Colgate-Palmolive Company
Q3 2021 Earnings Call Transcript

Published: 29 Oct 2021

[Operator:]

Please standby. We're about to begin. Good day, and welcome to today's Colgate-Palmolive Company Third Quarter 2021 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now, for opening remarks, I would like to turn the call over to Chief Investor Relations Officer, John Faucher. Please go ahead, John.

[John Faucher:]

Thanks, Jennifer. Good morning, and welcome to our 2021 Third Quarter Earnings Release Conference Call. This is John Faucher, Chief Investor Relations Officer. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and our most recent filings with the SEC, including our 2020 annual report on Form 10-K and subsequent SEC filings, all available on Colgate's website for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in Tables 8 and 9 of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website. Joining me on the call this morning are Noel Wallace, Chairman, President, and Chief Executive Officer, and Stan Sutula, Chief Financial Officer. I will provide commentary on our Q3 performance, as well as our latest thoughts on 2021 guidance, before turning it over to Noel to provide his thoughts on how we will continue to deliver on our growth trajectory. We will then open it up for Q&A. As usual, we request that you limit yourself to one question so that as many people as possible get to ask a question. If you have further questions, you are welcome to re-enter the queue. Our focus on innovation, premiumization, pricing, and productivity allowed us to deliver solid Q3 and year-to-date results, despite a very difficult operating environment. We continue to deliver against our targets because we are executing consistently on the strategy no laid out at back in 2019. We are focused on delivering consistent, sustainable, profitable growth, both volume and pricing growth, growth in all of our categories, growth in all of our divisions emerging and developed markets. And this has enabled us to deliver 11 straight quarters with organic sales growth in line with, or above our long-term target of 3% to 5%. This is, despite very difficult comparisons, and a challenging operating environment. The current operating environment is challenging in many different ways. Consumer mobility is limited in many markets, particularly in Asia due to government restrictions to stop the spread of COVID-19, which is having a negative impact on category growth. These restrictions have also led to temporary closure of manufacturing facilities across many industries as you have heard in the news, and from other companies. We are not immune to these restrictions, although given the essential nature of our categories, we produce products that people and their pets use on a daily basis to lead healthier lives. We have been able to resume production throughout our network, although sometimes at a lower-than-normal level. This did have a slight impact on sales in the third quarter. And we expect a modest impact in the fourth quarter, as we ramp production back up. We are fortunate to have a flexible and resilient global supply chain that has helped us to offset some of the effects of the supply chain challenges, albeit sometimes with additional logistics costs. Speaking of logistics, the stress on global logistics networks is creating shortages of raw materials, lengthening shipment times, increasing costs, and adding additional uncertainty. All of this is on top of the significant increases in raw material costs and continued movement in foreign exchange. These challenges will continue into next year, but we will continue to meet them head on. Our net sales grew 6.5% in the quarter, driven by 4.5% organic sales growth and a 2% benefit from foreign exchange. Our organic sales growth in the third quarter was led by Oral Care, where we were up mid-single-digits and Pet Nutrition, where we were up double-digits. We delivered organic sales growth in homecare despite a difficult comparison, which puts our homecare business at double-digit growth on a two-year stack. As expected, organic sales in Personal Care declined mid-single-digits as we lap the COVID related growth in liquid hand soap in the year-ago period. But sales remain above 2019 levels. We grew volume 1.5% in the quarter. Pricing grew 3% in the quarter up sequentially from Q2, despite a more difficult 4.5% comparison. As we continue to layer in new pricing to try to offset accelerating raw materials costs. Pricing was up in every category and every division. Raw materials continue to increase in Q3, putting further pressure on our gross margins, despite additional pricing and productivity efforts. Our gross margin was down 180 basis points in the quarter. Pricing was a 110 basis point benefit to gross margin, while raw materials were a 510 basis point headwind, despite a slight benefit from transactional foreign exchange. Productivity was favorable by 220 basis points. On a GAAP and base business basis, our SG&A was up 50 basis points on a percent of sales, driven by significant increase in logistics costs as advertising was up on a dollar basis, but flat on a percent of sales basis. Excluding logistics and advertising, our overheads were down slightly on a dollar basis and down nicely on a percent of sales basis. We continue to increase our investments in capabilities like digital, e-commerce, and data and analytics. But this was more than offset by sales leverage and tight expense controls. For the third quarter on a GAAP basis, our operating profit was down 5% year-over-year, while it was down 3% on a base business basis. Our EPS was down 7% on a GAAP basis, and up 3% on a base business basis. A few comments on our divisional performance; net sales in North America grew 1% in the third quarter. With organic sales growth of 0.5% and 50 basis points of favorable foreign exchange. Volumes were flat in the quarter, despite a negative nearly 400 basis points impact from lower liquid hand soap volumes. While pricing was slightly favorable. We made significant progress on our North American business in the quarter