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

Good morning. We're going to get started with the next session here. And for that next section -- next session, I am thrilled to welcome Colgate to the stage. Joining us from Colgate this morning are Panos Tsourapas, who is Group President of Europe and Developing Markets; as well as John Faucher, Chief Investor Relations Officer as well as the Senior Vice President of M&A. What we're going to -- we're going to run this session is that Panos will kick us off with about 10-or-so minutes of prepared remarks, and then we'll jump right into Q&A. And with that, I'm going to hand it over to Panos.

Thank you. Thank you, Steve. Good morning. We are very happy with John to be here, after we present the usual disclaimers, to talk to you briefly about our company, representing the 34,000 diverse and dedicated Colgate people serving our consumers in over 200 countries and territories around the world. We're going to talk briefly around the key components of our focused strategy, and then we will reiterate some key points we talked about in our first quarter call. As Colgate, since several years, we are deploying a very tightly focused category strategy anchored around Oral Care, Pet Nutrition, Personal Care and Home Care. And there is very interesting component and synergistic component around these categories, which is the fact that many of our brands and categories are driven by what we call a profession-recommendation model. Toothpaste is recommended by dentists. Pet Nutrition is recommended by veterinarians. Some of our Personal Care brands are recommended by dermatologists. For instance, EltaMD is the #1 brand for sun protection recommended by dermatologists in the United States. And since we are in France, Sanex, our leading body cleansing brand, is the #1 recommended by dermatologists here in France. And these enable us to drive a lot of synergies across the different business units, selling best practices, transferring people and deploying effective digital and e-commerce strategies in today's world. Colgate, we are very proud to have this brand and to represent actually this brand. It is the most penetrated brand in the world. It is the brand that is touched most by consumers in our planet. And this also reflects the leadership profile of our business. Most of our business is in brands that they have either #1 or #2 position, as you see the categories in that slide. Beyond Colgate toothpaste, we are #1 in manual toothbrushes, we are #1 in vet clinics in the U.S. or #2 in the other categories. Organic sales growth. Consistency of delivery is, I think, something that characterizes very well the performance the last years. For 13 consecutive quarters, which is 3 years and a quarter, we are delivering organic sales growth within or above the targeted range that we have set, which is 3% to 5%, despite significant disruptions and challenges that we all know we did face this period. And I think this is reflecting the resilience, the effectiveness and the operating excellence of our teams all around the world. And we grow our businesses across our categories. You see that we have a consistent net sales growth in the last years. And we grow our net sales in all 4 categories, but also in all the geographic divisions we run our operations. So our sales growth is broad-based. Another key point of our strategy and a necessity in today's world is building new capabilities. And I will briefly talk about 3 areas: our focus on innovation, on driving premiumization, and driving more breakthrough and transformational innovation around our categories. Just some few examples to give you some flavor on what we are talking about. This is the latest whitening, premium whitening offering that we are rolling out across the world. Probably some of you who are in, you have heard us talk, we have a unique hydrogen peroxide technology for whitening products, but for regulatory reasons, cannot be deployed in many parts of the world. So we created a non-hydrogen peroxide formulation that delivers the same benefits, and we are rolling it out as we speak in the non-peroxide markets. And this is the product that we are rolling out at very significant premium across Asia. In the United States, we just launched the first 5% peroxide toothpaste, a $10 price point, the most expensive toothpaste that we have launched ever actually so far. And as the marketing team of the U.S. was telling us with John, who had a meeting with them last week, this is the most successful launch in the U.S. the last couple of years. And you can see some of the other premium whitening devices that we are bringing to the market that do deliver the same quality of whitening benefits that people can get in a dental office at their home. So great opportunity for premiumization and for incremental business. A good example of a premium innovation in the Home Care category under our Suavitel brand, which is the leading fabric care equity in Latin America, a good example around Protex. Protex is the leading antibacterial brand that we have in developing markets where we have created a new formulation, which is natural-based, delivering the same antibacterial benefits without the chemicals that we had in the past, something which is very important and relevant for the consumers today. And Hill's, the restage, relaunch of Science Diet was a key part of our success the last years for Hill's. And we're now relaunching and repositioning our Prescription Diet, which is our veterinary-recommended part of the business, new pack, new kibbles. For those of us that we have dogs, we know how important the shape of the kibble is for the attractiveness of the food. And a new range of digital tools to support our engagement with the consumers and with the veterinarians. I would say Hill's is one of our businesses that has excelled significantly, and it's leading in the area of digital marketing, performance marketing and personalization. And another interesting product is our latest Prescription Diet, which is called Derm Complete. This is a breakthrough nutrition that manages food and environmental sensitivities for dogs. And it's very interesting how this has been developed because dogs cannot talk and tell you how they can react to different foods. So we have used the wearable technology so we can measure how they scratch and how they sleep to develop these products. We are very excited with this innovation. E-commerce, digital, data and analytics is something that we need to excel, and we are making great progress. We grew e-commerce digital sales last year by 27%. They represent today 13% of our sales. Over half of our media are deployed through digital. And we deploy the highly effective programmatic methodologies in 80 countries around the world, effectively in every country that this kind of methodologies are available. And this has enabled us to improve significantly the return on investment of our digital spending, having far higher productivity from our efforts. And we have embarked the last years in a significant effort to upscale our organization in these new capabilities and these new skills, and the results reflect this effort. Revenue growth management is one of our core competencies and capabilities. We have a very clear tool kit of 7 levers that we deploy around the world. And particularly nowadays that pricing is far more important for mitigating the significant cost increases, we put a lot of focus there. And just a simple example to give you some flavor on how this is applied in the market. Brazil is one of our largest and most important markets. We -- our toothpaste share would represent over -- nearly 3/4 of the market. So we have embarked in a very consistent and systematic effort to premiumize our portfolio. And you see the results of this effort. We put the premium part of the business from 37% to 40% in '21 versus '20, and we continue on that path. Finally, just a few comments on what we said in our first quarter call. We raised the organic sales growth guidance from 3% to 5% to 4% to 6% for the year. Our pricing was accelerating during the first quarter. We did reach in March a high single-digits level, and we expect this to continue for the remaining of the year. We experienced, as it's clear everybody in our industry, significantly higher raw material and logistic costs, higher than what we forecasted even last January. And as a result, we project base business EPS to be down at middle-single digits. And we are working very hard, obviously, to offset these increased costs. We are facing with $1.2 billion headwinds in raw materials inflation in 2022. We are accelerating our Funding-the-Growth savings program. We are implementing our Global Productivity Initiative, which is going to give us meaningful savings on an annualized basis. And we are deploying fully our revenue growth management toolkit, driving, as we said, high single-digit pricing looking forward. So these were our opening comments. And we can have ample time, I guess, for Q&A. So thank you.

