Colgate-Palmolive Company (NYSE:CL) participated in the 2022 Barclays Global Consumer Staples Conference held on September 7, 2022, at 11:30 AM ET.

Key Personnel from Colgate

Noel Wallace – Chief Executive Officer

Key Participants from the Conference Call

Lauren Lieberman – Barclays

Lauren Lieberman Opens the Conference

We are thrilled to welcome back Colgate’s CEO, Noel Wallace, to our conference. Noel will begin with some prepared remarks, followed by a Q&A session with me. Without further ado, Noel, the stage is yours.

Noel Wallace’s Opening Remarks

Thank you, Lauren. It’s truly exhilarating to be back here in person, enjoying the opportunity to reconnect with investors and cherished colleagues. As a quick reminder, I want to reiterate our Safe Harbor statement. With the school season beginning over the past two weeks, it’s a time filled with both excitement and anxiety for children, as they reconnect with old friends and forge new relationships. This insight inspired us to explore the significance of a smile on that first day back at school. I’d like to share a brief spot that encapsulates the essence of what the Colgate smile represents. This campaign, which originated in Latin America, is being rolled out globally to promote the brand’s core message of optimism and the transformative power of a Colgate smile. This initiative has significantly strengthened our brand, especially in today’s challenging retail and consumer landscape.

Now, I’d like to outline some key messages for today. We’re effectively executing the strategy we laid out three years ago, focusing on driving consistent topline growth, evidenced by 14 consecutive quarters within our guidance. This growth spans all categories and all six divisions of our company. Importantly, this growth is well-balanced between price and volume, demonstrating a robust growth mindset we’ve cultivated since implementing our strategic changes three years ago. To achieve this growth, we’ve transformed our organizational operations and enhanced our capabilities across the board. Over the past two years, we’ve communicated our progress in scaling these capabilities and the positive outcomes this has generated throughout the enterprise. A crucial element of our growth strategy involves sustained investments in our brands, as showcased in the campaign you just witnessed, which continues to resonate with consumers and bolster our brand equity. We are judicious in our cash expenditures, and I’ll elaborate on our capital structure and strategies later. Additionally, a significant investment in our workforce is essential for enhancing the capabilities we aim to establish within our organization, ultimately enabling us to adapt effectively to our current business environment.

Today, I will cover four critical areas. First, I’ll discuss our focus portfolio and provide context on why we believe the composition of our categories is particularly advantageous, especially given the current challenging consumer environment. Next, I will touch on how we are scaling the capabilities we’ve developed over the past few years and the resulting outcomes we are witnessing. I will also address our productivity initiatives, especially in light of heightened inflation over the last 18 months and recent foreign exchange fluctuations. Finally, I will share our approach to utilizing our robust cash flow to reinvest in the business and enhance shareholder value. Moreover, I’ll quickly reiterate our longstanding commitment to focusing on our four core categories: oral care, pet nutrition, personal care, and home care. These categories have proven attractive, with consistent growth across our entire business. Our sales over the past three years reflect growth in all categories, driven by strong brand penetration. We proudly hold the number one position in toothpaste, manual toothbrushes, and vet clinics for our Hill’s brand, as well as significant positions in liquid hand soap, mouthwash, bar soap, liquid body cleansing, and dishwashing.

Let’s delve deeper into these categories and discuss why we find them so attractive, particularly in today’s climate. A key characteristic of the categories we compete in is their everyday usage. According to data from the U.S., approximately 75% of our categories are utilized daily by consumers, making them non-discretionary purchases that encourage repeat buying. For instance, sun protection is a relatively new category for us, but its significance cannot be overstated as awareness of skin cancer has grown over the years. We see tremendous growth potential in this area. Additionally, we often receive inquiries regarding consumer behavior, particularly about the impact of private labels globally. The following chart illustrates the landscape in our categories: the average private label share is around 5% or lower, indicating robust brand loyalty. Interestingly, many categories we compete in have shown a decline in private label growth, reinforcing the necessity for trusted brands in our sectors. In contrast, the non-Colgate categories we do not compete in show a different dynamic. This data emphasizes the importance of fortifying our brands, and I’ll elaborate on how we are leveraging science and technology to achieve this moving forward.

Building strong recommendations is a cornerstone of our strategy for the categories we compete in. We prioritize establishing robust scientific and technological foundations in our research and development efforts to introduce new products to the market. This emphasis on science not only yields strong clinical support but also fosters endorsements from professionals, including dentists in oral care, veterinarians in pet nutrition, and dermatologists in skin health. The engagement strategies we have employed worldwide to enhance endorsement levels are detailed on this chart, showcasing their significance as a foundational element of our strategy. Creating trusted brands and ensuring consumer loyalty are paramount, and we view opportunities for premiumization as vital. Professionally endorsed brands tend to command a premium in the market, which further enhances consumer loyalty over the long term. Last year, we established an entire team in New York dedicated to fostering collaboration among professionals, sharing best practices across our categories, and enhancing recommendation levels. This initiative aims to optimize our market approach and leverage expertise across the three segments where it holds the most relevance.

