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

Okay. We're going to get started. So next up, we're pleased to welcome Colgate's CEO, Noel Wallace, to the stage. Noel is going to start with a presentation highlighting the success of Colgate's 2025 strategic plan, give us a little peek into a few topics of the 2030 strategy. And then after that, I'll come back on stage for a brief Q&A.

Well, thank you, Lauren, and good morning, everyone. A reminder, I'm sure you've seen this a couple of times already. Okay. So in terms of my prepared comments, I'll spend about 15, 20 minutes reprising our '25 strategy, more specifically, the short-term results that we've seen this year in 2025, the longer-term results over the period of that '25 cycle, which started in 2019. And then I'm going to jump into some of the capabilities that came out of that '25 strategy that set us up for our 2030 strategy, which we just introduced to the company 2 months ago and we will begin to execute come December 31 of this year. Okay. Financially, in terms of where the quarter was, you saw the highlights in the second quarter, 2.4% organic growth ex the impact of private label. That's really the key number. to take away from this chart. If you look at other aspects of that second quarter earnings call, we announced a new productivity initiative, which is quite exciting for the company, particularly as it parallels the 2030 strategy that we're introducing. And it will give us the resources and the funding to not only continue to accelerate the top line growth of the company, but hopefully continue to accelerate the bottom line growth of the organization as well. A couple of initiatives to that productivity. It will be a supply chain realignment in terms of getting the supply chain to work more efficiently in the current environment where customization is highly required and more personalization from our retailers. And secondly, getting our organizational structure more aligned behind this concept we call omni demand generation, which requires us to behave differently and process the inputs a little bit differently to execute more effectively on the ground. Our 2025 outlook, no change from the second quarter. Okay. So let's jump into the strategy and what's working over the longer period of time. And more importantly, as we kicked off the 2025 strategy back in 2019, the key aspect of that strategy was to get back on our front foot from growth. And we really wanted to drive more sequential consistent top line growth. And you can see for 6 consecutive years, we've been at or above our long-term range of 3% to 5%. As you heard me say in the second quarter, we expect 2025 to be at the low end of the 2% to 4% organic that we communicated on the second quarter call. Importantly, it was getting that growth to be more broad-based across all of our categories, and that certainly transpired over the last 5 years. And importantly, likewise, the breadth of our business geographically, both here in North America and around the world, particularly in emerging markets, ensuring that we're growing all aspects of the business, and that has continued to prevail. An important part of the 2025 strategy was reinvesting in our business to accelerate growth. And you can see that we have stepped up our advertising investment over the last 5 years. That's growing brand penetration, but most importantly, growing brand health, which particularly in the market that we're competing in today is critically important to sustain the penetration and the continued growth of our brands. Productivity, cost controls and despite increasing a lot on the advertising line, you've seen obviously the sequential dollar earnings per share growth that we've seen over the period of that '25 cycle. Likewise, record cash flows from in-house productivity initiatives, managing our working capital more efficiently, which has allowed us to invest back behind the business in terms of different acquisitions, but more importantly, increase our dividend for the 61st consecutive year. Likewise, share repurchases, but we balanced our cash very effectively across the company to ensure that we continue to drive investment in the business and shareholder returns. Okay. Let me get into this 2025 strategy, which I talked about quite a bit over the last couple of years in terms of the capabilities that we've been building and focused upon. What I want to talk about are 2 important ones, which are innovation and revenue growth management, and that will set me up for some of the things that we're going to talk about relative to the 2030 strategy. So 2 aspects. Science-led innovation was a key aspect that we wanted to invest behind as we went into the 2025 strategy and build our innovation capabilities. I'm pleased that we're progressing quite well there. You see some examples of that. And then I'll come back and talk about how we're scaling different capabilities that we've invested behind as we've had more flexibility in the P&L over the last 3 to 4 years, it was critically important for us to look where the businesses were going to need operational benefits in the future and investing behind those capabilities in the short term. elmex, a great example of innovation, premium business in Europe that we strategically decided to leverage much more effectively across the European market in the select markets around the world. Let me show you an example of some of that innovation and advertising that supports that. [Presentation]

