Colgate-Palmolive Q4 2021 Earnings Call Transcript

Presentation

[Operator]

Good day, and welcome to today's Colgate-Palmolive Company Fourth 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, Chief Investor Relations Officer at Colgate-Palmolive]

Thanks, Orlando. Good morning, and welcome to our 2021 full year and fourth quarter earnings release conference call. This is John Faucher.

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 full year and Q4 performance as well as our outlook for 2022 before turning it over to Noel for his comments. We will then open it up for Q&A.

We delivered solid results in 2021 despite a very challenging operating environment, which we believe provides further proof that our strategy is working. For the full year, we grew net sales 6%, adding nearly $1 billion in revenue. We grew organic sales 4.5%, at the higher end of our 3% to 5% 2021 guidance range, despite difficult comparisons. Importantly, our organic sales growth this year was led by our two most important categories: Oral Care, which delivered organic sales growth at the high end of mid-single digits; and Pet Nutrition, which delivered organic sales growth in the teens, our second consecutive year with double-digit organic sales growth for Hill's. Both of these categories saw an acceleration in organic sales growth in 2021, which we think bodes well for 2022.

Personal Care and Home Care organic sales growth were both down in the year as they lap very difficult comparisons driven by COVID-related demand, but we anticipate both categories will return to growth in 2022. But on a compounded basis, over the past three years, we've delivered organic sales growth across every division and every category with growth in both volume and price. And we are confident that our growth will continue into 2022.

Our innovation pipeline is strong as we continue to shift our focus to more breakthrough and transformational innovation. We have raised our level of brand support, including increased advertising spending that is driving improved brand equity. Our digital transformation is paying off with e-commerce market shares growing in key markets and strong e-commerce sales growth across all of our categories, including Pet Nutrition and within Personal Care, premium skin.

That said, the operating environment remains volatile. With COVID still very much impacting our business, unprecedented raw material inflation and supply chain disruptions. As Noel will discuss, we believe our 2022 plans and our long-term strategic choices will allow us to continue to grow and improve our profitability as we move through the year. This includes significant pricing, increased advertising, breakthrough and transformational innovation and stepped up productivity.

Our net sales grew 2% in the quarter, driven by 3% organic sales growth and a 1% negative impact from foreign exchange. Our organic sales growth in the fourth quarter was driven by Pet Nutrition and Oral Care, while Personal Care was down slightly and Home Care was flat due to COVID-19 comparisons. Organic sales growth in the quarter was negatively impacted by the factory closures related to COVID-19 lockdowns we mentioned on the third quarter call.

As you have seen across many companies and industries, raw material pressure worsened in the fourth quarter, putting further pressure on our gross margin. Our gross margin was down 300 basis points in the quarter on both a GAAP and Base Business basis. Pricing was a 120 basis point benefit to gross margin, while raw materials were a 670 basis point headwind. Productivity was favorable by 250 basis points.

On a GAAP and Base Business basis, our SG&A was down 150 basis points on a percent of sales basis, driven by lower advertising spending, lapping record levels in the year ago quarter as well as lower overheads, excluding logistics. Our combination of net sales growth and productivity drove our overheads, excluding logistics, down meaningfully, which helped us offset a large increase in logistics costs, both on a dollar basis and a percent of sales basis.

For the fourth quarter, on a GAAP basis, we delivered earnings per share of $0.18. Our GAAP earnings per share includes a $518 million after-tax charge for impairment on our Filorga Skin Health business. We completed the Filorga transaction right before the beginning of the COVID-19 pandemic. The pandemic has had a significant impact on key channels in which Filorga competes, including travel retail and Duty Free in China, and pharmacies in Europe.

While we have been unable to offset the continued weakness in these channels versus our projections when we announced the acquisition, we have full confidence in the Filorga brand and are forecasting double-digit growth going forward.

Our two other skin health brands, PCA Skin and EltaMD, are performing well and should continue to deliver strong growth. On a Base Business basis, our earnings per share was $0.79 for the quarter, up 3%. Our full year Base Business earnings per share was within our 2021 guidance range of up mid- to high single digits.