As I mentioned earlier, scaling our capabilities is crucial. We are reorienting our company to adapt to the evolving market landscape, and I’ll delve deeper into this transformation. Our capabilities have been evolving over the last few years, and we’re now focused on scaling them across the enterprise. This evolution begins with our commitment to science-led innovation, which forms the backbone of our company. For years, we have emphasized the clinical efficacy of our oral care products, and we are applying this same focus to our skin health initiatives. Additionally, our Hill’s brand has been built on professional relationships and the clinical superiority of our nutritional offerings for the past 45 years.

To illustrate our commitment to innovation, I’ll share an example from the U.S. regarding our whitening strategy, which we’ve been developing for nearly five years. Our latest launch, the Optic White Pro Series toothpaste, contains the highest level of peroxide of any toothpaste we offer, at 5%. Achieving this level of stabilization required significant technological advancements. The results have been remarkable, driving significant incremental growth for the franchise, and we’ve introduced this product at a premium price point to capture market share in the premium segment where we had previously underperformed.

Another notable example is Hill’s Prescription Diet, Derm Complete, which represents a groundbreaking advancement in nutrition. This product addresses both food and environmental allergies in dogs, backed by extensive clinical research. What makes this launch particularly interesting is that we incorporated wearable technology into our clinical studies. Think of it as a Fitbit for dogs, which allows us to monitor scratching patterns, especially during times when pet owners are not present. This capability enables us to substantiate our claims regarding the effectiveness of our diets, leading to endorsements from veterinarians. This innovative approach showcases how we are effectively integrating science and technology to create superior products tailored to dogs with specific health challenges.

In the realm of skin health, we boast a highly efficacious business, with our sun care brand being the top choice among dermatologists in the U.S. We’ve extended our product line to include a portable stick format, marking the first of its kind in our franchise. Developing this technology required significant investment in achieving the same high standards of cosmetic elegance while ensuring the product remains residue-free and effective, particularly with our mineral sunscreen. This endeavor reflects our commitment to quality and our understanding of the expectations set by dermatologists who recommend our products.

Our core business remains robust across the globe, representing the majority of our operations today. We recognize the necessity to innovate consistently, enhancing the value of our core brands. I’d like to share an example from Sorriso in Brazil, the second-largest brand in the market behind Colgate. After several years without innovation, we recognized the need to revitalize the brand and return to its core positioning rooted in Brazilian heritage. Following an extensive formula upgrade, we successfully increased our market share by 120 basis points. I’d like to share the campaign that captures the thought process behind this relaunch, featuring popular local music to resonate with the Brazilian audience.

Moving on to our Hill’s business, it is divided into two segments: the wellness segment, represented by Science Diet, which you may be familiar with, and the prescription diet sold through veterinary clinics. We are currently in the process of relaunching the latter segment, focusing on a digital-first strategy that enhances packaging and resonates with consumers. Our redesign emphasizes optimized search capabilities and effective communication with veterinarians regarding the clinical superiority of our products. This initiative aims to educate pet owners on the efficacy of our offerings and the recommendations necessary for improving therapeutic nutrition.

In South Africa, we have a significant fabric softener business that hasn’t received much attention. We’re re-evaluating our approach to enhance relevance for consumers. For instance, we recently upgraded our Sta-Soft product line, concentrating the formulation to deliver superior fragrance and sustainability benefits. This upgrade has allowed us to command higher prices, with the index showing a 150% increase compared to our baseline business.

Digital transformation, particularly in eCommerce and data analytics, has been the most significant change for our company over the past three years. We have implemented various initiatives aimed at enhancing our digital capabilities, which we believe will provide a competitive edge in the long run. This ongoing transformation requires a commitment to establishing organizational fundamentals. We have introduced enterprise-wide digital tools, recruited external talent, and invested heavily in training to upskill our workforce. Empowering our teams to understand the digital landscape is crucial for connecting the dots in their roles. We are currently focused on sharing best practices across the organization to scale these capabilities and drive further enterprise growth.