Great innovation at the premium end of the market. And you can see over the last 5 years since deploying this strategy, both innovation, stronger support in this part of the market. You can see the sequential growth, which elmex is one of the fastest-growing toothpaste in the European market. And importantly, as we look at the incrementality of that share on the franchise, coupled with the growth that we've had on the Colgate franchise, we've seen now a record European share the world to Asia, a serum-infused toothpaste, again, capitalizing on the anti-aging benefit and the insights that we're seeing in the Asian market. This one in China. We have revital technology, which restores the collagen in your gums to prevent further collagen loss, which is an exciting proposition in terms of anti-aging, new innovation, new segment and very, very premium. Going now more south into India, which is very interesting. I talked about that earlier this morning in one of the tabletops. Our anti-cavity core businesses is a big, big part of our franchise around the world and particularly in India. Here's a breakthrough technology combining amino acids and arginine with calcium in order to provide 2x stronger teeth. Again, the anti-cavity segment in India is the biggest part of the market. We need to continue to innovate in our core businesses to ensure that as we launch premium businesses, they come suitably on top. Here's an advertisement that reflects that piece of innovation. [Presentation]

What's important strategically here is that the cavity segment continues to be a major prevalent disease worldwide. And although most of us think this is old school stuff, we need to be very focused on bringing new technology to continue to provide the efficacy that our brand has always stood for and ensure we're bringing more users into the category. Moving into Personal Care Protex, one of our largest antibacterial franchises around the world, a great example of taking a strong existing business, bringing new science to it with a new 24-hour claim and superior breakthrough technology, new packaging, new advertising and interesting in a very, very mature market like South Africa, where we've just introduced this, we've seen 450 basis points of share growth in the market since its introduction, which clearly shows that the science-driven technology that we're bringing to the market is playing out with consumers in that marketplace. Here's a piece of that advertising. [Presentation]

Again taking big core franchises and ensuring that we bring technology and innovation and the best science to those brands. Moving into our premium skin care, EltaMD. Hopefully many of you over the summer, just an extra product, #1 brand recommended by dermatologist here in the U.S. 100% mineral sunscreen that we've now brought a skin barrier repair technology to it. Redness is a key issue with many people around particularly in the U.S. This product reduces redness and sensitivity in your skin by 52%. So great technology not only in terms of the SPF side, but on the skin side as well. So an exciting add-on to our strong skin care portfolio in derms. Moving on to Hill's, our Science Diet relaunch again this year, upgraded with an ActivBiome. We've been spending years understanding the microbiome in pets, understanding the importance of the microbiome and digestion. We now have an improved product that delivers on improved digestion and organ health. On the therapeutic side, or prescription diet side, many vets are dealing with complex problems, sometimes multi-dual issues in pets. These 2 products allow vets to address dual problems that are quite common in pets with one product, which is quite exciting for the veterinary community. A big piece of the relaunch this year has been a new campaign for Science Diet, which has been based on quite a few years of really understanding consumer insights in the category. And the basic tension or insight behind this is that we can't possibly love our pets as much as they love us. And the guilt that you feel with not providing as much love to your pets, the best thing you can do in that regard then is to feed them Science Diet. Here's an ad that reflects that. [Presentation]