In order to accelerate changes to our operating structure that will allow us to reallocate resources to our strategic priorities and faster growth businesses and channels, drive efficiencies in the company's operations and streamline our supply chain to reduce structural costs, this morning, we also announced the global productivity initiative. We intend to execute the majority of the productivity program in the current calendar year, and once the projects are implemented and finalized, is expected to result in cumulative pretax charges totaling between $200 million and $240 million in annualized pretax savings in the range of $90 million to $110 million. We would expect the benefits to begin to flow through in the second half of 2022 and then accelerate into 2023. We returned $3 billion to shareholders in 2021 with our net share repurchase up almost 50% year-over-year.

A few comments on our divisional performance. North America net sales declined 1% in the fourth quarter, with organic sales down 1.5% as the division lapped high single-digit growth in the year ago period with liquid hand soap providing a greater than 3 percentage point headwind in the quarter.

In toothpaste, our consumption was ahead of shipments, as our all-outlet market share was up 50 basis points in the quarter. We have announced significant pricing across all of our categories in North America, which will be implemented throughout Q1 and into Q2.

Latin America net sales were up 3.5%, with 6% organic sales growth. Oral Care grew high single digits, while Personal Care and Home Care grew mid-single digits. Brazil led the growth in the quarter behind strong pricing and premium innovation across whitening and naturals.

Europe net sales declined 6% in the quarter with organic sales minus 3.5%, lapping 4.5% growth in the year ago quarter and a 2.5% foreign exchange headwind. While the pricing environment in Europe is normally very difficult, we expect to see pricing across the portfolio. We gained market share in Europe in Q4 with particular strength behind elmex and we have significant innovation planned for 2022.

Asia Pacific net sales grew 0.5% and organic sales grew 1.5% in the quarter with volume and pricing up slightly and a modest negative impact from foreign exchange. Our Asia e-commerce business continued its strong growth in Q4 and for the year. We gained nearly 400 basis points of toothpaste market share in e-commerce in China in 2021, combined on our Colgate and H&H businesses.

Africa/Eurasia net sales grew 2% in the quarter, as organic sales growth of 3% was partially offset by negative foreign exchange. The organic sales growth was driven by Oral Care despite impacts from the supply chain disruption from COVID-19 restrictions I mentioned previously. Volumes were also negatively impacted by political volatility in Eurasia.

Hill's finished another great year with a strong fourth quarter. Net sales grew 12% and organic sales grew 13% for the quarter. The U.S. continued to lead Hill's growth performance with strength across the gamut of brick-and-mortar and e-commerce retail partners. We expect another strong year for Hill's in 2022 with strong levels of advertising support, best-in-class e-commerce execution, innovation and pricing growth.

And now for guidance. We expect organic sales growth for the year to be within our 3% to 5% long-term target range, driven primarily by continued growth in Oral Care and Pet Nutrition. Using current spot rates, we expect foreign exchange to be a low single-digit headwind to revenues, operating profit and earnings growth for the year. All in, we expect net sales to be up 1% to 4%. We expect gross margin to be up for the year, but we highlight that, just as we saw in 2021, there will be significant swings in year-over-year performance as we go through the year. The biggest raw material headwinds year-over-year are in the first quarter, and we expect that they will moderate as we go through the year.

On top of the productivity program I mentioned above, we will continue to take additional steps to mitigate the impact of logistics and raw material cost headwinds, including additional pricing, optimizing trade spending, accelerating FTG where available and many others. Advertising is expected to be up on both a dollar basis and 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 expected to be between 23% and 24% for 2022 on both a GAAP and Base Business basis. At this point, we have not incorporated any proposed changes to U.S. corporate tax rates. We expect double-digit earnings per share growth on a GAAP basis. On a Base Business basis, we expect earnings per share growth in the low to mid-single digits.

There are a few factors that will determine where we fall in that range. We have budgeted modest sequential declines in some raw material prices as we go through the year. If those raw materials stay at current levels, this will be above what we're currently budgeting.

Foreign exchange. The dollar has been trending higher recently. If that continues, it will be an additional headwind. We assume that raw materials and logistics cost increases are not unique to us. And our plans do not include significant manufacturing downtime due to COVID-related lockdowns.

And with that, I'll turn it over to Noel.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Thanks, John, and good morning, everyone. Before I get into my remarks, I want to wish all of you a safe and happy new year. Of course, I'll be speaking to you all again just a few weeks for CAGNY, and I'm very much looking forward to that.

