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

So we're going to get started. Next up this morning, I'm pleased to welcome Colgate-Palmolive's CEO, Noel Wallace, to the stage. Over the past few years at our conference, Colgate has highlighted the capabilities that has been building that have enabled the company to deliver consistently strong and balanced growth. We look forward to hearing Noel discuss the strategy and scaling capabilities as the company looks out to 2030. Noel is going to give a brief presentation, and then I'm going to join him on stage for questions after that. [Presentation]

Great. Thanks, Lauren. Great. Well, welcome, and good morning to everyone. It's great to start off with a video that really features our brands because I'm going to spend a lot of time today talking about brand health and how we're driving the penetration for those brands. But this is more a reflection of the incredible efforts that our 34,000 colleagues around the world have put in to driving sustainable growth for the company. A reminder of our safe harbor. So let me quickly recap the second quarter results, which were strong. Sales were up 5%. Strong organic at 9%. We were lapping, as you remember, almost 9% last year. But importantly, that growth was very well balanced between volume at peer-leading 5% and good pricing as well coming through the P&L. Organic sales obviously continuing to trend after 22 quarters within our long-term guidance. So we're very pleased with that. The balance of that business across all of our divisions and all of our categories are certainly evident in the first half of the year and you saw that again in the second quarter. Gross profit margin expansion of 300 basis points, a function of the pricing that we're getting into the P&L and obviously a more benign cost environment. Operating profit up double digit, again, our fourth consecutive quarter of double-digit operating profit. That's driving market share growth. I'm going to talk today about penetration, which is really behind that market share growth. And importantly, our free cash flow up 29%. For the second quarter guidance that we provided, we will take our -- keep our net sales at 2% to 5%, including a mid-single-digit impact from foreign exchange. You've obviously seen the exchange movements a lot in the last couple of weeks, particularly the Latin American currencies. Organic sales guidance was increased to 6% to 8% from 5% to 7% previously. Gross profit and margin is expected to still be up on the year. We'll continue to fuel the top line with accelerated advertising, I'm going to talk about ROI and how we're thinking about that as we look through the balance of this year. Base Business EPS guidance was raised to 8% to 11% from mid- to high single digits. And we continue to believe we'll have strong cash flow to allow us the flexibility to invest back behind the business or pay our dividends or buy down debt as well as share repurchases in the year to go. So in the first half, clearly, our strategy is working and I'm going to talk to you about what's working in the strategy, but more importantly, how we're going to sustain that growth moving forward. If you go back to 2019, when we set up our new strategy, the whole essence of that strategy was to drive consistent top line growth and getting organic back in our 3% to 5% long-term guidance. And we've now delivered 22 quarters within that guidance range, and it's critical for us the way we look at it, to drive consistent top line growth in order to drive the consistent EPS growth that you expect. In the first half of the year, importantly, we saw volume come back into the P&L. Despite the significant pricing we've taken over the last couple of years, it was really important to see the volume revert back into our businesses. And clearly, across the board, all operating divisions grew volume in the second quarter while we also got some pricing. We'll continue to see pricing recede, we believe, in the near term, at least in the back half of this year, and we'll continue to see volume growth be strong as we move through the back half. The driver behind that is getting the advertising and the health of our brands where we needed to get them. We've obviously accelerated the spending on advertising quite considerably over the last 3 years, and I'll talk about how that's paying back in terms of brand health and penetration. But a big reason behind this acceleration beyond the health of our brands was ensuring that we're improving the elasticity of our brands as we took significant pricing over the last couple of years. And I think the strong volume growth we demonstrated in the second quarter is a testament to the fact that, that strategy is certainly working for us. That has translated into the all-important earnings per share. Now 4 quarters of teen earnings per share growth, so we're deeply proud of that progress and hope to continue to sustain a good earnings per share growth in the future moving forward. The balance sheet, an important aspect for us. Obviously, with the inflation that we saw in '22, it was getting the cash back to where we needed to give us maximum flexibility. You see the cash is up 63% in the [ '23 year ] and up 29% on the year-to-date basis. So a good control of our working capital and getting the cash profits up to drive that. Again, penetration is ultimately how it's driving market share, but good to see the global market share is responding very positively with the advertising, to the premiumization strategies that we put in the market. I would dimensionalize penetration a bit more to help you understand what's driving this growth, but encouragingly, we're seeing great response to the work that we're putting into the marketplace. So the important question