All right. Perfect. Thank you, Panos.

Maybe we pick up where you left off there on sort of the commentary coming out of the first quarter. I take that more as a reminder of your outlook, not...

Yes. Yes, so that is a reminder of what we said on the first quarter call. It's not new guidance or anything like that or a reaffirmation of guidance.

Got it.

Which is our normal policy.

Yes. Okay. So in that context, as you said, you had called for cost inflation to progressively build through the year. As you're looking at the cost environment today, just a little bit of level set as to how that cost environment is progressing relative to your outlook, are there pockets that are running higher? Are there pockets that are showing more relief? Just a little bit of perspective on how you're viewing current costs.

I would say that one word that would characterize the cost environment is volatility or extreme volatility, particularly on the raw materials which are connected with oil, like resins. You see how oil fluctuates on a daily basis based on geopolitical events from $100 to $120, and this obviously impacts the raw materials cost. I think, by and large, what we see for the year is that the [ oil ] cost is going to be at the range of what we said. Probably some of the logistic complexities that were created by COVID should ease down since the industry is bringing more capacity. But I have to say, we have seen so many increases in the past that we don't count on that. We deploy commercial plans. We deploy our pricing, our promotional plans, our innovation plans against this headwind. So we effectively would be covered and we would be able to deliver according to our guidance whatever happens. This is the prudent thing to do, I believe.