Over the last three years, we have revitalized our core businesses, innovative and adjacent categories and expanded our availability in faster-growth markets and channels. All these efforts have helped us deliver three straight years of organic sales growth in or above our long-term targeted range of 3% to 5%. I believe our company is well positioned to continue our momentum and drive shareholder value in this year and beyond despite the difficult operating environment.

We compete in growing categories with high purchase frequency, daily usage and high levels of brand loyalty, and we have strong brands that are well positioned to take advantage of these category dynamics. Colgate is the most penetrated consumer brand in the world, with strength across emerging and developed markets. Hill's Prescription Diet and Hill's Science Diet have strong health credentials with vets and pet parents. Elmex and meridol are leading premium brands and therapeutics in the markets in which they compete. And other brands like Irish Spring, Protex, Suavitel and Pablo Losso, all delivered tremendous value to consumers and our retail partners. This also includes our skin health businesses, EltaMD, PCA Skin and Filorga.

John discussed the impact of COVID-19 on Filorga, which resulted in performance below our targets. We have plans in place to revitalize our Filorga business in those key channels, along with building out distribution and other growth channels and accelerating innovation. We are confident that Filorga will be a strong contributor to future top and bottom line growth. Trends on EltaMD and PCA Skin remained very strong.

We have and are building capabilities that will allow us to compete in all types of markets and channels. Our global operating model, including our supply chain, allows us to operate effectively and profitably in more than 200 countries and territories around the world.

Our transition to our new innovation strategy has enabled us to deliver a better mixture of global and local innovation, including increased levels of breakthrough and transformational innovation. This has had a direct impact on accelerating our growth, particularly in Oral Care, our rebound in Chinese e-commerce, for example, and accelerated growth in Pet Nutrition.

Our digital transformation, which will be an important topic when we present to you at CAGNY, has allowed us to accelerate our e-commerce efforts across all of our markets. We delivered another year of robust e-commerce growth and grew share in all six of our largest e-commerce toothpaste markets in 2021.And we are truly integrating ESG into our business strategy in ways that drive value. Bright Smiles, Bright Futures not only teaches children in underserved markets how to brush their teeth, but also help drive per capita consumption over time. And our recyclable toothpaste 2, which we shared the technology with our competitors, is helping to drive the entire category to be more sustainable, which is a requirement for any category to deliver growth in the future.

We also issued our first sustainability bond in the fourth quarter. We will use the funds to invest in our sustainability and social impact strategies while benefiting from a lower interest rate.

So I firmly believe we are well positioned to deliver long-term sustainable profitable growth to our shareholders and all of our stakeholders. But we also need to balance managing through the teeth of a very difficult operating environment while still delivering on that long-term strategy. We stay committed to our strategy. We will emerge from the next few quarters with sustained organic sales growth and structurally more efficient company that will allow us to grow profits while still investing in our brands.

Obviously, you all know about the headwinds that companies are facing in today's operating environment in terms of raw materials. COVID and higher costs are putting significant pressure on supply chains, including unprecedented impacts on logistics, both in terms of efficiency and costs. And recently, the dollar has strengthened. The key for us to deliver against our targets in the shorter term is to continue to execute on pricing and revenue growth management. We've already taken pricing in many markets, and we will have further significant pricing plan for the first half of this year, including moving some pricing that we anticipated for later in the year in 2022 into the first half.

You all know our funding the growth is well ingrained and a key component of offsetting rising raw material costs. We have put together new cross-functional teams that are focused on ensuring we are bringing additional opportunities to our Funding the Growth and that we are executing them as rapidly as possible.

So we're accelerating short-term actions to drive improved profitability, but we know the key to shareholder value creation is to remain committed to the long term. To that end, we will continue to invest in brand building. As I said a few minutes ago, it all starts with strong brands. We have turned our growth trajectory around over the past few years, and a key component of this has been additional advertising spend. Our guidance for 2022 includes an increase in advertising to make sure we are able to sustain volume growth as we exit a period of very strong pricing. At CAGNY, you'll hear even more about how we've increased the return on marketing spend through our digital transformation.

We will continue to focus on innovation, providing added value to our consumers through innovation that supports increased pricing. Our innovation pipeline is very strong for the year and heading into next. We have innovation across our categories with a particular focus on premium innovation that brings new benefits and forms to our brands.

