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

In North America specifically? As I said earlier, this is not about taking pricing down, and this is about being more competitive with where we're seeing the competition move. And there are certain retail environments and certain programs at retail environments run where you need to be effective with your couponing. And so it's just pretty as simple as that. And we have not been targeting that as aggressively as we should and we're going to ensure that we get our fair share of that consumer, which is obviously a little bit more intense in the U.S. with the value orientation that we're seeing across the U.S. economy and our need to make sure that we're competing effectively in that regard. So there won't be any price reductions. It will be making sure our portfolio works as effectively as possible. Second will be price pack architecture, a lot of architecture work, making sure that we're offering the right price points across our portfolio, which has always been a competitive strength for us, the fact that we compete up and down and making sure that we have the right price points associated with the pack sizes that we have will be critically important. But there will be no price reductions in this. It will just be promotional tactical work that we do across certain retail environments.

Okay. Great. Last question on North America. When we're back here next year, consider that an invitation, what would progress look like on the North America business? And kind of how quickly do you think you can really reorient and start to execute on this strategic reset?

Yes, it's going to take some time, but clearly, it's sustainable top line growth. We need to see the organic growth come back and inflect positive consistently from quarter-to-quarter. We need to see the market shares, particularly in oral care, inflect positively over the next year. And we need to see, obviously, the margins come back into the categories where we're driving premiumization. Premiumization is an extension of that will be critically important. Our share of the premium growth across all categories, whether it's home care, personal care, where oral care needs to continue to accelerate.

Okay. All right. So let's turn to emerging markets. So clearly been the growth engine this year, Brazil, Mexico, India, China, all contributing nicely. How should we think about sustainability of that growth?

It's been there for decades for us as we've been in these markets for over 100 years in some of them. So we understand them extraordinarily well. And the growth to be very exciting for us. As most of you know, we do 70% of our revenues outside the U.S. And we've been in these markets for a long, long time. We understand the consumer. We understand the retail environments. We understand how to drive per capita consumption over the long term, and we understand it drive premiumization. So when you have that combination, you feel pretty confident that you can drive durable growth over the long term. And there clearly is a lot of upside still in the markets where we compete. Brazil, yes, we have a 73% share in Brazil. We have an 83% volume share in Mexico. Those are big numbers, but the premiumization aspect in Brazil is great. The per capita consumption aspect in Mexico as well as the premiumization aspect of Mexico is great. The category diversity that we have across those regions. We're very strong in not only oral care, but typically in our home care and personal care products as well. So we have a lot of levers to pull. The strength of the brand and the acceleration of advertising that we put behind those categories over the last 5 years has improved the brand resonance, improve the brand loyalty. So we feel pretty good that we're creating a stronger moat and we're bringing in new capabilities to emerging markets, just as fast as we're deploying them in developed markets, so things like AI we're doing exceptionally well. We've taken programs out of India and put them into other emerging markets across the world. We're taking programs from Mexico and Brazil into smaller markets, across emerging markets around the world. So we're really trying to strengthen the capabilities and the enablers that we have in emerging markets to continue to protect and drive that durable growth for the long term. And the innovation in emerging markets is exceptional.

Okay. And for many years, like the story in these markets has been about both increasing category penetration, trading up the pricing ladder, like you mentioned earlier. Do you think is oral care household penetration opportunity? Like is it smaller than it was 10 to 15 years ago? Is premiumization like more the name of the game in some of these markets like Brazil?