here is how are we going to continue to sustain this good growth that we've had over the last couple of years? And what I'm going to do is try to, in the short time I have, dimensionalize a couple of aspects that I think are really important. You hear me talk a lot about brand penetration. Ultimately, yes, market share is important. Ultimately, gross margins and top line growth is important. But at the end of the day, it's pretty simple: if we're not putting our products into more households, we're not going to sustain profitable growth moving forward. So we spent a lot of time within the company really educating our marketing people, getting the insights on what drives brand penetration, and ultimately, how do we want to drive that in a profitable way. And that stems first and foremost, through driving brand health. I'll talk about 3 things today. Our science-led core innovation and how that's driving improvements across all of our price tiers. Scaling capabilities, you hear Lauren mentioned that. We spent a lot of time over the last 3 years building capabilities, and we're now scaling those and building new capabilities into the organization that we think set us up for success long term. And then ultimately, making sure the advertising investment that we're putting into the P&L is delivering the best return for our business and for our shareholders. So let's talk with science-led core innovation. It starts with great deep insights. If we get great insights, we can put the science behind that and that's exactly what we're doing. So let me talk a little bit about the trends that we're seeing in the marketplace. Preventative care is systemic across the world. This is, I think, a manifestation of the fact that consumers now are connected to so many aspects that give them an orientation of how healthy they are. It's not about going to the doctor anymore. It's about reading that continuously. We're going to play into that trend. As you see the statistics here on the [indiscernible] right, 83% of consumers will say oral care products that provide innovative benefits they're willing to pay more for. So this notion of preventative care is becoming very top of mind with consumers, and we have absolutely the right brand to play in for that. You're familiar with Colgate Total, one of our core businesses. We are doing a major relaunch of that business in Latin America, bringing superior benefits to that product that I can't talk about here until they're actually out in the marketplace. But this is rolling out as we speak, and we think plays perfectly into the trend of preventative oral care. We're going to couple that with the new toothbrush, a high density bristled toothbrush that has both tapered bristles for deep penetration in the gumline and between teeth as well as rounded polishing bristles in the middle. The high-density aspect of this brush, it has 5,000 bristles in it, which the ordinary -- this is 3x the amount of an ordinary toothbrush, which provides better cleaning and a whole different [ amount ] of feel for the consumer as well. So we love the innovation that this is bringing to market and really rounds out the Total range really nicely. And then we're going to couple of that with a relaunch of our mouthwash as well, and really connected the strong regimen claims that we've made on clinicals over the last 1.5 years that will hopefully substantiate the importance of rounding out your oral care routine with a mouthwash as well. I haven't showcased a lot of the science behind Elta. This is a brand that's built on its cosmetic elegance and the fact that it's the #1 brand recommended by derms, the #1 brand trusted by derms and the #1 brand used by derms. So it sets a very high bar to continue to make sure that we're driving the advocacy with that important line of profession. And in this case, we had a product that was leaving a sheen or what they call a white cast on people with darker-complected skin. We've developed technology to get rid of that white cast and still provide the cosmetic elegance and obviously the superior UV protection. So a great breakthrough in terms of this innovation. We're in the midst of taking that to the market as we speak. Taking the learning that we've had in premium skin health and now translating that into the mass market. So you've seen a lot of work in premium skin health around hyaluronic acid and retinal. We're now taking that and premiumizing our Protex business in Latin America. With this, this is off to a really great start in terms of how consumers have reacted to it. Again, a lot of consumers can't pay the premium prices associated with some of those benefits, we're bringing it much more into the mainstream and leveraging the scale that we have in that market. Soupline, the first unit dose fabric softener and our leading fabric softener business in France where we have a #1 position. Not only is this delivering the superior softness and fragrance delivery that consumers are looking for. It obviously provides significantly less plastic to the environment, as you see there, 72% less plastic than their ordinary fabrication. So a great innovation and a first unit dose innovation in the market. Moving on to Hill's. The derm segment is a very, very large segment in the interesting category. Dogs have either environmental sensitivities or food sensitivities, this one is specifically targeted to pets with food sensitivities and we're providing a low-fat version, which has been a long issue with the veterinarians needing a more low-cal recipe for their dogs and cats. And we brought great innovation by providing the derm protection that they're looking for in a low-fat diet. So good, just a smattering of some of the innovation. So let me now move quickly on to some of the capabilities. I'm