In implementing best practices, we recognize the varying maturity levels of digital sophistication across our categories. The Hill’s pet nutrition business has been on a digital journey for nearly a decade and stands as our most advanced eCommerce business. Our toothpaste segment in China has also excelled, ensuring we quickly share skills and knowledge across the organization. Colgate’s historical strength lies in its ability to swiftly distribute products globally, and we are now applying that same principle to our digital strategy. This approach ensures we remain at the forefront of evolving consumer and retail dynamics.

We achieve this through digital summits, leveraging the expertise gained from Hill’s success. Their approach to managing customer relationships and premiumization in eCommerce has set a benchmark. Europe has excelled in optimizing web search and enhancing consumer experiences, and we aim to scale these learnings as rapidly as possible. Ultimately, we are focused on brand experience planning, shifting from traditional channel marketing to a holistic view of the consumer journey within an omnichannel environment, ensuring our messaging effectively drives purchases.

The results of these initiatives are evident, particularly in our eCommerce growth. Over the last three years, we have successfully accelerated our eCommerce share, making it the fastest-growing channel in most of our categories. China has emerged as the most penetrated online market for toothpaste, and our digital-first strategy implemented three years ago has positioned us as the fastest-growing online toothpaste business in China, despite competition from over 75 brands.

Effective media buying is a critical skill we’re honing. We’ve partnered with media agencies to optimize our strategies, bringing more capabilities in-house to enhance our programmatic media approaches. We now have the ability to closely measure and evaluate our performance through daily scorecards. This innovative approach allows our marketing and commercial teams to assess performance regularly, enabling continuous improvement and optimizing our return on investment in digital initiatives.

We’ve trained 16,000 Colgate employees in digital competencies, including digital media, marketing, and data analytics. Our goal is to ensure the entire organization comprehends the significance of these skills, facilitating the transformation required to remain competitive in the future. Another critical area of focus is revenue growth management, which is essential given the significant raw material inflation we’ve experienced over the past couple of years, as well as recent currency fluctuations.

I’d like to share a unique example of how we’re combining our digital expertise with promotional strategies. Recently, we implemented a targeted promotion with pet specialty retailers, focusing on specific formulations, such as urinary health. By leveraging CRM data, we executed a promotion that decreased market duration costs by 50% and reduced deal depth by 25%. This success resulted from utilizing digital media across multiple channels, leading to a 24% increase in shipments and a 25% boost in consumption. This demonstrates how we integrate media strategy with promotional excellence to deliver better ROI for both our trade partners and ourselves.

Our commitment to ESG initiatives is another central focus. I encourage you to review our sustainability report, which outlines the extensive efforts we’ve undertaken. This crucial work demands resources, time, and strategic decision-making. We have published our TCFD and SASB reports, which represent significant undertakings and showcase our dedication to transparency. We are proud of the progress we’ve made towards our 2025 and 2030 sustainability goals. As you may know, we were the first brand to launch recyclable toothpaste tubes, reflecting our responsibility as the market leader. This initiative initially incurred costs but is essential for driving industry-wide adoption of recyclable tubes, allowing consumers to connect with our brand’s commitment to sustainability. Our Colgate Total toothpaste now features the recyclability logo, and we recognize the importance of educating the market on sustainable practices as the industry shifts towards this model.

I’d also like to highlight two impactful social programs we’ve initiated at Colgate. Our Bright Smiles, Bright Futures program aims to educate 1.4 billion children on proper oral hygiene practices by the end of 2022. These early habits create lifelong connections to the Colgate brand and have a significant social impact in the communities we serve globally. Additionally, our Hill’s Food, Shelter & Love initiative supports pet adoption efforts across the country, ensuring that each new pet owner receives a bag of Science Diet pet food. This approach not only strengthens our brand but also positively impacts society.

Given the current cost inflation challenges, we are keenly focused on enhancing our productivity initiatives. We aim to leverage our cash resources efficiently. Our Funding the Growth program is integral to our company culture, enabling us to identify and capitalize on opportunities for growth. We have proactively announced a global productivity initiative with expected annualized savings ranging from $90 million to $110 million. This initiative is crucial for maintaining leverage, especially as logistics costs remain a significant headwind. Over the last six months, we’ve effectively reduced our overhead costs by 70 basis points. With sustained topline growth and a long-term view, we anticipate more leverage will flow through our P&L, allowing us to maintain essential advertising levels that fortify our brands.

In terms of cash management, Colgate has a strong return on invested capital (ROIC), and aligning our investments with business growth is crucial. We’ve increased our capital expenditures to enhance capacity, especially for Hill’s products. Additionally, we’re directing our cash towards productivity and ESG initiatives to support sustainable long-term growth. You may recall our acquisition efforts, including a recent purchase that closed in early 2023, aimed at expanding wet capacity for Hill’s, which is the fastest-growing segment in the dog food category. We’ve also announced three new acquisitions pending regulatory approval. This strategic shift demonstrates our thoughtful approach to utilizing cash reserves to support a business needing capacity for impressive growth. By leveraging our existing relationships with manufacturers, we can expedite capacity expansion significantly, ensuring we meet the growing demand more efficiently than building new facilities from scratch.

