Colgate-Palmolive Company (NYSE: CL) Q4 2022 earnings call dated Jan. 27, 2023

Meet the Key Leadership Team at Colgate-Palmolive:

John Faucher — Chief Investor Relations Officer and Senior Vice President, M&A

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Stanley J. Sutula — Chief Financial Officer

Industry Analysts Contributing Insights:

Dara Mohsenian — Morgan Stanley — Analyst

Andrea Teixeira — JPMorgan — Analyst

Kaumil Gajrawala — Credit Suisse — Analyst

Chris Carey — Wells Fargo Securities — Analyst

Peter Grom — UBS — Analyst

Kevin Grundy — Jefferies — Analyst

Olivia Tong — Raymond James — Analyst

Nik Modi — RBC Capital Markets — Analyst

Jason English — Goldman Sachs — Analyst

Steve Powers — Deutsche Bank — Analyst

Robert Ottenstein — Evercore — Analyst

Mark Astrachan — Stifel — Analyst

Lauren Lieberman — Barclays — Analyst

Bryan Spillane — Bank of America — Analyst

Commencement of Earnings Call Presentation:

Operator

Good morning, everyone. Welcome to the Colgate-Palmolive 2022 Fourth Quarter and Year-End Earnings Conference Call. This session is being recorded and is also being simulcast live at www.colgatepalmolive.com.

To kick off today’s discussion, I’d like to hand the floor over to our Chief Investor Relations Officer and Senior Vice President, M&A, John Faucher.

John Faucher — Chief Investor Relations Officer and Senior Vice President, M&A

Thank you, Allison. Good morning, and welcome to our 2022 fourth-quarter and full-year earnings release conference call. This is John Faucher speaking. Today’s call will include forward-looking statements, and I must emphasize that actual results may differ significantly from these statements. We encourage you to reference our earnings press release and related prepared materials, along with our latest filings with the SEC, including our 2021 Annual Report on Form 10-K and other subsequent SEC submissions. All of these documents are available on Colgate’s website and provide important context regarding the factors that could lead to variations in our actual results. Additionally, today’s call will discuss non-GAAP financial measures, including those identified in Tables 8 and 9 of the earnings press release.

A full reconciliation to the relevant GAAP measures is included in the earnings press release and is also accessible on our website. Joining me on the call this morning are Noel Wallace, our Chairman, President, and Chief Executive Officer; and Stan Sutula, our Chief Financial Officer. Noel will share his insights on our Q4 results, as well as our outlook for 2023. Following that, we will open the floor for questions. Noel?

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Thank you, John, and thank you all for being with us this morning. I would like to extend my warmest wishes for a Happy New Year to everyone. Today, I mainly want to focus on our expectations for the year ahead, as I believe we are well-positioned to achieve strong results in 2023, despite the challenges posed by a difficult macroeconomic environment and ongoing uncertainties. However, I am also pleased with the progress we achieved in 2022.

We experienced organic sales growth across all four of our categories, notably achieving double-digit organic sales growth in Pet Nutrition and high-single-digit organic growth in Oral Care. 2022 marked our fourth consecutive year of organic sales growth, consistently aligning with or exceeding our long-term target range of 3% to 5%. We have successfully maintained this growth trajectory across every quarter, achieving a remarkable 16 consecutive quarters of growth. This ongoing success underscores the strength of our strategy, which has allowed us to navigate various operating environments, each presenting unique challenges and opportunities. By focusing on our core strengths, leveraging our capabilities across our portfolio, innovating in faster-growing adjacencies, and exploring growth channels and markets, we are confident in our continued growth prospects.

Looking ahead to 2023, as we execute our strategy, we expect to see accelerated earnings growth and generate additional cash flow to enhance shareholder value. We are well-prepared for this year despite the uncertainties that persist in the global landscape. Our portfolio consists of four focused categories that provide essential products for consumers, who trust our brands to support healthier lives for themselves and their pets. This emphasis on health and well-being drives consumers toward science-backed innovations with professional endorsements, an area where we excel. Trust is a crucial factor in our categories, which helps maintain relatively low private-label penetration and allows for premium pricing based on differentiated benefits. Within these categories, we command strong market shares, with most of our revenue stemming from brands that rank either first or second in their markets globally.