going to focus on two. You've heard me talk a lot about our digital transformation and our data analytics transformation. Diana at CAGNY presented some of our AI, and what I'm excited to share with you today how we're actually now deploying some of this AI to drive the top line and the productivity of our business. So if I look at 5 -- look at digital, there were 5 vectors, so to speak, that we were very focused on. We had to be very choiceful on the areas that we wanted to transform across the organization. We brought in a lot of core competency from the outside to help us develop these, and you can see them across the bottom. Making our media work harder, obviously, with the acceleration that we've had there, that's of paramount importance. We've really worked hard to get the best talent from our WPP agency, which is the largest advertising firm in the world to make sure that we're bringing the best of their network into our business and building our own internal capabilities in a much more different way about brand building. Driving digital commerce that continues to be a fast-growing area, which is e-commerce, where our penetration affords us the opportunity to be much more aggressive and we're doing, I think, a terrific job there. Marketing -- excuse me, mastering retail media. This is a growing segment of the media market and an area that we have to really strategically think about carefully on how we're using that in the context of all the media opportunities that we have and making sure that it's drawing obviously effective ROI and brand building for us. But the area I want to spend more time on today is developing effective digital content. And as you can imagine, content is very fluid. It's dynamic and changing all the time. And we used to have systems and tech stacks in our company working with our agency to make sure that we're addressing that and gaining a competitive advantage in the market. So let me talk about that a little bit. Here's an example of AI where we're able now to test every piece of content that goes out in a digital medium with AI and score it versus the history of what we have. And that allows us to get far more confident that what we're deploying is particularly working for us. So again, a huge enhancement on how we think about the efficiency of our media and that's actually in the markets today, and we're rolling that out around the world. Second is analytics, a huge area of opportunity for the organization. But again, there are so many different spaces companies can decide to focus on. We've been very choiceful in the areas that we think are going to drive sustained top line growth for us and improve the profitability at the bottom line. So here are the 5 vectors there. Revenue impact, we talked a lot about revenue growth management. We're now making it much more technical and algorithmic-driven by taking data and taking conclusions from that data that AI is giving us. Media spend optimization, programmatic media is a key opportunity for us to make our media more efficient, obviously, avoiding unnecessary cost as we use data analytics to determine the inefficiency. Time saved, we can use data to be much more efficient in how we make decisions. And things that we're taking literally months to decide we can make decisions much quicker. But the area I'm most excited about is promo optimization, and that's how we look at gross to net, which historically was all very labor-intensive, where we had to look at strenuous spreadsheets to really decide how things were working. Now we can put it into AI models and decide what's working or what's not. So we're using AI and machine learning to literally put billions of scenarios into our network to decide on how to optimize gross-to-net spending. We've just tested this now with one of our major retailers in the U.S. They absolutely love the opportunities. We're working with them to perfect the model. And as we perfect that model, we will roll it out to more retailers in more geographies around the world, but an exciting opportunity for you. So again, a lot of the stuff that Diana talked to we're now trying to put it into the market and deliver real benefits into the P&L. Third, a question that we get asked frequently, which is, well, how high is high on advertising? And are you getting the ROI that you need for the business? So let me talk a little bit about that here. Clearly, we put a lot of investment, this is to build brand health and to build brand penetration at the end of the day. And you can clearly see the step-up that we've had in the growth of the company, the consistent organic growth that we've had. And you consistently see the performance that, that is now delivering at the bottom line. So in essence, yes, the advertising is working. But we're not going to sit back and simply say, let's spend more. We need to figure out how to optimize that spend in ways that will drive ongoing efficiency. And I think data and some of the analytical -- digital work that I showed earlier will certainly unlock that. But the ROIs are improving, and this is probably the most important metric aside from the business performance to ensure that we have confidence in the spending that we have in the marketplace. And you can see year in and year out, we have better ROI, particularly in the digital space. And as we continue to move more of our spending towards digital, we would expect this ROI to continue. As we build the tech stacks in the company to get better at analyzing this data, we likewise will assume that those ROIs will continue to improve. So let me show you a smattering of our advertising, which I think will give you a sense for the impact we're having and how we've improved certainly the cut-through value of our media. [Presentation]