Yes. And a similar question, there were a number of supply bottlenecks that you've been dealing with progressively over the last few quarters, inclusive of the first quarter. Those seem like they had largely shown relief as you exited the first quarter. Just is that a fair read? And are there any areas of supply disruption that you're currently most concerned about?

I think it's a fair statement. When we see the case fill rates, the service levels around the world are being improving, particularly in areas that we had some challenges, as we have talked about, like North America, we are back where it should be. And this is reflected, if you follow, for instance, the North America scanning data, these improvements are clearly visible. So I think it's a fair statement. They are, by and large, behind us. Now what nobody can predict is where the next disruption is going to be. If China decides to shut down, I don't know, half of their provinces because of COVID or if a country decides to stop exporting and your own packing material, I don't think that this is something that anybody could predict. But I think we have built enough buffers in our systems through safety stocks, through contingencies. We learned all this in the last couple of years that we should be able to cope adequately.

Okay. Okay. And the other topic that is quite pressing, which also no one can predict, is around price elasticity and the strength of the consumer. The general consensus, I think, at the conference so far is that, so far, consumer demand is pretty resilient. Pricing is being implemented reasonably successfully and is being accepted by retailers and consumers. What is your perspective on that? And I guess where are you most watchful of a potential break in consumer demand as we go forward?

I would agree, by and large, for the statement. I think the volume elasticity we see through our pricing efforts, even in prices that we have in regions that we have taken high double-digit pricing or in regions that we have raised prices after many years, is that volumes are developing as expected or even slightly better. So I would expect that this would probably continue. However, I think it is totally unknown which is going to be the impact in consumption by the overall growth of inflation. You see here in Europe, here in France, we have 5%. In Germany, I think we have 10%. In the U.S., we have 10%. So definitely, might be a consumer squeeze that would make the development of volumes quite unpredictable. As far as we are concerned, we believe that we are very well positioned to compete and win in this space because one of the unique elements of our portfolio is that we compete at all price points, and we have a very wide availability. So we are at all price points and across channels. If I take Brazil, for example, an example we quoted, we have these base offerings close to BRL 30 in high-end drug markets, drug stores in Sao Paulo, and we have BRL 2, small sizes in small stores in the provinces of the country. So wherever consumer could shift, either pricing-wise or channel-wise, we have a very competing offering. So this might competitively turn to our advantage. And if you see how we have -- which were the results in this kind of crisis periods, this specificity of our portfolio and our executional ability makes us emerging stronger actually.

Does it change at all the approach to premiumization that's been a hallmark over the last couple of years? You mentioned the toothpaste in the U.S., most expensive toothpaste yet, most successful launch yet. Is that a by-product of demand looking backward? Or can that strategy hold as we go forward into a more stressed environment?

This is interesting. I think, no, because even in a distressed country, even in an emerging market, there is still the 10%, 15%, 20% at the top of the pyramid that I would say -- I wouldn't say it's immune, but it's less affected by all these trends. So there is still room for a premiumization. So we will pursue this strategy. What normally happens in these kind of situations, the people who are being squeezed or the brands or the positions are the ones in the middle. So the people who spend at the top continue spending. Some people go from the middle relatively to the top. That's why for us, could -- might turn to our advantage because this is where we have a very strong portfolio in our core business and the best availability and distribution network from...

And then, Steve, if I can just add to that. So we index at about an [ 89, 90 ] around the globe in terms of the toothpaste category. So even if the growth in the higher-end segment slows a little bit, there's still a market share opportunity there. And a lot of that is based on indications, right? So a lot of that could be based on sensitivity, it could be based on gums, it could be based on white. And so if we go in with the right indication, with the right technology and innovation, we still have the ability to gain share in those segments even if there is some overall weakness in the category.

And one of the things -- one of the attributes of your outlook coming out of the first quarter was a maintained A&P outlook, right? So I guess if I couple that with your comments just now, is the company viewing this period as a potential moment of acceleration, doubling down at a moment of offense as opposed to a moment of defense where you can grab additional share as competitors potentially pull back? I guess simply -- more simply put, is this a period of offense for Colgate? Or is the Colgate on a more defensive stance?

