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

Good morning. Welcome to today's Colgate-Palmolive Second Quarter 2026 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I'd like to turn this call over to EVP, Investor Relations, Claire Ross.

Good morning, and welcome to our second quarter 2026 earnings release conference call. This is Claire Ross, Executive Vice President, Investor Relations. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Forward-looking statements inherently involve risks and uncertainties and are made on the basis of our views and assumptions at this time. Please refer to the earnings press release and our most recent filings with the SEC, including our 2025 annual report on Form 10-K and subsequent SEC filings, all available on our website. For a discussion of the factors that could cause actual results to differ materially from these statements. These remarks also include a discussion of non-GAAP financial measures, which exclude certain items from the reported results. including those identified in tables 4, 6, 7, 8 and 9 on the second quarter earnings press release. A full reconciliation to the corresponding GAAP financial measures and related definitions are included in the earnings press release. Joining me on the call this morning are Noel Wallace, Chairman, President and Chief Executive Officer; Stan Sutula, Chief Financial Officer; and John Faucher, EVP, M&A and Special Projects. Noel will provide you with the thoughts on our results and our 2026 outlook. We will then open it up for Q&A. Noel?

Well, thanks, Claire, and good morning, everyone. Before we begin today's discussion, I wanted to pause and recognize someone who's been a pillar to our investor team and to our company for quite some time. John Faucher will be retiring at the end of September, making today his 40th quarterly earnings call, with the company and its 29th alongside me. John brought a rare combination of investor perspective, great business judgment and strategic thinking not only to our business and our earnings process. But our M&A work our Board discussions and broader shareholder engagement. He's taught me a lot about value creation. It's been a fantastic adviser to our leadership team and a dedicated partner to the entire and analyst and investor community. I know you know John, who has been a prolific quarter of tough culture. So it's only fitting for me to end with an infamous on solo quote from Star Wars. So thank you, John, and may the force be with you.

Thanks, Noel.

So with that, let's get on to the quarter. We're pleased to have delivered another quarter of strong top and bottom line growth, particularly in the context of continued global volatility. Our strong results this quarter across our financial statements were broad-based with organic sales growth in 4 of 5 divisions and 3 of our 4 categories. We delivered solid gross margin expansion before a modest tariff benefit. Base business EPS ahead of our expectations, even as we delivered a double-digit increase in advertising. Our balance sheet and cash flow performance through the second quarter is also very strong. With free cash flow up 18%, and we returned $1.4 billion to shareholders. The strength of our global operating model, combined with the strong execution on the ground continues to drive our performance. As was the case last quarter, our sales growth was led by emerging markets, which were up mid-single digits, driven by India, Brazil, Mexico and China. We also had strong contributions from our European markets as we continue to drive organic growth and market share gains through innovation and omni demand generation. Our Hill's business was also contributed to growth as it continues to outperform the category with premium science-led innovation. We will work to maintain this global momentum while driving improvement in the U.S. where we were not satisfied with our performance, as you saw in the commentary. Here are some of the actions we're taking to change the trajectory of the U.S. business in the second half. Continued scale-up of our '26 and '27 innovation. We're pleased with the performance of our recent innovation like Optic White Pro Series with Active Shine technology and our expansion of Fabuloso new forms. We will continue to drive these new products with increased distribution and strong brand support. With heightened competition in many of our categories, we will take surgical actions by category and channel to drive market share improvement while still executing behind our revenue growth management playbook. And we've also planned for higher levels of brand support across our core businesses to drive both our equities and win at the point of purchase. On a global basis, we'll continue to invest behind and scale our capabilities in areas like innovation, data, analytics, digital and AI. This leaves us well positioned to deliver procedural superior products to accelerate category growth and drive market share improvement. We believe our efforts in revenue growth management, promo AI and funding the growth give us the ability to invest in advertising to build our brands while driving profit and EPS growth, even in a period of significant cost inflation. We will also deliver against our strategic growth and productivity program as we build the right organizational structure to deliver against our 2030 strategy. We've executed a strong first half of the year. While there are still some uncertainties ahead, we are optimistic the strength of our global model will continue to do both in the short term and set us up for long-term success. And with that, I'd be happy to take your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Dara Mohsenian with Morgan Stanley.