So you'll recall this is a brand we brought from Latin America, probably the better part of 15 years ago. And we've really leveraged initially the Hispanic market, which obviously had a strong affinity and orientation to, but now it's become a really strong brand in the mass market. And this chart kind of gives you an indication of the success we're having behind just a great, well-positioned brand, is obviously delivering against expectations that the market has around efficacy and fragrance. This is the relaunch into a super-concentrated formula where we've seen great success on that using 50% less plastic at the same time, but driving enhanced efficacy and a great success story for us in terms of getting innovation right, getting the target and using effective content. That spot you showed that's a whole series of telenovela spots that we have on YouTube. So again, utilizing social medium and the video platforms very effectively to drive the brand. So that's household penetration and brand health, and it really is underscored by these 3 aspects of our strategy. But it really permeates the entire organization on how we think about driving growth. And the penetration brand growth plans that we have are all driven by where is the penetration opportunity that we see and how do we want to develop a pipeline of innovation and advertising content to deliver against that. What I'm going to do now is bring this all together very quickly by giving you a real life story in India on how these strategies have come to life to drive an India business that unfortunately had gotten distracted and we got back to the core of what we stand for and we really focused on shifting our marketing efforts back to the core and the science principles that built that brand over 90 years in India. We got distracted with the ayurvedic segment. We took a step back and said, let's get back to what we stand for, and that's demonstrated in here and how we're thinking about it. Likewise, 1.3 billion consumers, vast majority of consumers brush their teeth less than one time a day. We have a vast opportunity to drive consumption. We're going to show you some innovative ways that we're trying to do that on top of our Bright Smiles, Bright Future, and obviously, making sure that we put the advertising in there. Three core big core businesses, our base anti-cavity business, which we relaunched with superior efficacy in the last year. We took Max Fresh, the freshness segment is a very significant part of the Indian market with a brand that delivers 10x longer lasting freshness than an ordinary fluoride toothpaste. And we're premiumizing the India market by launching whitening and bringing that benefit and establishing that as a long-term growth opportunity for the market. So here's what we look at internally in terms of how we think about brand health. First and foremost, it starts with are we getting consideration? Are consumers considering us in their buying set when they see the advertising or think of buying the category. And you can see for our individual variants, Strong Teeth, Max Fresh, Active Salt and Visible White, the consideration over the last 3 years has moved up very, very nicely. You can't get in a consumer shopping basket unless you're being considered. That's the obvious conclusion to that. But more importantly is the health of the brand demonstrating the efficacy that you want and are the messages resonating and cutting through. Top-of-mind awareness, what do consumers think of first. You can see that continues to grow. Brand of first choice in their consideration, that continues to grow. Best oral care expert, this was, again, a deliberate effort for us to take the brand and get back to science and get back to what we stand for. You can see the success we're having there. And ultimately, that ladders into what we've talked about, how do we get the elasticity given the pricing that we've had to continue to be delivered in the market and not see significant erosion and you see worth paying more for. Again, we think very much connected to the best oral care expert, but this is how we think about brand health to ensure that, that advertising money is indeed working effectively for us. The second thing, 8 of 10 Indians have cavities. 1.3 billion consumers were brushing their teeth less than one time a day. And if you look at the fact that some of the habits and practices of that market, that it's just common for people in that market to finish off their evening with sweets. They go to bed and they have sweets. So we developed a campaign to really tap into that insight and go after nighttime brushing. 80% of urban consumers in India. So think about that, 1.3 billion, 80% do not brush their teeth at night. And so here's a campaign that's going to turn that around. [Presentation]