Another key advantage lies in our commitment to building, sharing, and scaling capabilities to foster growth. I will continue to stress the importance of our digital transformation, which influences all aspects of our operations. This year, we have seen benefits from our data-driven media spending strategies, leading to enhanced efficiencies. Our innovation initiatives are designed for long-term impact, not just immediate launches, and we have redirected resources to prioritize breakthrough and transformational innovations.

Within our prepared remarks, we discussed the market share gains we are achieving in the whitening segment of the toothpaste category. Our long-term strategy includes launching products such as Optic White Renewal and Optify Pro Series in the US, as well as our new MPS whitening technology that is being rolled out globally. This approach leverages our superior R&D capabilities to drive sustained market share growth. Furthermore, we are continuously rolling out at-home and professional whitening products to strengthen our credibility and expand our market presence in the premium segment. Our focus on enhancing revenue growth management capabilities, particularly through the increased use of data and analytics, is also driving our pricing growth beyond mere list price increases.

Lastly, our robust balance sheet is a significant asset. Our combined financial resources give us the flexibility to reinvest in our portfolio and pursue value-enhancing acquisitions, such as our strategic moves in the pet food sector, which are anticipated to drive accelerated growth. Additionally, we have implemented measures to offset the extraordinary cost increases we have experienced in recent years. We have consistently adjusted pricing strategies and plan to implement further price increases in the first half of this year.

Our Funding the Growth initiative achieved another successful year in 2022, and we anticipate even higher savings levels in 2023. We launched our global productivity initiative last year, and we began to see positive impacts in our financial results during the latter half of 2022. We expect to see even greater savings in 2023, which will aid in funding investments and expanding our operating margins. Overall, we believe we are well-equipped for 2023, even amid global uncertainties. The macroeconomic outlook remains volatile, potentially impacting consumer spending. The situation in China remains uncertain as the country emerges from COVID-19 lockdowns. Although raw material and foreign exchange costs continue to present challenges, they appear more manageable than before. However, as we learned last year, circumstances can change rapidly. We enter 2023 with strong top-line momentum and a proven strategy, supported by the right brands, capabilities, and efficiency drivers to ensure continued growth and improved bottom-line performance.

With that, I will now turn the discussion over to our Q&A session.

Engaging in Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today will come from Dara Mohsenian from Morgan Stanley. Please proceed.

Dara Mohsenian — Morgan Stanley — Analyst

Hello, everyone. I wanted to discuss the guidance for organic sales growth for the upcoming year, especially in light of a strong Q4 performance and the robust pricing strategies we have observed. I’m assuming that this guidance incorporates a slight decline in volumes, possibly due to pricing impacts. Is that correct? Additionally, could you provide some commentary on how you perceive competitive dynamics regarding pricing and demand elasticity as we move into 2023?

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Thank you, Dara, and good morning. To recap, we are indeed pleased with the strong organic growth we experienced across our business segments, especially as we concluded the year with significant momentum. The pricing strategies we implemented have positively impacted our profit and loss statement, particularly when viewed on a two-year stack basis, showing an increase of up to 15.5%. We have consistently taken significant pricing measures, and we expect to witness the benefits of these strategies as we transition into 2023.

Nonetheless, volume remains a challenge globally, which has been a common theme throughout this earnings season. Many categories have experienced a pullback, which is anticipated given the scale of pricing changes implemented across various regions. We expect to see continued pricing adjustments during the first half of the year, which may put pressure on volumes, particularly in the latter half of the year. Furthermore, the landscape of economic vitality in different markets globally presents its own set of uncertainties. Europe is currently grappling with significant inflationary pressures, resulting in softer category performances. Demand elasticity is comparatively higher in Europe than in other regions.