First, best wishes to John. Thanks for all your help through the years, and we'll miss you on these calls. And then Noel, I wanted to touch on the Pet division. Clearly, pretty soft category dynamics in the quarter, but obviously Hills is performing well from a share standpoint. So just any perspective around the category softness. Do you think we're sort of nearing a bottom. But more importantly, how do you think the Hill's business is positioned relative to that category softness? And can these share gains continue. And then also, just if you look at Pet organic sales growth even adding back to the private label discontinuations, it's really pricing that drove the organic sales growth. So just any perspective on your ability to continue to realize pricing in PET and last -- sorry for the multi parts, but I think it's important to probably touch on prime and the plans there and how significant that can be to your business as you think looking out over the next couple of years.

Yes. Thanks, Dara, for the question. Let me start broad-based another -- we think, impressive quarter for Hill's. And as you rightly called out, in the tough market environment, we delivered solid organic growth. If you look at it ex private label at 4%, so well above the category, which is more or less flat right now, particularly in the U.S., where we continue to grow at 4%. So U.S. is a little softer than some of the emerging markets and global businesses. Private label, as you well know, had a 200 basis point negative impact to volume. So ex private label volume was roughly flat in the quarter on a tough comp and a tough market. So by and large, we're very pleased. Why is that? We grew in all segments across the business that we're focused on, except for Science Diet dog where we've talked about the migration to small pets and large pets are certainly deteriorating in terms of their ownership as function of that the dry dog food business down a little bit, but everything else up, particularly in the areas where we've been building momentum, cat, wet and small pause. The other impressive number in the quarter was our therapeutic business which continues to grow very, very nicely, both from volume and pricing, which is helping to not only drive that strong gross margin acceleration, but the positive mix we had in the quarter as well. Margin performance, as I just mentioned, was good. Operating margin was up nicely, as we continue to increase the advertising as a percent of sales, so strong advertising levels once again in Hill's and we would further expect to do that in the back half of this year as we look to accelerate category growth. E-commerce, likewise, another growth driver of strong businesses across some of the pure-play retailers and we did well on Prime Day. So overall, we think we're executing against the write-outs particularly in the U.S. Our international business was up solid mid-single digits. So again, an area of opportunities we continue to drive penetration and growth of the science-based premium segment of the market. Specifically on prime, the prime business continues to do very, very well in Australia. They were up very nicely in the quarter. on top of significant growth in the first quarter. So we're very pleased with the continued acceleration of that. But I think more importantly, we've learned an immense amount about the prime launch, particularly around the manufacturing process delivering high-quality, consistent fresh products, and that's been very much built into the launch of the fresh that we're rolling out as you have heard right now in the U.S. It's anchored against single proteins. So we believe there's real science behind it. It's clearly going to be professionally driven. We're focused on getting the profession to underscore the importance of the quality of these products and the efficacy values they bring. We've launched 3 single protein diets who are in the midst of rolling that out and phasing that out. It will be a very thoughtful launch. Again, as I've mentioned in previous conversations, we're not leaning to generate significant volume right now. We're looking to really build the brand and underscore the science for the nature of our product and the quality of our product. The manufacturing business is going very well. The rollout is going as we plan. We'll have more to talk about that later in the year. But overall, market shares continue to grow, certainly in the segments that we're focused on. We have good market share performance. In terms of the category, I do think the category has bottomed out, but we shall see as we see inflation in the U.S. market, we'll probably see the category continue to be under a bit of pressure. But as we've said consistently, we have real growth opportunities in the segments that we're going after, we're under indexed. So again, on wet, on cat, on small paws. And certainly, the international business as we continue to go after markets where we think we can build the science-based credentials that deserve any of this product for the long-term health of the brand. So in essence, a good quarter for us. and a good growth opportunity as we move forward. category will continue to be pressured, but the opportunities to grow the top line are there for us.

Next question comes from Peter Grom with UBS.

Great. Thank you, everyone. So John, I also want to say thank you. John, thank you and maybe keep with the pop culture references. I specifically want to thank you for never having me maybe -- now to my real question, I was hoping to ask about gross margin. You know in the prepared remarks some benefits from refunds in the quarter. But even after backing that out, it was a pretty strong result. So maybe can you unpack how that came in relative to your expectations, what drove the strength? And then looking ahead, gross margin has been now expected to be for the year, but can you maybe walk through the phasing a bit just in the context of 3Q, I would imagine having peak inflation. .