Yes. Good question. If we're doing our job right, the opportunity for household penetration is coming down, right? Because over the years, we're investing to drive that household penetration. So I think overall, there are still opportunities for penetration across some of the emerging markets. I'll talk perhaps about some of the newer markets that we're going into, and per capita consumption still is a clear opportunity. But if you take the biggest opportunity holistically, if you take Mexico, Brazil, India, China, that's 50% -- 56% of the middle class growth over the next 5 years, those 4 markets. You add Nigeria and you add Bangladesh to that, which are new markets that we've been going into, you get to 65% of the middle class expansion. And those 6 countries alone represent 25% of the population growth. So emerging markets, and I'm just throwing some of the bigger markets out. Emerging markets clearly is the growth opportunity for our company in the long term, given the fact that we've been there for so long, and we see the growth opportunities, both in middle class and population. And that's exactly the type of organic and tailwind we want behind our business. And so we'll continue to focus on the breadth of our footprint around the world and the opportunities that we see in those emerging markets.

Okay. Great. Let's talk a little bit more about China. So even though it's kind of a smaller market for you guys, it's gone through its own transformation. Colgate China, like you mentioned, has performed well. Hawley & Hazel starting to improve, maybe not exactly where you want it yet, but making progress. What have you seen in China about how the consumer and the go-to-market model are changing? And how have you adapted? And then specifically, a couple of times, you've mentioned this morning even already about the Colgate China playbook and how that's transferable to Hawley & Hazel, but maybe explaining what that means would be helpful.

Yes. If you remember, I guess, probably 4 or 5 years ago when we were sitting here, China was our turnaround story. And I give the management team in Asia and particularly in CP China, wonderful kudos for the incredible role that they did and changing the trajectory of that business from a drag on the business now to a growth accelerator for the business and a profitable growth accelerator at that, which has been terrific. One of the big changes that we've seen in China that most CPG have experienced over the last 5 years is the complete transformation of the brick-and-mortar business to an online business. Now roughly 50% of the business in China is online. And across that online business is a multitude of different platforms that require very, very distinctive go-to-market approaches in order to be successful. And our team has done 2 things exceptionally well. They've innovated for those platforms really well, and they've created with all of our AI abilities, analytics ability, a media structure that's pretty unique. So we're able to develop thousands of pieces of content per day now in China to deliver personalization to the market. That's all done through AI and done through a system that we've built over the last 3 years in order to compete more effectively in that retail environment. Hawley & Hazel is now playing catch up to that. They're really starting to deploy the CP playbook on innovation. They've got good premium innovation that we talked about, which is the dual tube technology that's done very well online, but they need to continue to step that up to be successful in that market long term. The market has become more expensive to compete in. And so as a result of that, we've invested all these capabilities over the last 3 or 4 years to truly determine is the effect of our spending, doing what we need to do to drive the brand long term. You can deploy a lot of spending in a platform like Douyin, which is the equivalent to TikTok, and get a real jump in your sales. But long term, is it profitable for the business? And is it doing what you want for the brand and the entirety of the market. So we spent a lot of time strategically thinking through that aspect of how to win in China. And so far, that seems to be playing out quite well with our formula. So continue to see opportunities. Hawley & Hazel still has some work to do, as we know, but they're starting to really take some of these best practices that we've had in CP China and deploying those across their own business.

Okay. I said it was the last question on North America, but I do want to know if there's learnings from the turnaround in China that you can take back to the U.S.?

Yes. Absolutely. I think what we've seen is the pace of innovation in China is at a multiple higher than what we've seen in the rest of the world. And so as a result of that, we're starting to build systems in our innovation process that we think can transfer from China into other markets. And clearly, the priority is North America. So I've had the North America team visit China in order to understand what might be relevant for them. Clearly, the online business in the U.S. is nowhere close to what it is in China, but there's still a lot of transferability and how they think about the insights they're gleaning from the market and how they deploy innovation, particularly in personalized at innovation based on unique retail environments at a much faster clip.

Okay. Let's switch and talk about Hill's. So Hill's continues to outperform in what's been a pretty soft pet category. I know the expectation is for Hill's to keep gaining share. But I'm just curious how you're thinking about category growth and also pricing power for Hill's in a soft market environment?