The situation in China remains uncertain, especially with high infection rates persisting. While there is optimism regarding China’s reopening, our observations during the fourth quarter highlighted soft volume performance in the categories we operate in. We anticipate this trend to continue into the first quarter but expect improvement as we advance into the second half of the year. Therefore, we will continue to prioritize pricing strategies across our categories during the initial half of this year. However, we are mindful of the substantial pricing changes we enacted in the latter part of 2022, and we will closely monitor their impact on consumer behavior.

In summary, our elasticities have been in line with our expectations thus far. We are confident in our organic growth range and, if current conditions persist, we aim to be at the upper end of this range, if not exceed it.

Operator

Our next question will come from Andrea Teixeira with JPMorgan. Please proceed.

Andrea Teixeira — JPMorgan — Analyst

Thank you, and Happy New Year to you as well. I have a broader inquiry regarding volume performance, particularly the reported global decline of minus 4%. This figure appears to be favorable compared to some competitors. Can you elaborate on the influence of retail destocking, particularly in relation to Filorga? I appreciate your insights on this matter.

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Thank you, Andrea, and good morning. I’d like to provide additional context regarding our volume performance globally, especially as we progressed through the quarter. We observed improved volume metrics in the fourth quarter when compared to the third quarter, despite experiencing an incremental point of price increase at 12.5%. While we are pleased with this growth, we did encounter challenges, particularly in the skin health segment, which faced significant inventory reductions, especially in North America. The Filorga business experienced notable volume softness in China, primarily due to COVID-related lockdowns. Additionally, our operations in Russia accounted for roughly 30 basis points of impact on our overall volume performance.

Regarding elasticities, they have remained consistent with our expectations globally, with slightly elevated elasticities in Europe, which aligns with historical patterns. We did encounter some unexpected inventory reductions in India, particularly within rural markets, where recovery has not occurred as swiftly as we anticipated in the fourth quarter. We remain optimistic about the potential for recovery in these markets as we progress through 2023. Overall, the volume trends we observed in the fourth quarter were aligned with our expectations, and we did not foresee a further deceleration in inventory reductions in the US skin health segment.

Concerning volume exit rates in Europe, I would describe the situation as generally positive, with strong share growth observed across many categories, particularly mid-to-high single-digit organic sales growth in both oral care and home care segments. However, the personal care category, specifically Filorga in China, faced challenges. Despite these difficulties, we have maintained strong market shares, and pricing negotiations have proceeded favorably.

Operator

Our next question will come from Kaumil Gajrawala from Credit Suisse. Please proceed.

Kaumil Gajrawala — Credit Suisse — Analyst

Good morning.

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Good morning, Kaumil.

Kaumil Gajrawala — Credit Suisse — Analyst

Regarding your commentary on market share, you seem satisfied with the trends. Could you elaborate on whether your satisfaction extends to volume share as well as value share? Are you equally pleased with your performance in volume terms?

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Certainly. As I previously noted, we felt encouraged by our overall performance in Europe, particularly within the oral care segment. In North America, the data indicates that we have either maintained or increased our share in eight to twelve categories. Notably, we have seen robust oral care growth both for the year and within the quarter. In Latin America, our shares have remained relatively flat, and we are content with our position in the region, especially considering the significant pricing strategies we have implemented.

Our performance in Asia is characterized by strong e-commerce growth, though we experienced some softness in brick-and-mortar sales. Overall, e-commerce continues to excel, while the Africa and Middle East regions also show strength. In summary, we are pleased with the momentum we have achieved in terms of market shares by value. Volume performance remains consistent, albeit with slight softness observed in Europe, which can be attributed to the substantial pricing adjustments we have undertaken. In Asia, we have seen a similar pattern, with value shares holding steady while volume shares exhibit some softness.

Operator

The next question will come from Chris Carey of Wells Fargo Securities. Please proceed.

Chris Carey — Wells Fargo Securities — Analyst

Good morning.

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Good morning.