Yes. Thanks, Peter. Let me start strategically in terms of how we're thinking about gross profit and some of the decisions and focus areas and all that stand. Unpack a bit more of the details on it. Clearly, gross margin was strong in the quarter, up 100 basis points, and you point out, up 90 basis points versus the previous quarter as well. So we got a little bit a modest benefit from refunds, but the bulk of the growth definitely came through our core business and some of the initiatives that we're taking around the world. Clearly, some inflationary pressures that we put into the P&L. We talked about getting those costs upfront into the P&L. On the first quarter call, and that's really important as we look to manage the business to ensure that we're proactively cost into the income statement. So our teams on the ground are executing pricing and revenue growth management and using all of our tools to generate profit growth as we look to increase the advertising, as you saw in the quarter. So that clearly is happening. And we'll continue, obviously, to focus on the elements of our revenue growth management. Our promo AI tools are being scaled around the world. We're seeing benefits from that. We had strong funding growth in the quarter. Doubling down on that as we move forward. We don't anticipate we'll see any more refunds coming or very insignificant going forward. So we're focused on the core health of the gross margin line, and that's really driven by mix, funding the growth and the pricing that we have and the overall discipline that we're seeing. It was great to see a little mix come through in the quarter as well. That is intentional looking at the growth opportunities we see around the world and our more focused category country combinations on where we'll see benefits from that. So overall, strategically, the teams are executing well. the pricing is in the P&L. We'll watch inflation carefully. As you saw in the prepared remarks, we expect the good to peak in the back half of this year as well as tariffs, but we're well ahead of that right now. We'll continue to manage as we move on with that, let me have Stan break it out a bit more for you.

Yes. Thanks, Noel. So let me unpack that a little bit more. First, we are very pleased with the margin performance here in Q2. And it's not -- it was multifaceted with good RGM, good productivity, the pricing, the mix, very, very strong performance here by the team. But we have our eyes wide open. And as we said in our first quarter call, we look to make sure our teams understand where we see materialize is going they can anticipate that and their pricing, their RGM actions for the rest of the year. On material prices, they're slightly below our expecting as the higher raw material costs were partially offset by the benefits of the tariff funds in the quarter. Now as you look at the back half of the year, Q3 is essentially largely locked in, pretty much in line with where we previously guided. Q4 might be a little bit lower than our previous assumptions given oil more in the $90 range, but we're still seeing impacts related to uncertainty about the war. As we look at the back half, we have easier compares on a year-on-year basis. We've increased our gross margin guidance to roughly flat for the year, but we do have to keep in mind that we do expect the higher raw materials and tariffs will be higher in the second half of the year than they were in the second quarter. The reason for the raise is our execution here on Martin and the components that go around that. So we're confident on the year to be flattish up and down.

The next question comes from Lauren Lieberman with Barclays.

Great. Just wanted to talk a little bit about the balance between volume and price mix, particularly as we look into the second half. There's been a lot of strength from some other consumer companies, particularly in emerging markets. I know you had strong, in particular, Brazil and India this quarter. But just curious how you're thinking about volumes and acceleration like there up in the second half.

On, thank you. Yes, the back half, at least as we see right now, we got a lot of pricing in the first half. We anticipate we'll be a little bit more volume driven in the back half of this year as we see the continued focus on the momentum we have, particularly internationally in some of our big markets, particularly around the premium side of the business as well. So we see opportunities on the volume more or less in the back half. We're not anticipating that categories will inflect any differently in the back half right now. So we've assumed more or less sustained based on what we've seen in June and the early parts of July, so pretty consistent. So our focus will be on getting the new products executed, driving brand penetration, delivering a balanced pricing volume but slightly more towards volume in the back half as we move around the world, and that will be pretty consistent market by market.

The next question comes from Robert Ottenstein with Evercore ISI.

Great. Thank you very much. The commentary on China continues to sound a little bit more positive. So I'd love to if you could do a bit of a dive on the Chinese market, which is always changing the competitive dynamics there, changes in how the Chinese are shopping, which we're picking up as we look at the beauty sector, in particular. And just an update on the turnaround for Darley and how you're going to be able to keep up momentum for Colgate at the same time?