Long-term strategy for the company, obviously we want to see this improve over the next decade. A real opportunity for us to partner with health officials in the country, but making sure that we're committed to driving per capita consumption in a very, very opportunistic market for us over the next decade. So some exciting work, thinking very differently how to tackle that. And this goes in parallel with our Bright Smiles, Bright Future program, which is obviously the cornerstone of our oral health education around the world and a very big part of the India growth strategy moving forward. So my compliments to the India team who is doing just a fantastic job. You saw the double-digit growth in that market in the second quarter. Again, I think a reflection of the strategies, getting back to what we stand for and making sure that we scale our capabilities in that market as well. You can see that's paid out obviously on our core toothpaste growth as well as the premium toothpaste growth, which is important for that market. Long term, we see significant growth in the middle class in India, and therefore, that affords us a really unique opportunity to continue to premiumize that. With over 50% share in that market, we have a responsibility to grow the category as profitably as possible. So I'm going to finish off with a spot on Nigeria, which I think kind of brings a lot of the excitement that we have around oral care and consumption building, particularly in a huge opportunity market like Nigeria, but let me summarize very quickly in terms of the messages that I want to leave you with. Clearly, the strategy is working, but the important thing is we can't be complacent. We're thinking about 2030 now and how we need to continue to dial up our capabilities and continue to make changes to sustain that growth. Scaling the capabilities is important. We're centralizing a lot of those capabilities into the New York office to ensure that we can deploy them as efficiently and consistently around the world as possible. And we're obviously continuing to look at ways to optimize our investment around the world. We love the fact that we're driving brand health, we love the fact that we're driving brand penetration, but we need to continue to look for ways to make sure that, that media spending continuously delivers the ROI, particularly given the strength of our innovation pipeline over the next couple of years. So with that, let me just finish off with the India spot and then I'll open it up for some Q&A -- Nigeria's spot, I said India's spot. It's Nigeria. [Presentation]