Chris Carey — Wells Fargo Securities — Analyst

Noel, regarding your observations on incremental pricing, I note that you mentioned productivity is expected to accelerate. Given the outlook for raw material inflation, I’d like to understand the potential for significant gross margin expansion. I’m aware that reality often diverges from projections, but could you help clarify your expectations in this regard? Thanks.

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Certainly. Let me address the strategic positioning of our profit and loss statement, particularly in relation to growth and investment. I will then pass the floor to Stan, who will delve into the specific constructs surrounding our gross and operating margins. As you rightly pointed out, we are genuinely pleased with the improvements we have observed in operating margins, and we anticipate this trend to continue, allowing for further investments in advertising. As highlighted in our prepared remarks, we intend to maintain our investment strategy, which has yielded positive responses to our initiatives over the past few years. The core adjacencies and channels we focus on have driven strong organic growth, evidenced by a 5% dollar increase in the quarter, despite facing significant foreign exchange headwinds.

We have emphasized the necessity of investing in our business, particularly as we bring more capacity online, which has begun to materialize in the fourth quarter. As we look to 2023, we will continue to amplify our investments in the Hill’s business to capitalize on the incremental capacity we have developed.

Our oral care segment has shown strong momentum driven by innovation and substantial pricing strategies implemented across various categories. We remain committed to ensuring that our investments are effectively utilized to achieve our pricing objectives and stimulate consumption growth for our retail partners. Overall, we expect this to be another year characterized by good investment, strong market share growth, and positive top-line results flowing through our profit and loss statement.

Now, I’ll turn it over to Stan, who can provide further insight into our gross margin and operating margin strategies.

Stanley J. Sutula — Chief Financial Officer

Thank you, Noel. In terms of gross profit margin, we have started to see progress in North America, Latin America, and Africa, Eurasia, with improvements reported in operating margins during the fourth quarter. When analyzing gross profit, as Noel pointed out, our pricing strategies have positively influenced our results, and productivity improvements will serve as a tailwind moving forward. While raw material and packaging costs have presented challenges, we anticipate some moderation as we transition into 2023.

As we project gross profit margin expansion, it is essential to remain mindful of our advertising investments, which we expect to increase both in absolute dollars and as a percentage of sales. Additionally, we anticipate a rise in interest expenses year-over-year, primarily driven by increasing rates and slightly elevated debt levels as we incorporate Red Collar into our financials for the full year. We also expect our tax position to rise slightly on a year-over-year basis, particularly within recessionary environments. Therefore, while we forecast improvements in operating margins or EBIT margins, these will be partially offset by interest and tax considerations, leading to projected low to mid-single-digit EPS growth.

Operator

Our next question will come from Peter Grom of UBS. Please proceed.

Peter Grom — UBS — Analyst

Thanks, operator, and good morning, everyone. I wanted to inquire about the gross margin results for the quarter, which were somewhat unexpected. In your prepared remarks, you identified several key drivers that led to results falling short of expectations. Could you elaborate on where the most significant variances originated, whether they were due to sales mix, commodity prices, or perhaps startup costs and manufacturing variances?

Additionally, following Chris’s inquiry, as we look ahead, can you provide a framework for understanding the projected raw materials and packaging inflation? Is it reasonable to expect this to fall within the $300 million to $400 million range, or is it higher? Gaining clarity on the gross margin bridge will be essential as we evaluate the upcoming year. Thank you.

Noel R. Wallace — Chairman of the Board, President, Chief Executive Officer

Sure. In the fourth quarter, we faced an ongoing challenging environment regarding raw material inflation, with an additional 900 basis points of impact on gross profit compared to the third quarter. A significant portion of this pressure stemmed from agricultural prices, which remained elevated throughout the year. Furthermore, as we integrated the three Red Collar facilities and transitioned some high-capacity volume business to our plants, we incurred startup costs and variances that negatively impacted our margins during the quarter. Additionally, inventory reductions in skin health and the challenges experienced by our skin health business in China also contributed to the mixed impacts observed in the quarter.

With that, I will hand it