We're also investing in capacity. Our capex rose in 2021, primarily because we're investing in incremental capacity for growth, along with investments to advance our sustainability efforts. Our need to build capacity across the business, mostly in Pet Nutrition, shows that the rebound in organic sales growth is real and one we expect to continue. This investment won't preclude us from continuing to return cash to shareholders through share repurchases and dividends.

And finally, today, we announced a productivity initiative that is focused on aligning our costs and investments with our long-term strategies. This program is designed to deliver savings that can both be reinvested for growth and apply to the bottom line. Importantly, this program, along with the pricing and Funding the Growth, should allow us to exit this inflationary cycle with more levers to drive growth and profitability and keep our strategy on track.

So 2022 will be another volatile year with all the headwinds you heard me described, but we intend to execute to deliver growth and drive shareholder value. all with delivering against our long-term strategies, which makes me very excited about the future for our company.

And with that, I'll open it up to your questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] And our first question will come from Dara Mohsenian with Morgan Stanley. Please go ahead.

[Dara Mohsenian, Analyst at Morgan Stanley]

Good morning, guys.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Good morning, Dara.

[Dara Mohsenian, Analyst at Morgan Stanley]

So was just hoping for an update on the Oral Care business. The full year is often a good time to take stock of where you stand. So can you discuss your market share performance in Oral Care in 2021? Trends as you progress through the year, probably most productive to talk about it on a regional basis? But as we look forward, Noel, after the strategic changes under your leadership the last few years, are you satisfied with where you stand? And how do you think that business is positioned for 2022? Thanks.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Yes. Thanks, Dara. So as you heard in some of the prepared comments, Oral Care accelerated in 2021. In fact, it was double the growth rate that we had in 2020. Our consumption exceeded shipments in most markets, and that was a function of some of the supply chain challenges that we incurred, particularly here in North America as well as in Asia. So if I walk around the world, really strong back half performance in Europe. In fact, we're at record shares on the toothpaste business exiting the fourth quarter there. You heard John mentioned the strong growth we're seeing in China, which was obviously a key a key market for us to get turned around in the last couple of years. Our e-commerce shares are up very, very strongly. They're close to 400 basis points and the fastest consumer brand in the market. Our brick-and-mortar shares are holding. So overall, we're delivering share growth there.

Latin America Holding, as we talked about, we've been very much on driving revenue growth management in those markets and have some great success, particularly in markets like Brazil. And we're trying to resist just chasing some of the promotional volume at the lower end of the market, which has lost some of our volume share. But overall, we feel very good about where we are, particularly around the premiumization.

North America, while we exited strong, we're still not satisfied with the performance there. Clearly, we believe we have significant opportunities there. The innovation plans we have in place for 2022 reflect our commitment to that market as well as the increased advertising support, particularly around the premiumization strategy, and we expect to see shares rebuild nicely in 2022. But satisfied at least that the fourth quarter and some of the back half activities that we put in place to be more competitive, have certainly stabilized the share, and now it's about growing. As we mentioned, some of our untracked channels continue to perform very well in Oral Care, in the U.S., particularly the club channel as well as e-commerce.

We don't talk a lot about toothbrushes, but that business had a really good year for our share growth is up in toothpaste -- excuse me, in toothbrushes across most markets, and some good innovation likewise coming on that. That will be coupled obviously with strong pricing. I'm sure we'll get into a lot of discussion on that, but we have taken pricing in emerging markets. We are rolling aggressive pricing in developed markets, and that will continue to bolster share and our ability to support the brand moving forward.

So overall, we're pleased with Oral Care, Dara.

[Operator]

And our next question will come from Peter Grom with UBS. Please go ahead.

[Peter Grom, Analyst at UBS Group]

Hey, good morning, guys.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Hey, Peter.

[Peter Grom, Analyst at UBS Group]

So I just wanted to ask around the guidance for gross margin expansion, just in the context of what we're seeing right now. Can you maybe help us understand some of the underlying drivers behind that? And I know John mentioned it embeds some moderation in raw material costs. So could you maybe provide more detail there or maybe where you expect that moderation? And then maybe just more broadly, like how should we think about the phasing of gross margin expansion? And ultimately, how that impacts earnings cadence as we move through the year? Thanks.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Sure. So let -- I guess to start with raw materials there. Obviously, we saw a significant acceleration in raw material prices following the first quarter in 2021. That continued to escalate as we went through the year. And certainly, based on where we thought we were in the third quarter, we saw significant increases moving into the fourth quarter. In fact, resins up more or less role price is up 30% to 40% in the fourth quarter. So all of that is now built into how we're thinking about '22, and we expect raw materials, quite frankly, to peak in the first quarter.