Great insights there for a business that we think has significant growth potential and a way to really involve children to persuade their parents to brush their teeth, which, in this case, our education and insight suggests that we're getting children to brush their teeth, but their mother and father aren't. So great opportunity there. Thanks. Over to you.

You looked at me like I was the one not brushing my teeth. Okay. Great. We still have few minutes, so we'll just have a few things I wanted to maybe try to touch on. Let me start out with something closer in, notwithstanding the way we just spent the last 25 minutes or so. But just to walk around the world I thought would be helpful just if there are any areas in particular markets that you're incrementally more concerned, whether it's market growth slowing, competition dynamics changing. Let me start there.

Yes. No question, there's a lot of differences as you think about how economies and geographies are evolving. And the fact that we do business in 200 countries around the world, we have a great exposure to that. And that's one of our strengths, is obviously the diversity of our business and particularly the strength of our emerging markets. So if, I guess, bring that down to the specific divisions and how we set up our business, let me start with North America. Clearly, we've seen pricing recede in North America. The category is a little bit sluggish. What we see is that -- was a summer impact or whether as we come out of the summer and into the back-to-school period, whether we see that come back, but we're mindful of that. But I do think, given the significant pricing and competitive nature of the North American market, you will continue to see some recession of the pricing dynamics there. Again, given the fact that over the last 3 years, there has been considerable pricing taken in the U.S., I think, coupled with the fact that we see coupon redemption rates up quite considerably over the last 6 months in the U.S. So my expectation is you'll see that business, at least the U.S. category, continue to slow or be sluggish. But again, the segmentation of that business, the premiumization opportunities are there. The mid-price, it continues to be very robust. And when you have good premium offerings, you get the share growth there. Latin America, a wonderful region for us. Obviously, we've seen a lot of foreign exchange issues over the last 1.5 months, particularly the peso and the real. Consumption in general looks good. We saw a little blip in August in Mexico, which we're going to have to watch carefully. But the expectation is that, that will come back as we move through the back half of the year. But overall, there's still some pricing opportunities given where the deval is. But again, consumption seems to be okay and our volume and value shares are up very nicely across all of our categories in Latin America. If I move over to Asia, China continues to be sluggish. Our business isn't significant there, but we do see the fact that consumers are not returning to the category nearly at the levels they were in the past. Categories have come down. Our Colgate business continues to grow share in China. Our Darlie business has flattened and now we're starting to see the early signs of green shoots on the Darlie business which is our local brand there, and that continues to demonstrate that it's turning around despite the fact that we took significant pricing over the last 2 years. Africa, Middle East, good consumption. A lot of foreign exchange pricing going into that market. But the team there under Maria Paula's leadership is doing a phenomenal job scaling our capabilities that I've talked about and doing some incredible things to drive consumption in the market. And shares are up really nicely across that division. And then what division, Hill's. Hill's obviously continues to perform exceptionally well. We had 2.5% volume growth in the second quarter, including the impact of private label, which you brought that number down a bit. But we still see real growth opportunities despite the fact that the category has slowed a little bit, we think, driven to a certain extent, some of the pet adoptions coming down. But where we compete and where we want to compete, the headspace is still very good. There's new form opportunities. There's small paws, there's cat. We continue to have a lot of headspace. And a big part of our focus has been North America. That will continue to be our #1 priority, but we have real opportunities to expand, particularly given that we've opened up the manufacturing capacity on that business, and that's afforded us a significant opportunity now to get into more recipes and different forms and packaging configurations to drive that category.

Okay. Great. I'm going to ask one pointed follow-up, which is just -- you mentioned in North America coupon rate -- excuse me, coupon redemptions are up. Is that kind of what's impacting the pricing we're seeing in scanner data? Or has actually like promotional intensity gone up?

We haven't seen a significant change in promotional intensity. I talked about on the second quarter call and at Deutsche Bank as well, we did have to adjust some pricing in a couple of our categories, not in oral care, but certain home care segments and in certain personal care segments. That was reflected in the second quarter pricing. That will obviously flow through for the balance of the year. Coupon redemptions are driving some of that pricing down in the category. We've not seen -- there hasn't been a significant conversion in private label. And we've seen very little step down in terms of price tiers. I mean, as I mentioned in my prepared remarks, a little bit more in the mid-tier. We have not seen people going all the way down to value. And as we've talked about before, private label, particularly in the oral care category, has very low penetration.

Okay. Great. Advertising, reaching that new high watermark that you highlighted on the slide, and probably not coincidentally, we've seen that really nice acceleration in volume growth to this peer-leading 5 percentage level. So taking the comments you just made on what you're seeing in various markets and investment levels going into the second half, how should we think about volume expectations from here?

Well, I think I would characterize certainly that our focus has always been how do we balance pricing and volume in the P&L. And we've obviously had to take a lot of pricing to offset the inflation that we've seen in categories. We fully expect to see the volume come back and the pricing recede. So that will be consistent through the back half of this year. The volume, though, is performing really, really well. I mean, we were leading in pricing in Latin America. We've seen our volume come back really strongly there. We saw the volume come back very strongly in North America. We had some comp benefits there as well. But certainly, the volume shares that we've seen in North America given particularly where our brands are positioned have performed really, really well and that speaks to the fact that as we took some of the pricing down that we were not competitively priced, that is reflected well in the volume performance we've had there. If you go across the world, we're getting great volume performance in Europe as we see the receding of pricing there and that's delivered record market shares for our businesses in Europe as well. So we feel like the strategy that we put in place, the years of investing behind the brands and building brand salience and resonance and bringing good innovation to the market is helping us withstand some of this consumer softness we see and getting consumers to choose our brands over competitors.

Okay. Great. We're out of time, but we are lucky to have a breakout session. So please join me in thanking Colgate and we can move to breakout.

Thanks, everyone.