Yes. Second quarter is a great quarter for Hill's, 4% ex private level on a flat category. So clearly, we're growing share in all the key segments I've talked a lot about being much more selective on where we want to grow. And we clearly have swim lanes or channels that are extremely important to Hill's. Starts and ends, quite frankly, with the professional advocacy that we have and the strength of the brand and the profession, largely driven by a prescription diet business and our ability to transfer that equity into pet specialty, where we have a strong business as well. While the category has been somewhat slow, we're still benefiting from the significant acceleration that we saw during COVID. So as I mentioned, I think, 2 or 3 years ago, that will pay out perpetuity for us because we've had a lot more pet adoptions during COVID, the base has gotten bigger. And what's really interesting, when you start breaking down the dynamics of the category, we're seeing 1 that dogs are aging quickly and there's a lot more older dogs in the U.S. right now. And as a result, that's excellent for us, because older dogs and invariably have more health concerns, health concerns bring them to the vet, and the vet recommends prescription diet in many cases for some of those issues. That continues to play favorably for us. Likewise, during COVID, we saw a lot of GenZ adoptions of pets. So we're really trying to make sure that we get our fair share of that younger demographic that will then build in the future for us as we move forward. So demographics of the category, the category is relatively flat. There's still growth opportunities where there's GenZ and the aging consumer. Second is the segments that we've talked about consistently over the last 3 to 4 years. A significant change in pet ownership from large dogs to small dogs to cat and to the use of vet to add to the bowl. And we played quite aggressively to bring our science into those segments, and we're growing very nicely in those segments in order to generate that 4% growth I talked about in the second quarter.

Okay. Great. I know there's been a lot of interest in the fresh launch for Hill's. So I know it's early days, but just any learnings or things you'd want to share on that line?

Yes. Maybe I'll start with Prime 100, which is the acquisition that we made a few years back in Australia. Clearly with the aim to understand the fresh category. And it's a very interesting category, but it's unique in many ways, particularly from a manufacturing and distribution standpoint. Obviously, it's cold chain, which is something new to Colgate and new to the Hill's business. . But we bought the Prime business because one, it had a strong therapeutic underpinning had strong advocacy from the profession and had exceptional quality and a unique manufacturing process that we thought was quite interesting. Fast forward 2 years, after sitting and learning from that business, we have started a rollout of Hill's Fresh in the U.S. It is driven, first and foremost, by going to the profession and getting their advocacy. -- profession was looking for a professional science-based brand to recommend clearly the awareness of fresh in the U.S. has expanded quite considerably over the last 5 years and pet owners are asking, well, what do you think about fresh. Now they have an alternative to recommend to those pet owners in Hill's Fresh. We're being very selective and very choiceful in how we do this rollout. We've launched a single protein a brand that has therapeutic benefits to it that we like. And the fact that the profession seems to be very supportive of what we're doing and how we're going about introducing the Hill's name into the category. This will be a very thoughtful launch. This is not about generating immediate incremental sales and dollars through the P&L. This is about building the brand for the long term with the profession in the segment of fresh. And so we're going to be very choiceful in how we deploy it and how we rolled it out, ensuring that we are very considerate of what we need to do to compete in this category for the long term and not simply generating short-term benefits. We have an exceptional quality brand. We have great acceptance from the profession and from the consumers thus far. It's going to be a long road to get to where we need to get to, but we're committed to it long term, and we've got some good indications out of the gate.

Okay. Great. Let's talk a little bit about the SGPP, so strategic growth and productivity program, for those that don't know. You framed it as more of a strategic enabler than just like typical cost savings program. So I'd like to understand how the program actually changes the way Colgate operates and to talk through any related changes to work structure that are coming out of it?

