMB 20.

I mean that's an illustrative thing. We're not going to shift the entire portfolio. But yes, directionally.

And that would be up from like 14, 15? Or I'm just trying to get a sense of...

I mean that's probably fair. I mean the price points are probably -- I mean, again, some of our price points in China can be as low as, let's say, RMB 8 to RMB 10, but we've got a lot in sort of that RMB 10 to RMB 15 range as well. So directionally, I think that's kind of the way to think about it. And again, it's not going to change overnight because you still have the existing core portfolio. The view is, okay, how can you incrementally get your average price point up and really help change the imagery of the brand.

Got it. Got it. And then just while we're on China, has the lockdowns had any impact on your business? It must have some. Anything that you can talk about just in terms of the -- as much detail as you can in terms of the trading environment in China, April, May, now June coming out? Is there anything that you can comment on?

What I would say is we don't really have anything specific to say in terms of trends or anything like that relative to our business and certainly nothing different than what we said on the Q1 call. We do not have much in the way of operations in the Shanghai area. We do have some people who work there in e-commerce, but we don't have manufacturing facilities, et cetera. So I would say, while there will certainly be some consumer disruption, what have you, for the vast, vast majority of our business, there's really in the Oral Care business, nothing really to note from that standpoint in terms of disruptions in the market relative to COVID. A little bit on our skin care businesses, Filorga and EltaMD do have operations over in China. So a little bit of an impact there, but nothing material and certainly nothing different than what we told you back in April.

Got it. Let's kind of move over to emerging markets. And if I remember right, when we had you last year, talking about emerging markets. I think one of the comments was that in emerging markets, sometimes a little bit of inflation can be a good thing. I don't know if we're over that a little bit. So it's a lot of inflation now. But traditionally, you've done a good job managing -- a great job managing that. Can you kind of talk where that stands in Brazil, in India, Mexico, those major markets? And what's going on in those markets in terms of the consumer and pricing you've done and any kind of trade down that you may be seeing and just kind of dealing with the current operating environments?

Yes, sure. So it's a little bit difficult to say, right? It's very much market by market, right, in terms of -- you mentioned India, right? So the rural consumer in India has been struggling for a little while now. And so now there's some optimism. And I think this kind of goes back to your point that increases in commodity costs, particularly agriculture costs could help the rural consumer in India bounce back. In Brazil, we're seeing significant inflation, but we're also seeing greater wage inflation, right? So we are paying higher wages to our employees, et cetera. What I would say is, generally, we have seen a lot of the pricing in emerging markets. And so when the elasticities have been, as we said on the Q1 call, they're worse than expected from that standpoint. So I think that's somewhat optimistic. It can depend market by market, brand by brand. So if I look at the market shares in Brazil, Colgate Total continues to do very well. And that's at the high end of our sort of mass nonpharmacy portfolio. Sorriso was doing well at the lower end. But that's probably more because we did a relaunch on Sorriso, new packaging, new flavors, et cetera. We've taken pricing. So could that be a little bit of a trade down? Maybe, but we think it's more the dynamics in the category in terms of some of the marketing we put in place. So I would say when you take the type of pricing that consumer products companies generally are taking in emerging markets right now, which is fairly aggressive, you would expect some volume elasticity, right? So there will be an impact on volumes. In some markets, you see that happen pretty quickly. Things normalize. Again, these consumers are more used to this level of pricing. And then the demand bounces back as wages come up. And so I'm optimistic that we will see, again, normal levels of elasticity. We'll see if we end up having to take more pricing depending on where raw materials go from here. There most likely will be more pricing, we think, across these categories in emerging markets as we lap pricing that we took last year. But I think so far, so good in terms of how we're looking at the impact of the pricing on the consumer.

And for the most part, have the most relevant competitors followed in the pricing in Brazil and Mexico?

Yes. So we're generally seeing -- again, what I would say is the raw material situation is the same for everyone. So when you look at the type of increases that we're seeing, particularly in terms of fats and oils, which we talked about on the call, everyone who competes in those categories with us has the same pressures, right? Fats and oils were expected to be up, let's say, 30% year-over-year. And then they're going to be up 60% year-over-year. So that's going to lead to pricing. So we think in general, we've been very pleased by the pricing we've taken. And it's been pretty consistent across the categories, again because no one has seen anything different than what everyone else is.