Great emotional insight that we've now captured with our strong scientific value that we bring to pet owners. So off to a great start with that campaign. Okay. So that's on the innovation side. Just a quick peek at that. Let me move on to some of the capabilities that I think are critically important as we embark on our 2030 strategy, but that we've spent the last 3 to 4 years building in ways that we think are going to provide significant benefits to us down the road. And the one I really want to talk about is revenue growth management, where -- we started with basic analytics and have now moved into really advanced AI on all the proprietary tools that we've developed under RGM, which RGM is our revenue growth management initiative, intended to drive more pricing and value in the categories by using data and now AI to generate better solutions. So let me take you through that in more detail. This chart really depicts the journey that we've been on over the last 5 years. We started with a basic version, which was more on the descriptive side. So basically just doing analysis. We then moved into the predictive part, bringing AI into it, which allowed us to predict pricing models based on vast amounts of data. And more exciting now, we're going to be expanding across the world and scaling is our new prescriptive AI, which is going to allow us to not only combine all these data resources that we've had globally around the world, but now start to provide recommendations on solutions to drive value for the category, whether your inputs are on volume, your inputs are on sales or your inputs are on margin. So a very, very advanced piece of technology that's going to allow us to make much smarter decisions and work collaboratively with our retailers as we share their data with our data to drive category growth moving forward. Here's just an example of that. Again, it's an AI optimizer that we can take over 1 billion data points and inputs now and get recommendations in less than 30 minutes on how to optimize based on the objectives that both ourselves have and our retailers have collaborating together. So it provides significant flexibility to drive value for us. Okay. So let me look quickly at 2030. I'm not going to get into a lot of specifics here. What I'm going to do is try to give you some sound bites in terms of how we're thinking about 2030. As I mentioned earlier, we have rolled this strategy out to the entire organization, which is really exciting that we're basically ready for '26 to come. We're starting to put our money where our mouth is in terms of the strategic choices that we're making and the operational benefits that this 2030 strategy will unlock for us moving forward. So the 5 key thematics for you to think about without getting into too much specifics, big global business. We need to leverage the penetration of our brands around the world and market those a little bit differently moving forward in terms of how we organize ourselves. We're going to put more money into innovation, particularly in key geographies around the world, North America being one, our Hawley & Hazel business in China being another. We're going to harness the best-in-class omni demand generation. I will spend more time on this in just a moment and tell you why that's so important to how we see the market evolving moving forward. We'll continue to double down on the capabilities that we've been building in the last 3 years in data and analytics and advance our AI even further to generate more ROI, efficiency and productivity for the company, and importantly, continue to develop our high-impact culture by aligning our KPIs and our training and development and inclusion numbers. Okay. So a couple of examples of omnichannel. I'm going to take you through some specific examples in China, which I think is really the best example around the world on markets that have truly evolved omni, but we're seeing this issue, quite frankly, evolve all over the world as we speak. This is about as simple as you can get in terms of trying to map out the consumer journey that we're dealing with today in terms of how do we lock in our media strategies to address all these different touch points and ensure that our communication and our content is truly addressing the moments that matter. Now why is this simple? Because it's not done by demographic, by age group, by region or other segments that we have. So you can multiply this exponentially to really get a sense for the complexity and organizing yourself to deliver a message that truly drives awareness, conversion, purchase and loyalty in the end. And that's what we're spending a huge amount of time over the last couple of years to ensure that we have a structure and a capability in place that really brings all these skill sets together in a much more harmonious way to drive a seamless integration and consumer centricity to our marketing strategies. So China is a great example of that. 40% of the China market is online today. So one of the biggest online markets that we compete in the world. That means that almost 60% of the business is still on brick-and-mortar. What's interesting in China is 80% of the media today is digital. Interesting sound bite to give you a little bit of sense of the complexity of getting the path to purchase and the consumer journey understood. 15% to 20% of Alibaba's flagship store sales happen between 12:00 p.m. and 6:00 in the morning. So I use that simply to demonstrate the fact that to really understand the consumer journey, you have to organize yourself in ways to really understand what are the moments that matter in the target consumer that you're after. And China is doing an exceptionally good job at that. So if you take what they're trying to do is how do we develop a brand when you have a good percentage of the market that only buys online, yes, you can market on those specific platforms. But I still have 60% -- almost 60% of my business is buying brick-and-mortar. How do I influence those consumers together, so I have a very harmonious strategy behind building my brand in a very consumer-centric way. And so what we do here in this example is we're advertising on the online platforms and understanding which consumers are buying offline and online to ensure they were impacting both online and offline purchases. And here, we're doing it exceptionally well. Perfect example of that is Sam's. Sam's Club is one of the strongest and fastest retail environments in China today. They have both an online and an offline platform. What we've done here is we partnered with a Little Red Book, which is an online platform. We advertise specified where we were going after Sam's consumers, allowed to drive content that excited the Sam's consumer, got them to either buy the product in store or offline. The example I'm showing you is a Colgate Pump. This brand has been in the market for 8 years. With the integration of data from online and offline and the personalization that we do, we increased sales at Sam's 30x simply by truly understanding the target market that we're after. That is what omni demand generation is all about, truly making sure that your media is working in a much more synergistic way to drive effectiveness and spend. So here's some of the learning. Obviously, consumer centricity at the heart of it. You have to have the consumer journeys mapped out well. Omnichannel orchestration requires you to think about the entire channel. What you can't do is operate in silos any longer. You have to be thinking about the choices you're making on how you're going to purchase and repeat over the long term. And obviously, it takes strong cross function of collaboration to make that happen. So in summary, overall, we feel our strategy has worked. We've gone from $15 billion to $20 billion in the last 5 years. Clearly, the strategy we have in place for 2030 is to continue to accelerate top line and bottom line growth for the company. And we're excited about obviously beginning on that journey despite the challenges that we currently see in the marketplace. So with that, I'll invite Lauren back up.