I would say that this potentially could be a period that the strength of our brands and the strength of our execution would play to our advantage. And for this reason, we maintain our A&P posture, so we are able to continue to strengthen our brands. If you see one of the things that happened the last years, if you see the brand health metrics around the world, if I take the Colgate brand or if I take the elmex brand here in France, they are improving. So our brands are becoming stronger. Hence, to your point, this might be an opportunity for us by maintaining our advertising, by optimizing our execution, which is one of our strong points to come out, out of this period of disruption even stronger. This is what we discussed with our teams, and this is our objective moving forward.

Great. I mean maybe it would be helpful if maybe go around the world, kind of region by region, business by business and just a little bit of level set on what the status is. And really, if there are 1 or 2 milestones to call out over the balance of the year, that is -- that are most important for each region, I think that would be helpful.

And if we go from, I guess, from East to West, I think our Asian business overall is doing very well. Obviously, Asia is still the region that is being impacted the most because of COVID. There are still closures, lockdowns, limitations in movement. Our market share in Asia are in a very good trajectory, particularly in China, we're very pleased with our performance. Colgate is the fastest-growing brand actually in the country with extremely well in e-commerce that we have clearly quadrupled our market share the last years. And we are the fastest-growing brand in a very competitive environment, and this is a very good indication of the effectiveness of our innovation and execution efforts. We are totally restaging our Darlie brand, which is the biggest brand that we have in China with totally new innovation plans. And we are very -- we see a very good trajectory out there. Our Indian business is doing well. We all read about the challenges that the India economy faces, particularly in rural areas. So nobody is immune from these challenges. So overall, apart from the external disruptions, we feel good about the business in China. Moving West, our Africa/Eurasia business obviously is impacted by the disruption in Russia and Ukraine. But the rest of the business, Sub-Saharan Africa, South Africa, our Middle East business is doing very well. Europe is probably the most challenging environment because of high inflation and pricing. We work a lot with our European retail partners to ask our -- the necessary price increases, and we're making a lot of progress. And we see a very good trend in our market share. For instance, we are discussing with our German team yesterday, we reached in Germany the highest ever market share that we have in toothpaste, growing all our 3 brands, elmex, meridol and Colgate, which is an indication that what we do commercially is working. We talked about our U.S. business. You see the scanning data that we are improving significantly. It's public information. I don't need to comment. Our Hill's business is doing exceptionally well and will continue doing so. And in Latin America, we are very buoyant. You see in Latin America, the last 3 years, we are posting organic sales growth of double digits or high single digits. We have implemented our pricing plans. So we will continue in this trajectory. So overall, we are not free of challenges. There is a crisis. They are popping up every day in one of the countries. But I think, by and large, we see good momentum around the businesses in the business around the world.

Great. A couple of things to pick up on that. So the Prescription Diet launch, the H&H Darlie relaunch in China, I take it that those are on track. What's the cadence of impact in terms of how that should -- how we should see that flowing through results over the balance of the year in terms of timing?

Do you want to take it?

Yes, I'll -- we can split. I'll talk of Darlie. Darlie is the brand that has the widest availability and distribution in China. And China is very complicated in terms of distribution. We think that, for instance, we're here in France, we were with our team for 2 days and we talked about complexity, and the comment I made was imagine if you operate in China. So to do this big transition for the -- in the beginning of the year, we had to slow down so to do the -- to change the products. Now I think the new products are in the majority of the stores. And the full force of our activities is starting being deployed as we speak. So I think we should start seeing the real positive upside as of this month, second quarter, third quarter and first quarter of next year.

So some shipments in the second quarter and then shipments from...

We started around March. It would take 2, 3 months to do all these transitions, and then you fully deploy your commercial plans.