Okay. Any surprises? I mean you've got decades and decades of experience, right, in the emerging markets. Are they acting kind of as you would expect and historically in which you can kind of trade people down to smaller price points, but are actually more profitable for you and all the kind of channel dynamics that have worked in the past. Is that pretty much the same? Or is there any kind of new developments, anything that's disrupting historical patterns?

Yes. I mean, I think going back to the comment I made about revenue growth management, right? So emerging markets in these types of environments, I mean, that's the best opportunity, again, going back to the legacy of revenue growth management in terms of Coke in Brazil and things like that. Emerging markets are better set for that because, again, you have even broader price tiers than you have in the U.S., You have more inflation. So I think we've talked in a number of our presentations over the past couple of years about the revenue growth management capabilities that we built up in Brazil specifically, right? And so the channel dynamics there, whether it's discounters, whether it's supers, hypers, pharmacies, what have you and the ability to work on pack sizes, the ability to work on multipacks, et cetera. So I think we are better prepared to bring more, for lack of a better term, nuance to this in terms of saying, okay, it's going to be straight list pricing on everything, right? You can change your list prices. You can change your promo prices. You can change the frequency of promotion. You again can come out with smaller pack sizes. You can offer, again, sort of 2 packs, right? So someone's paying a higher ring, but they're saving in value. So I think we've got more flexibility in how we execute against these than we did before, which I think will lead to, again, getting through this with a little more intelligence and figuring out, okay, what's really driving value for the consumers and driving value for our customers, which at the end of the day is how you really have to think about this. It's like yes, you're taking pricing. But you want to make sure that you're still offering the right products to your consumers and your customers so that they can stay in your category and in your brands.

Got it. Shifting over to the supply chain. Obviously, everybody was very stressed over the last 2 to 3 years. Your supply chain has always been seen as one of the more efficient in the consumer goods space. Were there things that you learned about your overall supply chain that or like oops, we got to fix this. Here's a new problem. We had a plan, we need more redundancies. Anything like that? And is that going to have to have any kind of impact on your capital spending or anything else kind of going forward?

It's a good question, right? So I think COVID -- it starts off with COVID, as you talked about, and then goes into all these other factors that include things like Russia, Ukraine, et cetera. And so we have a very robust enterprise risk management committee, which I'm on and which goes through a lot of single-source products, single-source raw materials, et cetera. So this is something that you build into the systems. But what happens is when you do see sort of unprecedented stresses in terms of getting raw materials out of China or out of Ukraine, what have you, it does cause you to look at things differently. So as I look at our supply chain, we talk about having a global supply chain, which we do. And that is true across certain categories and even in certain geographies. We source much more global. But a lot of products, if you think about some of our home care, personal care, even Oral Care products, we source more locally because you don't want to be shipping water in ocean freight given in terms of particularly what's happened with ocean freight prices, for example. So we have this combination of regional and regional/local as well as local. So I would say what we saw over the course of the back half of the year was given COVID-related shutdowns in Asia, some impact on our global supply chain in Oral Care, where our factories were shut down. We had to restart. We were -- we have incredible employees who are willing to live in the facilities while we restarted production. And we were able to catch up eventually, but it definitely impacted some of our volumes in Q3, Q4 and even slightly into Q1, which again we talked about on the call. Some of the local stuff is really more COVID-related in terms of issues surrounding Omicron early in the quarter. We did see some issues in terms of getting products back and forth from Mexico as well as tightness overall logistics markets. So that's more on the regional local aspects. And I think we've gotten past that, which has helped our on-shelf availability, as I mentioned. I think to your point on lessons learned, you're going to -- everyone's going to have to build a little bit more flexibility in. I don't think there are huge changes that we would need to make. You may see some of the global production move a little bit more regional, right? But you've got to make it also work from a cost standpoint because the cost benefit of having global supply chains have been tremendous over the past decades. So I think building a little bit of flexibility, little bit of redundancy here and there, and that's something we have been working on. As you look at our innovation strategies and those talked a lot about focusing on innovation as a capability, right and really building up new innovation strategies. Whether that -- he has talked about it at CAGNY every year. We have Pat Verdun who runs R&D for us, talk about at CAGNY last year. As part of that, you have to build more flexibility into your supply chain, right, shorter runs. All this innovation we're selling in China at RMB 40, RMB 50, RMB 60, you're not -- you don't want to run that on the same lines that you're running Anticavity or Colgate 360. So you have to build flexibility into your manufacturing, right? Maybe you have plants in India than run smaller runs and plants that run full out on your bigger SKUs. So I think there's an element, as you listen to everybody talk about their supply chain going forward. It's balancing that efficiency with the flexibility as you deliver more innovation, more growth. It's going to be a real opportunity for us, and it's one that we're embracing head on.