We have developed our plan based on spot rates today, and we expect the spot rates to hold and begin to moderate towards the back half of 2022. So you see raw materials potentially peak in the first quarter and then stabilize and begin to potentially moderate in the back half. You layer on top of that our pricing strategies for the year.

We took some pricing in the fourth quarter in emerging markets. We took more pricing in the developed markets in the first quarter, which will mostly take effect as we exit the first quarter in the second quarter. We've got, obviously, the additional productivity programs that we talked about this morning. That will be very back half weighted more in the end of the third quarter, early fourth quarter and into '23. So we won't see much benefit this year, particularly in the first half.

So -- and you combine that likewise with an innovation plan that is weighted more towards the premium side, particularly in North America in the first quarter. And all of that will help us lead to growing margins as we go through the year and exiting the year with margins up.

[Operator]

And our next question will come from Lauren Lieberman with Barclays. Please go ahead.

[Lauren Lieberman, Analyst at Barclays]

Great. Thanks. Good morning.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Hey, Lauren.

[Lauren Lieberman, Analyst at Barclays]

Hey. I was curious if you could talk a little bit more about the restructuring, because I feel like it's rare to see a program that only one year in nature. So kind of are these projects or programs that would have been on the to-do list, but were accelerated? Are they opportunities that you proactively sought out and look for ways to accelerate what would typically be funding the growth because of the environment?

And then also, I feel like in the last 12-plus months, there have been a couple of things that have come up regionally with sort of operating surprises, whether it's a supply chain hiccup in one market or another. So to what degree also does this program may be look at factors that impacted some of that less consistent operating performance that you've had over the last year or so? Thanks.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Yes. Thanks, Lauren. I think the key word you use is really trying to be proactive. I mean we came into this year after the first quarter, noticing, obviously, an environment that was becoming more challenging, particularly around COVID and disruptions associated with that as it then obviously led into a significant inflationary environment and we got out ahead of this as quickly as we could to start thinking about our 2025 strategy and ultimately, what we were trying to achieve and how we wanted to accelerate.

We've seen a lot of great progress in our digital transformation. We've seen a lot of great progress as we've restructured our innovation groups around the world towards breakthrough and transformational innovation and the benefits we're seeing coming out of that. And we decided we really wanted to accelerate that transformation and make sure that we get that savings into the business as quickly as possible as well as the benefits of how we structure ourselves to be more agile and faster to market. The benefits we get out of increased resources in the digital space as well as the innovation.

Now bear in mind, as you heard from John, we had a really good year around controlling our overheads, and we have been constantly looking at ways to mitigate the inflationary pricing we're seeing in the market. Our overheads were down on the year, down considerably in the fourth quarter. And I think that's just good business. We're constantly looking for ways to optimize how we operate. On top of that, we want to look at how we structure ourselves to really continue to accelerate the growth momentum that we have.

So as we move throughout the year, we will exit this program. As you said, it's a one-year program with the savings really falling into the back half of 2022 and into the first half of '23.It allowed us to really fine-tune where we wanted to focus and allowed us to do that in the 12-month period, and we think that's ultimately right for the business to ensure that we don't have ongoing distractions across the organization, and we get on with trying to accomplish what we've set out to do for the year and into '23.

On the regional point that you were mentioning, Lauren, listen, as you've heard from everyone, the supply chain challenges everyone faces are quite significant. And it really, to a certain extent, depends on the structure and composition of your supply chain. We have had, as you know, one of the most efficient supply chains in the world in terms of how we've optimized our global sourcing all around the world and how we put capital into ensuring that we have extremely low-cost plants. We will benefit from that long term to be sure.

In the short term, given some of the disruptions that we've seen both in Asia as well as here in North America, we've had to deal with that. And that has brought some additional costs. And obviously, as you heard, some disruption to the top line of the business as well. Likewise, no question into the market share. So we're moving to get through those as we go into '22, and we feel very confident in where we are with our supply chain and the changes that we're making, particularly in the productivity initiative to continue to optimize that moving forward.