with solid Oral Care growth driven by mid-single-digit growth in toothpaste, which led to improved toothpaste market share performance through the quarter. Personal Care and Home Care were both down, as we lapped COVID benefits in the year-ago period although LTAMD and PCA skin delivered strong growth in the quarter. North America operating margins were negatively impacted by raw materials and higher logistics costs. The impact of plant closures on our global supply chain required us to incur additional airfreight charges to fulfill customer orders in the quarter. We also incurred some additional manufacturing costs in the quarter that should help improve the long-term profitability of the division. Latin America net sales were up 11% with 8% organic sales growth, and a 300 basis point benefit from foreign exchange. All 3 categories delivered organic sales growth in the quarter with Oral Care, organic sales growth in the high single-digits. Volume was plus 2.5% in the quarter, while pricing was up 5.5%. Brazil and Mexico led the growth in the quarter, while Columbia delivered double-digit growth following last quarter's political unrest. The natural segment continues to be a key driver of growth for us across Latin America, particularly Colgate Natural Extracts Charcoal. And we recently launched Colgate Zero Toothpaste in Brazil. Our strong Latin America pricing growth highlights the success of our Revenue Growth Management program with a combination of less price increases, premium innovation, and trade promo adjustments. Europe net sales grew 1% in the quarter, with organic sales minus 1%, and foreign exchange adding 2%. Volume was down 1%, and pricing was flat. Oral Care organic sales grew high single-digits, While Personal Care organic sales were down sharply driven by difficult liquid hand soap comparisons due to COVID related consumption in the year-ago period and a decline in Florida Duty free sales. Colgate elixir toothpaste continued to drive growth in the quarter, along with strong contributions from Elmex and Meridol. Asia-Pacific net sales grew 1% and organic sales declined 0.5% in the quarter, with volume down slightly and pricing and foreign exchange both slightly positive. Oral Care saw low-single digit organic sales growth in the quarter. While Personal care, and Home Care were down due to difficult COVID comparisons. We did see government imposed mobility restrictions negatively impacting category volumes in several markets, including many in Southeast Asia. India and the Colgate China business both delivered strong volume growth behind robust innovation in the rebate EC segment in India and an e-commerce in China. Our saw significantly improved performance in Q3 versus Q2, with trends also improving sequentially through the quarter. Africa, Eurasia net sales grew 1% in the quarter with organic -- with an organic sales decline of 1% lapping double-digit organic growth in the year-ago period, more than offset by a 2% positive impact from foreign exchange. Volumes were minus 4.5%, while pricing was plus 3.5%, The organic sales growth decline in the quarter was driven by personal care as we lapped double-digit growth in the year-ago period due to COVID related demand and pricing. Oral Care organic sales in the quarter were flat as disruptions in the global supply chain had a negative impact on product availability. Fill strong growth continued in the third quarter with 20% net sales growth and 19% organic sales growth. With strong growth in both emerging and developed markets. Organic sales growth was driven by double-digit volume growth and high single-digit pricing through list price increases and our premiumization strategies. Our focus on the microbiome, which talked about during our CAGNY presentation this year, continues to pay dividends with the active biome plus technology. Including in Hill's Prescription Diet gastrointestinal and Hill's Science Diet Perfect Digestion Both of which are driving sales growth and share in this important segment. And now for guidance. We still expect organic sales growth for the year to be within our 3% to 5% long-term target range. As I mentioned previously, we have seen an impact from government actions to stem the spread of COVID-19, including reduced consumer mobility and supply chain interruptions. We are managing through these issues, but we would expect modest headwinds from this to continue in the fourth quarter. Using current spot rates, we expect foreign exchange to be a low single-digit benefit for the year, others slightly less favorable than when we gave guidance in July. Please note that at current spot rates, foreign exchange will have a negative impact on Q4. All-in, we still expect net sales to be up 4% to 7%. given the continued pressures from raw materials, we are projecting a greater decline in gross margin than when we last gave guidance in July. Fourth quarter gross margin is expected to be roughly in line with the third quarter although the raw material situation remains very difficult. We continue to take additional steps to mitigate the impact of these cost headwinds, including additional pricing, optimizing trade spending, accelerating FTG where available, and many others. We are focused on recouping the gross margin we have lost due to cost inflation over time, and are planning to take the actions necessary to do so. Advertising is still expected to be up on a dollar basis, but flat on a percent of sales basis. Given the issues surrounding logistics networks on a global basis, our logistics costs will continue to be a headwind, particularly in the U.S. and Africa/Eurasia. Our tax rate is now expected to be between 22% and 23% for the year on both a GAAP and base business basis. On a GAAP basis, we still expect earnings-per-share growth in the low-to-mid single-digits, and as we said on the second quarter call, towards the lower end of that range. On a base business basis, we continue to expect earnings-per-share growth in the mid-to-high single-digits. Again, we would expect to land at the lower end of that range. And with that, I will turn it over to Noel.