Yes. Let me back up for a second because we initiated the program roughly 1.5 years, 2 years ago coming off of the growth that we saw through the '25 strategic plan. So it wasn't like we were behind the 8 ball we needed to produce costs in order to do this. We really felt we had an opportunity to strategically enhance the organization's capabilities and use some of the savings that we would generate not only to funnel back into those capabilities, but to funnel the growth opportunities that we saw around the world. . So clearly, a manufacturing footprint more optimized around the world as we look forward and more strategically looking to drive more personalization through automation. And so we need to make sure that we're able to deliver against the specific retail environment needs and be much more personalized with our offerings and be much more online ready with our offerings. The automation that we're putting into our plants and the savings that have come from that are generating an opportunity to do that specifically. So we'll think about deploying our portfolios a little bit differently in terms of the SKUs we offer to the market. . Second was taking the savings and investing back in the capabilities that have been so important to us over the last 5 years. So we've really increased our spending on AI, moving now into things like agentic. We're increasing our focus on data analytics and insights, and that's through collaboration with some of our big retail partners. And third, we put a significant amount of that savings into specific head count allocation to innovation. North America would probably get the majority of that. So we've had a lot of ways where we've been able to take that savings and continue to deploy it in areas that we think we can scale now. and continue to drive consistent top line momentum while also dropping some of the savings to the bottom line.

Okay. And so if we assume for the moment that category growth is sort of permanently impaired. Does the work being done under this program give you enough like operating leverage to deliver algorithm level growth going forward in a more subdued category growth environment?

Yes, you've heard me use the work flexibility in our P&L a lot, and that's a discussion we have with all of our operating meetings is making sure that we have flexibility up and down the P&L. And we've done a really good job of building that flexibility. SGPP is just 1 of those levers, funding the growth is another, our revenue growth management is another, premium innovation is another. So yes, we think we can continue to build leverage through the P&L as we move forward. But clearly, it starts and finishes with durable top line growth. and our ability to continue to fund advertising, which we funded strongly in the back half of this year. We'll continue to hopefully accelerate the category and drive the leverage through the P&L, but optimizing our plans for lower category growth, if that happens, the automation I talked about earlier, the robotics that we're putting into our plants. That allows us to drive more leverage through our facilities as we see volumes subdued. But rest assured, we are very confident that categories will inflect positive ultimately as the economy starts to come back and we get a lot of the noise out of the system that we're experiencing now, because the inherent base fundamentals of those categories, where there's per CAF penetration or pricing that we have will allow us to drive the category growth to better levels.

Okay. Great. I did just want to ask a question on M&A. So there's been some pretty big portfolio moves across Staples in the last year. Colgate has been on the sidelines and has really remained focused on 4 core categories. But if we took a step back, like what are the kinds of assets you might be interested in acquiring? How does M&A fit in with the 2030 strategy? And then also just thoughts on acquiring sort of the small faster-growing emerging brands that are out there?

Yes. I think we have been excellent stewards of our capital structure. We're very careful about how we deploy our capital and M&A is an easy temptation to get into, particularly if you're chasing growth, and you need to make M&A to growth. We find that to be a very dangerous position to be in. We feel that we're in a position where we have enough tailwinds in our categories and the focus that we have and the strategy of go point will generate the strategic plan that we have. As I've said before, we do not include M&A in our strategic plan at all. The organic growth has to justify what we're trying to deliver to our shareholders. Big M&A is really hard. We don't really see transformational M&A in the cards at all. It's extraordinarily difficult to execute. There's a lot of executional risk that comes with that, and we don't necessarily see it as necessary for the current growth trajectory that we see on our business. Cold chain M&A might be an interesting opportunity for us. If we see assets that we believe add to the brand strength that we have, add credibility and capabilities to the categories in which we compete and that we can add benefits back to them. Prime 100 was a perfect example of that. It was a nice fit into the business. we allowed us to really understand how to do cold chain distribution, allowed us how to manufacture a fresh product in a much more effective way than we initially were thinking. So it's brought real benefits to the business. We like those types of acquisitions that we feel are accretive to the business long term and have a real additive benefit to our capabilities. But big transformation will not be something that we're necessarily looking at.

Okay. Great. We're going to have to leave it there. We're going to go to breakout, but please join me in thanking Noel for being with us this year.

Thanks, everyone.