Perfect.

Want to stay over here?

I was grabbing my glass and then my water. Granny over here. Okay. Perfect. Great. So the comments on your success on the '25 strategic plan were really interesting. I was curious if you could share sort of what areas of that plan do you think were the ones where you were the most successful and what are ones where you could still improve upon?

So if you go back to, I guess, 2019, I mean, clearly, the whole focus for the company in 2019 is we've got to get back to growing dollar top line growth and dollar earnings. And so as I mentioned, we've grown from $15 billion to $20 billion and at the same time, increased our advertising based on the leverage that we've been able to generate through the middle of the P&L and grow dollar-based earnings per share. So holistically, that's been an extraordinarily part of our success. But the top line growth was one thing. What we needed to do was ensuring that we weren't just focusing on the quarter and the year that we were building capabilities for the long term. And that's what we're most excited about that we've spent a lot of time building AI capabilities across the company. We've trained an enormous amount of people in terms of how they can enhance their current jobs. We've showcased those examples around the company, so people can leverage those. We built capabilities in digital where we were behind and now we're much more advanced. We've increased our level of innovation. Our level of innovation as a percent of sales over the last 5 years has grown 500 basis points. That's good, but in my view, not good enough. We need to step that up as we move into the 2030 strategy. So innovation, capabilities around digital and AI and certainly getting more focused around top line growth has been key. The other aspect that I think is important for the audience to take away is we're much better at strategic planning. I mean we now have made real choices on where we're going to differentiate ourselves in the marketplace and how we're going to continue to drive sustainable growth for the company. And that has allowed us to get much more aligned in terms of what we're trying to accomplish. We're not having a lot of inefficient discussions about whether we should do this or that. We have a clear strategy and a clear purpose for the company that's well understood by everyone, and now the 2030 strategy is the next step in that.

Okay. And you gave us a peek on several topics for 2030. Why was omnichannel demand generation, the one that you chose to spend more time on?

A lot of the learning that we've garnered over the last couple of years has showed us how complex that consumer journey has become. And the days of flooding the networks with prime time commercials now those days seem so simple, but they're so far in the 8past now. We truly have to understand those moments that matter. And there's nothing more important for our company than the media spend that we have to build our brands. And if that media spend isn't targeted and choiceful and isn't working synergistically between how consumers buy offline and how they buy online, we're going to waste a lot of money moving forward. Our responsibility is to drive more consumers into our franchise and more top line growth for our categories. And the omnichannel demand generation is a behavior change for the company. So you can't have a channel per se, the days of here's e-commerce and here's our e-commerce spend. that doesn't work anymore in my view. We have to have -- here's a channel where consumers may buy their product, but the spend that we have has to work for the entire market in terms of what we're trying to accomplish. And if we're too siloed in terms of how we organize ourselves to address that, we're going to waste a lot of money, and we're not going to drive consistent top line growth for the company.

Okay. What are going to be the biggest changes as you transition to the new strategy?