Great. Great. Let's talk about Hill's, which has been a huge success story and growth driver for the company, where, it's a premium product. What are you doing on pricing is trade down, an issue or risk on the Hill's business? So you had it many decades. You've got some record. And what are the commodities there that may pressure margins?

Sure. So I mean, look, the key on Hill's for us has been -- it's very similar to what we talked about with Optic White, right? So what you have is you have a highly efficacious, science-driven product, right? It's called Hill's Science Diet, at least the retail pieces, that drives better outcomes for consumers. And that's really been the focus since we did the Science Diet relaunch back in 2018. And we went back into the [indiscernible] and we said, look, we're going to reestablish Science as a driver. Organics and Naturals had a great run. Hill's is not the best suited for that segment of the category. So we've been able to rebuild the growth there through innovation, through advertising that stays true to the brand. And again, through all of our great work with the perfection because almost half of this business is prescription diet, right, which is coming from a direct recommendation from a [ event ]-- so because we've been able to rebuild those -- increase those scientific credentials that helps us from a pricing standpoint. What also helps us from a pricing standpoint is the RGM capabilities we talked about that we built across the organization. And then also the fact that we don't compete in mass, right, where you're more likely to see that trade down. So we have gained significant share in e-commerce. We have gained significant share in pet specialty. And our pet specialty partners have done a phenomenal job generating momentum both in brick-and-mortar as well as omnichannel. And so -- and we have worked with them because of our commitment to pet specialty and because of our investments in those channels, right, where we're not in mass. And they said, okay, you're our partner in these channels. We want to work with you to drive growth. So we've invested with them. We've invested in the category and they appreciate that partnership. So there is pricing that's going on in pet. You can see that in the reported numbers. The commodity mix is -- at the end of the day, pet food is food. So it's ad commodities, it's proteins, et cetera. And so -- and then you also have plastics and packaging in terms of resins. So we are seeing similar pressures there to what you would see with other food companies, and we are pricing accordingly. And so far, if you continue to sort of build on the brand and build on the scientific credentials and the efficacy, consumers will stick with you because they appreciate what the brand really wants. And you have to maintain the advertise, right? You have to show them, okay, this is why this brand deserves the premium that it has. And if you look at our relative price points, it's not particularly expensive relative to the brands it competes against in specialty and e-commerce.

Great. So just to kind of summarize things and wrap things up. Noel has been CEO now for 3 or so years, a lot of progress in China, premiumization, channel development or some of the things that kind of come to mind that you guys have really done the last few years. Looking forward for a lot of investors who are looking at the stock on a longer-term perspective, next 3 to 5 years, what are the key challenges that you're addressing now that Noel is focused on for more of a medium, longer-term perspective?

Sure. So I think if you look at what Noel said coming out of CAGNY in 2019, which is right before he took over as CEO. So he's been CEO for a little over 3 years at this point. The #1 challenge we had was reaccelerating organic sales growth and delivering that consistently, okay? And we have now delivered organic sales growth either in line or above our target range of 3% to 5% for over 3 -- over 4 years at this point. So we're very pleased with that 13 straight quarters. We're very pleased with that progress as we were delivering in 2020 and 2021, we're accelerating gross margin rate. The key in the beginning we had incremental advertising investments, we want to continue to fund investment. You have to drive gross margin to do that, okay? Obviously, with the raw material inflation that has been a headwind. We think we are well positioned to get back to gross margin expansion, which will then allow us to both invest back in the business. We deliver on productivity and our overheads have gone down dramatically. They've been offset by logistics costs, which for us in SG&A, and that will allow us to deliver the EBIT leverage, to deliver TSR growth at the high end of our peer group. And that's where our focus is. And that will also involve generating strong cash flow, buying back stock, dividend growth, et cetera. So I think the key for us sustaining the top line, taking the pricing to drive the gross margin and then using that to drive both investment and EBIT growth for shareholders.

Great, John. Well, we've run out of time. That went really fast. Thank you very much, and congratulations on the progress.

Thanks, Robert. Really appreciate it. I really appreciate you inviting us here. It's been great.

Absolutely. Thank you.

Thank you.