Thanks for the question. You're absolutely right. China is such a fascinating market. I think I maybe alluded to in the first quarter, we've had all of our operating heads in China in the last 6 months. To learn from some of the incredible innovation going on in that market, particularly around go-to-market, whether it's social media platforms, whether it's business-to-consumer platforms, it's just fascinating to get everyone inserted there. While I think China is way ahead of the rest of the world and some of it will apply to some if it won't. It's certainly promotes a significant amount of innovative thinking from our teams, and I think a real benefit to how we want to execute in other areas around the world. That being said, our businesses continue to do well, particularly our Colgate China business now consistently delivering mid-single-digit performance, good volume performance in the quarter, particularly out of our CP China business. . Despite a significant amount of disruption in that market in terms of new platforms, declines in brick-and-mortar shifts to e-commerce as a result and some very aggressive competitive environments as well. So whole very solid performance. We continue to invest behind the China business, both from the Colgate and the Darby side in terms of marketing, a lot of unique innovation going into that market. We've rolled out some of that in the world, the Optic White peripheral is a perfect example of taking an innovation that was developed in China with social first model and then roll that around the world, and we've seen a very nice share growth -- incremental share growth as a result of that. And the other important aspect is I'll mention is the digital talent that we're getting out of China. Some of the best in the world that we're exporting into other markets as we speak. Holly and Hazel was up, as you mentioned, up low single-digits organic growth, another quarter good volume growth, mainly driven from the BDC area and some good innovation at dual chamber continues to do well. We're not out of the woods on Holly and Hayesille yet. We still have a lot of work to do, but some exciting plans in the next 6 to 9 months around the brand and around how we're structuring innovation and technology there and ultimately how we're going to continue to capitalize on the shift towards online which the haul of the Daily business needs to capitalize on quite quickly. As I mentioned, Greater China was up mid-single digits, which is terrific to see. We're stepping up our innovation and our go-to-market strategies there and executing quite well. So my sense is still a challenged category though. The categories are basically brick-and-mortar down, e-commerce offsetting some of that. But in general, we would assume the market is probably down 1% to 2% in total, but we're executing well, obviously, consuming above those numbers. But it's a tough market. We're going to continue to be very thoughtful on how much we put into China, given some of the ROI that we're seeing in some of the new platforms that are emerging, but by and large, executing top line and delivering some good gross margin, and we see the profitability coming behind that. So more to come out and we'll keep you up to date as we learn more.

The next question comes from Chris Carey with Wells Fargo Securities.

So it's great to see a little bit higher range for earnings this morning. I'm curious, so why not raise the lower end of the organic sales growth guidance range, you're running 2.6% organic sales year-to-date. The lower end of the range would imply flattish for the back half of the year. You've got easier compares going into calendar Q3. Is that just a bit of conservatism in the outlook, is that some uncertainty on North America. We're hearing about retailer by cops and certain retailers in Europe. I'm not sure about it. It just struck me, given your year-to-date run rate. And so I'd love a bit more perspective on just how you're thinking about different ranges and some of the different cited downside scenarios perhaps you're considering into the back half of the year?

Yes. Thanks, Chris. Clearly, a solid quarter, as you point out from a top line standpoint, I think underscores the resilience of our model and the fact that our strategy is working around the world and the global footprint that we have and the category combinations that we compete in. That being said, you've alluded to just a few of the uncertainties in the world that we live in today. Clearly, the various wars, the impact on consumer confidence, the huge ups and downs we're seeing in the categories. We obviously talked about the significant drop in the North America categories in May. They did come back in June, but still below historical numbers. So we're seeing a lot of volatility. And despite the fact that we're executing above the market growth around the world, we didn't want to get too far ahead of ourselves at this point relative to where the top line is. Clearly, we're shooting for higher numbers, as you say, and that is clearly what we're hoping to achieve. But there's a lot of volatility in the market about consumer uncertainty as we measure it, particularly coming out of the higher gasoline prices at the pump. So we're going to be prudent and thoughtful there. And as we see things improve as we move through the back half of the year, we'll come back and look at that again. But right now, we felt it was a prudent place to land.

The next question comes from Andrea Teixeira with JPMorgan.

And congrats again, John. And thank you for everything. I think we go back 6 years. So we would see for the community. Just as we go back, you just mentioned this question, the environment in the U.S. I just want to kind of double-click in your comments on the prepared remarks, you said June getting better. Is there any -- you highlighted obviously more innovation, and you always have been kind of disciplined from a pricing perspective. Is there anything you can say about the price points or how competitive you are in kind of like the entry-level pricing. And then if we -- how comfortable you are on that perspective and how comfortable you are in terms of like you said for the second half? .