[Operator]

And up next, we'll hear from Steve Powers with Deutsche Bank. Please go ahead.

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Hey. Thanks very much and good morning.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Good morning, Steve.

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Good morning. So maybe rounding out Dara's initial question. Just could you talk a little bit about how Oral Care performed globally in the fourth quarter from an organic growth perspective? And then looking ahead, I guess I'm wondering if you can provide just some more detail around the composition of the 3% to 5% growth you've called for '22 both by product segment, Oral Care versus Pet and presumably some normalization in Home and Personal Care, but also by price versus volume because obviously, you're putting in a lot of price. So I'm assuming it's going to be mostly price-led. But I guess I was a little surprised in the quarter to see Latin American volumes dipped negative in response to the sequential acceleration in price there. So just curious as to how -- you're thinking about that and thinking about elasticity as '22 progresses? Thank you.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Sure. So let me talk a little bit about Oral Care. Obviously, in the prepared remarks, you saw that the fourth quarter was driven by Oral Care and Pet Nutrition. So overall, quite pleased. And that was despite some disruptions that we saw in the quarter. The shutdowns that we talked about in the third quarter had a more material impact in the fourth quarter. That was about 60 basis points of growth to the total company in the fourth quarter, and all of that would have been in Oral Care, so to speak.

So we're moving behind those. We see a little bit more disruption in the first quarter but we have a pretty good line of sight that by the second quarter and throughout the balance of the year, we'll be back to where we need to get to be on that. So overall, Oral Care was good.

I mentioned the strong exiting the market shares in Europe, which were very, very strong. We stabilized the shares in North America and actually saw some all outlet growth in the fourth quarter, driven by untracked channels, which was terrific. And we're particularly pleased with the reception to our new products in 2022 that we've introduced as well as the acceptance of the pricing across North America. So we're quite confident in terms of where we're -- how we're setting ourselves up for continued growth in '22.

You had a question on price volume, and I'll address the Latin America question within that. Obviously, there's going to be more price in our organic growth in '22 versus volume given the significant increases that we're taking across the world. And as I mentioned, we began taking pricing at the end of the fourth quarter. We have implemented and announced pricing across the emerging markets here in the first quarter, which will take effect, as I mentioned earlier, in the early part of the second quarter. But no question, given the size of the pricing that we're taking around the world, and you're seeing that from ourselves as well as competitors in other categories, you will see a falloff in volume. And we're accustomed to that. relative to how we think about our promotional cadence and how we think about our innovation plans as well to ensure that we continue to build volume through the balance of the year. So the makeup of the organic growth this year, no question will be driven more by price than by volume, which is a little bit different than what we've seen in historical years.

I'll say that all boats rise in this environment in the sense that everyone is impacted by the inflationary environment. So as a result, you're going to see pricing up pretty consistently across all categories. That plays, as you've heard from others, into elasticity that you're not seeing one competitor move, you're seeing the category move. So elasticity tends to be a little bit less. We will see. It's early days now. But our experience, as you well know, Steve, of taking pricing quite significantly to offset foreign exchange in markets around the world. We have been able to balance that elasticity impact with good innovation and good promotional cadence, understanding how to ensure we're innovating across the price tiers and making sure that we're protecting the consumer and the category growth at the same time.

Latin America had a really strong quarter. Bear in mind, they had a strong comp that they were dealing with. So the two-year stack looks terrific. I think it was about 16%, if I remember correctly. And obviously, 6% on top of 11% a year ago and largely driven by pricing. So a little bit soft in the volume line as we took some pricing, but we fully expect that, that will recover itself. Categories continue to be quite healthy in Latin America, mid-single-digit growth and the consumer seems to be responding to at least in the short term, but we'll watch that carefully as we move through '22.

[Operator]

And up next, we'll take a question from Andrea Teixeira with JPMorgan. Please go ahead.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

Thank you. Good morning.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Good morning.

[Andrea Teixeira, Analyst at JPMorgan Chase & Co.]

I guess you mentioned consumption has been greater than shipments. Can you update us on the service level in the U.S., where I understand that you're still reviewing inventory? And you mentioned that in the fourth -- the first quarter is still going to be impacted by that -- by some of the disruptions. So can you elaborate on that?