And then for Hill's, I mean, obviously, the growth has been strong for years now. So I'm not sure you're necessarily going to see a step change in -- from the Prescription Diet launch. Prescription Diet is about 50% of the business. And so this is really about adapting, taking some of the changes that we learned from the Science Diet relaunch in terms of better packaging, better messaging, better digital communication and working with that to increase the penetration of these therapies, right? And one of the things that happened is vets often do not prescribe therapeutic pet food when a pet needs it. So I've got a 13-year-old Labradoodle. My 13-year-old Labradoodle probably should have been on j/d, which is our arthritis formula, sooner. Our vet didn't recommend that. So we went to the vet and said, he's having this issue. Now he's on j/d, which I can speak personally is a very expensive pet food from that standpoint. So very good margins. There's an opportunity to work with the vets to understand when these foods can be prescribed more often to provide better health outcomes for the pet, and that's really where the science comes through on this. So we're going to see that launch beginning in Europe and then rolling to the U.S. So I think you'll see that begin to roll through. But the underlying prognosis for Hill's from a growth standpoint still remains very strong, and I'm not sure necessarily going to see a step change there from the Prescription Diet relaunch.

Okay. The other thing that, as you went around the world, it's consistent with what we've heard, emerging markets seem, you used the word buoyant for Latin America, but in general, I mean outside of the obvious points of disruption, seem pretty healthy. Momentum seems pretty strong. And the concerns that most of us end up talking about are very much centered on the developed markets. First of all, is that fair? Second of all, are there risks to Latin America or emerging market demand that are top of mind for you as we go forward?

There are always risks. But I would say having worked in all emerging markets around the world, I say that what we frequently don't realize, because most of the people who do the assessment come from developed markets, is that how resilient people are. For us here in Europe, having 5% or 10% inflation, it's life-changing. This was like 30, 40 years ago. Or a devaluation could be something that is critical. For people in Argentina or in Brazil or in other countries, it's something that they have experienced many, many times. So it's not a catastrophe. It's another crisis before the next one that might come, and people think how they would cope with that. I was in Sao Paulo 2 weeks ago. Inflation is high. Cost of living is high, but the city is buzzing. People are going on with their lives. And I think this fundamental element of the consumer psychology reflects the fact that emerging markets are sometimes more resilient than the developed markets where people have far more disposable income. So my personal view is that unless there is a major event or a major external disruption, I wouldn't see any reason that this trend would not continue in this round of crisis, particularly in Latin America. What we see so far commercially, sales-wise, the consumer reaction is quite good.

Yes, good. For those of us in the last session, we heard Unilever talk about a move to go from a geographic-centric corporate structure to one that is category-based. Obviously, P&G made that move 20-plus years ago. Colgate, outside of Hill's, remains geographically centered. Why is that the right structure for Colgate? And what are the advantages of being structured the way you are?

That's an interesting question. We had a lot of this debate and a lot this question when Procter changed their structure. I would say, one of the core competencies we have as a company is what we call winning on the ground. We have a very global business. We operate in many, many countries in the world. So being closer to the market and have accountability and responsibility for the P&L to the people who manage the countries, we believe, is a cornerstone for our success the last years. Simply, the world is too complex to have one person located somewhere to do promotional plans from Australia, China, South Africa, Brazil and the United States. It's simply too complex. This has been our assessment so far. And if you see the results, let's take the last 20 years that we have applied that model, not take a quarter or take over a long period of time, take our results the last 20 years, organic sales growth versus operations that are being structured by category, I think in most of the cases, our organic growth results are better, which might indicate that for the structure of our portfolio, might be a more optimum structure. This being said, 2 caveats here. The first is we are not a decentralized organization. We have a global marketing function. We have category strategies that are global, strategic clarity, global priorities, global R&D, global innovation, global supply chain, it's the -- one of the key cornerstones of our operating model. What we have regionally and locally, it's the accountability for execution. And we connect this accountability with the P&L responsibility. That's why this brings better results. The second caveat is that we always evaluate our operating model. So the world is changing. Technology brings new possibilities. Retail channels are evolving. If in the future, the world changes and we see that there is a merit to a different model, who knows? Nobody could say that this structure, it's perfect forever. Simply for us, as I said, when you see the results, has worked to our advantage.