Yes. Thank you. I think your question is specific to the U.S. And if that's the case, that's how I'll answer it. But if not, let me know and I can talk about more on a global basis. Clearly, we're all -- particularly the North America group disappointed with the second quarter. On top of the category softness we saw in May that I talked about we called that out at Deutsche Bank. We've seen heightened competitive activity, and we've seen obviously some -- in parallel, some inventory reductions from key retailers come through in the quarter as well. We think the softness is made, as I just alluded to, was really the peak gasoline prices, particularly in the U.S. and the commensurate impact on consumer confidence and people being very, very careful. The categories, as I mentioned, did rebound in June, and we've seen more or less that consistent in July as well. but still below historical numbers. So we need to be mindful of that, but certainly not where they were in May, which is -- it bodes well. Further impacting the shipment numbers in North America, where the inventory reductions we talked about. We're shipping consumption more or less at 1 with shipments down 3. So there's some noise in those numbers. We're not as focused on inventory reductions as we are being very deliberate about the actions that we need to take on the things that we control. And I think we've got a good line of sight of what actions that we need to take to continue to stabilize the market share is moving forward. So let me talk about a couple of those for you. So we're going to step up support to accelerate particularly premium innovation in the toothpaste category and quite frankly, across some bar other categories as well. You saw the recent launch of Optic White, and we're going to continue to focus on that. We've launched some extensions in Fabuloso and more of that to come. So we will continue to step up our '26 and '27 innovation grids, particularly on the premium side. Specific to your question on price gas, we did identify some very select price gaps in certain retailers in certain categories against some of our competition. We will address that, but be very prudent and thoughtful on how we do that. We can't be uncompetitive in terms of pricing and promotion, but we want to be sure that we're not leaving that further down. So we're going to be very thoughtful on how we go after some of those channel opportunities. And as I also mentioned, we're going to step up our spending in the back half of this year. Not competitive in some of the categories in terms of advertising support, so we'll accelerate that, and that's obviously built into our guidance as well. So clearly, the things that we control, we're going after. We're going to be very intentional. We recognize that the numbers aren't where they need to be. It won't be a linear improvement, but we'll see certainly a sequential improvement as we move through the back half of the year.

The next question comes from Filippo Falorni with Citi.

I also want to say thank you to John for all the help through the years. Best of luck to you. So I wanted to ask about Latin America. That business continues to do very well for you, both on volume and pricing growth. I'm just curious, like from a volume standpoint, what is driving the market share gains, if you can expand a bit there both in Mexico and Brazil? And then as you think about the back half of the year, how sustainable this consistent performance is, especially as you lap the Colgate Total reformulation last year?

Yes. Thank you, Filippo. Yes. As you mentioned, a good quarter for LATAM, another good quarter with up more or less 5%. And what's pleasing is the balance between both pricing and volume. So in pricing up to 8% and volume to 6%. Volume, as you mentioned, bounced back and bounced back quite frankly, in the last 3 quarters with obviously, a slightly easier comp, but the good news is the volume is coming back. Part of that is certainly driven by getting the total issue we had behind us as we continue to rebuild the total share, and that's coming back nicely. A strong innovation platform that we had across all of our core businesses, particularly in Brazil and in Mexico. And you saw the Brazil and Mexico numbers, I think, that we alluded to with Brazil up high single digits and Mexico up by single digits and oral care, in general, across Latin America up high mid-single digits. So good execution against a tougher market environment where categories still are running more or less mid-single digits, but not back to where some of the historical growth numbers were. So we feel like we're gaining penetration and certainly rebuilding the premium side of the business where we lost a little bit on total. From a category standpoint, all 3 of our categories were up, had strong growth, as I mentioned, in Oral Care, but we were up low to mid in Personal and Home Care behind some of the big relaunches on our core businesses in that region. So pleasingly, it's pretty broad-based. And as I alluded to earlier, the shares on Colgate Total are coming back and those have improved sequentially. And particularly in Brazil, and we're starting to see that as we comp against some of the issues we had last year in some of the other markets. As a bit of a tailwind but still very, very volatile with some of the political and economic uncertainties in the region. We won't expect to get the FX tailwind in the second half that we had in the first half. So we'll be managing pricing and inflation very carefully with our revenue growth management.

The next question comes from Kaumil Gajrawala with Jefferies.

John, also, congratulations if you decide to get Board and want to give Wall Street another world, Jefferies is always hiring.

I'll consider that, Kaumil.

Yes. I think I already know the outcome of that consideration. A couple of things just to understand this inventory thing. Is it a shipping below consumption. Is that a 1 and done? Is it something that snaps back later and it could be a tailwind into the back half? And then on Hills, particularly and the rollout of Prime, how do you manage the message on the value to veterinarians of fresh while also the core of the message of what the Hill's business is, which is selling to them the idea of the benefits of Hills, which is dry. So just curious how you balance that between -- balance of that messaging.