[Noel Wallace:]

Thanks, John, and good morning, everyone. So what I take away from our performance, I guess both in the third quarter and on a year-to-date basis, is that we continue to make good progress on our strict strategic and operational journey despite the significant volatility we're encountering across our entire business. At the heart of this is our strategy to deliver broad-based, sustainable, profitable growth. Every division, every category, both volume and pricing, that's our aspiration. And over the past few years, we have changed our mindset about how we drive growth. We're more proactive in attacking the opportunities for growth. Think core, premium faster alternative channels and markets. And of course, we talked a lot about building capabilities. Think digital, data, e-commerce, innovation. All of these are helping us mine these important areas of growth. While lapping our most difficult comparisons in over a decade, we've delivered organic sales growth at the high end of our long-term target range of 3% to 5%. And on a 2-year basis, both pricing and volume growth increased sequentially in the quarter. Importantly, this growth is being driven by our two most important categories

[Operator:]

Thank you. And we'll go first to Dara Mohsenian with Morgan Stanley.

[Dara Mohsenian:]

Hey, guys.

[Noel Wallace:]

Hey, Dara.

[Dara Mohsenian:]

Can you review your Oral Care market share performance globally, maybe compare and contrast some of the regions that are performing better versus laggards? And if you take a step back, looking at the strategies you laid out at CAGNY a few years ago, which strategies have taken hold in Oral Care are working? Maybe what are some of the areas where you might need some more work? And if I can just slip in a related second part, can you also update us on the competitive and the pricing environment in Oral Care in light of the higher cost environment here? Thanks.

[Noel Wallace:]

Sure. Thanks, Derrick. Overall, we're pleased with the progress that we're making on Oral care, particularly in toothpaste and manual toothbrushes. If you take our shares on a constant currency basis, they're relatively flat, which is better than where we had then. When you start to go around the world, particularly as you look at new channels, we're very pleased with the progress we're making in e-commerce and pharmacy. Let's just bounce around the world a bit. North America still has been a little bit soft, but we've seen the shares bounce back nicely in the last 13 weeks and where our shares are actually flat now and all outlet basis if you take e-commerce and all the untracked channels, our estimation is our shares are back to flat the U.S slightly up, which is good progress particularly as we've seen the acceleration of some of the premium that we've launched in the market, particularly whitening over the last 13 weeks. And likewise, our e-commerce shares continue to be good, not as strong as our general market, but progressing in North America. Europe, the shares have been strong. Our Elmex and strategy behind Elmex and Meridol has been very successful in pushing those businesses across all of our core markets. Our shares continue to be up across that region and we continue to see the shift toward our premium bundles, which was again part of the strategy change that we outlined back at