Returning cash to shareholders is a core aspect of our strategy. Colgate has maintained a dividend since 1895, increasing it for 59 consecutive years. We have returned over $30 billion to shareholders, emphasizing our commitment to sustainability and long-term value creation. Our dividend compound annual growth rate (CAGR) stands at 5% over the past decade.

As a quick reminder regarding our Q2 results, we refrain from updating or reaffirming guidance between quarterly calls. However, I would like to highlight that our sales increased by 5.5%, with organic sales climbing by 9%, marking the highest quarterly growth since Q4 2008. Since our announcement, we’ve observed significant foreign exchange fluctuations, particularly with the strengthening of the dollar against the Euro. This chart illustrates the consistent performance we aim for, evidenced by 14 consecutive quarters within or exceeding our long-term guidance of 3% to 5%. The organic sales growth reflects our strategic turnaround across all divisions and categories, with notable double-digit growth in our oral care and pet nutrition segments being vital KPIs as we continue to invest aggressively in these areas. Our sales guidance remains at 1% to 4%, while we have raised our organic sales growth forecast for the second time this year to between 5% and 7%. We anticipate gross profit margins will decline this year, with advertising expenditures projected to rise in dollar terms, remaining flat as a percentage of sales. As mentioned during the Q2 call, we expect base business EPS to decline in the mid-single digits.

Overall, our strategy is yielding positive results, with a strong focus on attractive core categories poised for growth and sustainability in the current market. We are adeptly leveraging our organizational capabilities to drive scalability across the 200 markets in which we operate, while simultaneously investing to strengthen our brands and business for our shareholders. We are committed to responsibly managing our balance sheet and, most importantly, investing in our people to ensure long-term success. With that, I’ll turn it over to you, Lauren, for the Q&A session.

Interactive Q&A Session

Q – Lauren Lieberman

Thank you, Noel. I’d like to start by discussing the concept of premiumization that you’ve mentioned several times, particularly in relation to your innovation progress. The example from South Africa was particularly interesting. Given that Colgate is a global leader in oral care, can you elaborate on the progress you’ve made in premiumization and how your performance aligns with category averages?

Noel Wallace

Certainly. We recognized the growing demand for premium and therapeutic products over the last three to five years, and we were initially under-indexed in that segment. Historically, we maintained a robust presence in core businesses, which typically fall within the entry or mid-priced levels. Our index was around 86 or 87 compared to the market average. To address this, we’ve launched innovative products that emphasize our science-based benefits at higher price points. For example, our whitening products and the strategic introduction of the Meridol and Helmex brands in targeted markets have enabled us to boost our index to approximately 90 today. It’s important to note that our index reflects market conditions, including core inflation, and we are confident that we’ve found the right balance between our super premium offerings and our core products to navigate the current consumer landscape effectively.

Lauren Lieberman

Are there any specific merchandising or messaging strategies you’re implementing to highlight the full range of pricing options available in your portfolio, or do you rely on consumers finding what they need on the shelves?

Noel Wallace

Absolutely. Our approach to revenue growth management extends beyond just pricing strategies; it encompasses packaging and promotional tactics. We’ve built skillsets within our commercial organization to effectively manage our portfolio and reduce price elasticity. Our packaging language has been refined, and we’ve launched several core relaunches that have improved our manufacturing efficiency. This allows us to enhance product performance and communicate new messages to consumers. For instance, our super concentrates enable more washes than traditional options, which illustrates our commitment to delivering value.

Lauren Lieberman

Shifting to North America, we’ve observed a significant change in business momentum recently. Can you share some foundational changes made to support this momentum? I know there have been supply chain improvements, but I’m interested in broader foundational changes.

Noel Wallace

The momentum we’re experiencing is rooted in our focus on core adjacencies and ensuring that we have the right processes to execute our strategy effectively. Over the past few years, we’ve brought in new talent to the North America organization, introducing fresh perspectives on how to implement our core Colgate strategy. A significant aspect of our turnaround has been enhancing our capabilities. While this may not be immediately visible in day-to-day operations, it reflects in our company results. We’ve developed considerable sophistication in managing a digital enterprise, which is essential in today’s omnichannel landscape. Retailers expect us to navigate their omnichannel needs, and we’re meeting those expectations by leveraging our insights to drive consumer engagement.

Lauren Lieberman

Regarding the external environment, have you observed any changes