Steve, if I can just add a couple of examples that sort of layers on Pano's thoughts about how you have to also manage the categories from the center, right, so it's not completely decentralized. So he talked about the Protex flaxseed formula, okay? So this is something that was developed at the center, natural ingredient to broad antibacterial benefits. And we have that, that's now been rolled out on Protex globally. So that includes Latin America, that includes South Africa, that includes Asia, right? So we're able to get that innovation across the globe. Same thing with whitening, where we're driving a more global whitening strategy despite the fact that we have different rules market by market about hydrogen peroxide. And then finally, and I can ask Panos to talk about this, you look at the rollout of elmex and meridol, right? So these are brands that have a European heritage, a very specific business model and channel strategy, and we're rolling them out across the world with that channel strategy intact, which takes a view from the center that, okay, we need to make sure we hold on to the equity of these brands as we roll them out globally. I don't know if there's...

No, that's a very good point because we should not see conceptually regional or category strategy are mutually exclusive. The point is how you merge them. If I take the example of Oral Care, take elmex which are therapeutic brands, we have a very clear global footprint and playbook on how we deploy these brands. Then we take this playbook, we deployed it after Germany and Switzerland to Italy and France, they are our fastest-growing brands, by the way, in both countries. And then we take this playbook and we assigned the responsibility to implement it with a proper supervision to our team in Brazil, the fastest-growing brand in Brazil. We do it with meridol to South Africa, fastest-growing brand in pharmacies in South Africa, in the Middle East. So it is a combination that there is central supervision, central strategy setting, best practices setting, avoidance of duplication in formulations or in products, but local connection between responsibility and accountability, which leads to superior execution.

Great. Okay. Does the emphasis that's been placed on digital competency, technology inside the company facilitate that? Because there has been a step-up in focus. We had a slide that spoke to that. I think there's been a reorganization of how technology fits in with Stan and Mike Crowe at the top of the company. Can you talk about, build on what you said in association with that slide and just talk about the benefits of those investments in technology? We obviously see the e-commerce percent of sales tick up, but I'm thinking more day-to-day in terms of speed and agility and how technology may enable some of that.

Absolutely. I think Noel has been clear for years on this, and he has personally spearheaded this effort. And in the last 3 years, we have done great progress. We have done great progress on digital commerce, data, e-commerce, omnichannel, go-to-market deployment, which is beyond, it's far more complicated because everything is emerging there. We have up-skilled our organization, as we discussed, but we also have brought into the organization expert matter -- experts that helped us accelerate in many areas. So we see a lot of benefits, first of all, in our communication efforts. We see consistently higher ROIs in digital efforts. We see faster deployment of ideas through the structure we have to share best practices around the world through our central functions. So the ideas now travel much faster than in the past. And we should not forget that as a company, we pioneer actually in our industry a totally integrated operating model through the SAP platform that we are there, I think, for 25 years. So we invoice to a central location. All our plants are fully integrated. And the biggest benefit we did see during COVID, that we were able to have real-time information across the world, which are the supply chain implications, how we can shift production, how we can find alternative sources of products in areas that we had disruptions, how we could even divert materials. So all this, I think, might be in the background, but has been a great enabler to the consistent sales growth results that we served before. Because to deliver consistent sales growth in a period of extreme disruption is not easy, and all these efforts have helped us a lot.

We got about a minute left. So I guess as a final question, much of the focus, at least from my perspective, that Noel placed on digital competency as well as premiumization came from, I think, a realization that Colgate was behind on those facts. If you were to benchmark and score yourselves on premiumization efforts and the digital competency today, how do you benchmark versus not only your aspirations, but versus peers?

Difficult to tell. I would say that we are making steady progress in premiumization, but we have room to go, and particularly in our Oral Care business. And the innovation plans, the technology ideas that we have ahead of us make me very optimistic that we will get there. In terms of digital deployment, e-commerce, I don't want to say that we are at par because you should never say so. You should always try harder. We are not the largest FMCG company, so -- which was [indiscernible] was saying we are #2, so we try harder. So by definition, we need to try harder. But I think we are competitive. And I say that because when I see our results in all the key markets, our market shares are doing pretty well. Actually, they are growing. We talked about Germany before. I can talk to you about many markets. So this indicates that what we do is working together with our organic sales growth results.

Very good. On that note, we'll close. Thank you, Panos. Thank you, John.

Thanks, Steve.

Thanks, everybody, for joining us.

Thank you.