And then on the Latin American comment that you answered to achieve just now, I was just wondering if -- when you think about the volume shortfall, is it coming from mostly from Oral Care or is it coming from Home Care or even some of the Personal Care items that were -- that had a lot of strong demand last year? Thank you.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Sure. Andrea, let me take your second question first because I think, to a certain extent, it addresses some of the earlier commentary on the quarter. Bear in mind that we had strong growth in Oral Care and Pet Nutrition. We were lapping significant category growth in Personal Care and Home Care that obviously paralleled our growth last year, given some of the impacts of COVID.

Liquid hand soap, as a category in '21 was down roughly 25%. Likewise, you saw that level of growth as a category in the fourth quarter as well. Some of our home products -- our cleaning products were down 15% to 20% as a category as well. So no question that had an impact in the quarter. But we've seen that kind of starting to stabilize and our sense is as we move into '22, those categories have hopefully bottomed out relative to consumption.

John mentioned that we shipped above -- consumption was above shipments, and that was due to a certain extent to the continued constraints around logistics, the challenge of getting trailers not only around the country, but across borders, either from Mexico or otherwise. Some of the challenges that we had and the shutdowns and plants across Asia that we mentioned earlier, that obviously had an impact on the North America number as well. But as I said, we're moving through those. We think we'll be out of that by the end of the quarter. We're taking the necessary steps, as I mentioned earlier, to ensure that our supply chain continues to operate as efficiently as possible. We'll make a couple of changes relative to sourcing. That has obviously created a little headwind in terms of cost. But overall, we feel good about, at least the plan in place, to address some of the short-term issues that we face. We'll see the benefit of that as we refill the pipeline to a certain extent moving through the back half of the year.

[Operator]

And next, we'll take a question from Kaumil Gajrawala with Credit Suisse. Please go ahead.

[Kaumil Gajrawala, Analyst at Credit Suisse Group]

Hi. Good morning. Question, I suppose, on inflation's impact on the consumer. Most of what we've heard so far, particularly in developed markets as we haven't seen a lot of impact. I guess you guys have probably a better sense than most given how much inflation you've dealt with around the world and how this is likely to unfold. So if you could just talk about maybe the state of the consumer today where you expect it to be in developed markets as it relates to how they might be impacted by inflation?

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Yes, thanks. Early days. Obviously, as you mentioned, we've had a lot of experience taking quite significant price increases around the world, particularly as we went through periods of significant foreign exchange headwinds.

As I mentioned earlier, I think the big difference here is that the price increases are coming across the entire market in all categories. And as a result, you tend to see a little less elasticity when that happens. But we're very prepared for that. As I mentioned earlier, very cognizant of our promotional cadence in terms of how to balance that, very cognizant of our need to bring value to our innovations to ensure that the pricing is executed successfully. But we feel pretty good about at least what we've seen in early days again, relative to elasticity, time will tell. But my sense is we'll be able to weather this quite well given the whole market is moving, and we have a strong innovation and promotional strategy in place to continue to ensure the consumer is valued.

[Operator]

Up next, we'll take a question from Chris Carey with Wells Fargo Securities. Please go ahead.

[Chris Carey, Analyst at Wells Fargo Securities]

Hi. Good morning. Can you just expand a bit on the pricing actions in North America? I know it's been asked, but perhaps in the context of the margin for the business in the quarter, obviously remains under pressure. And maybe loop into there how the productivity program for 2022 can potentially help that business. Do you think that with pricing coming with productivity coming with expectations around inflation getting a little bit better in the back half of the year that, that division from a margin standpoint can also improve along with the organic sales as some of the comps that have normalized and pricing builds?

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Sure. So we announced pricing in some of our Personal Care categories late last year, which took effect in the middle of this quarter. The balance of our categories have been announced and will take effect as we move into the second quarter. So that's clearly the cadence that we see relative to pricing.

Funding the Growth relative to the North America business is typically pretty directional across every quarter. As I mentioned, we have mobilized specific teams in North America and in other regions to accelerate some of our Funding the Growth initiatives. Bear in mind that as we're dealing with the challenges around the supply chain that we want to ensure that we're finding time dedicated time to deliver Funding the Growth. When we produce against the demand that we have, we obviously don't want to shut our lines down to test Funding ways to do that. On top of that, as you mentioned, the productivity initiative, which will be a global initiative, will impact across more regions. There's not one specific region that we're targeting specifically on that. All the regions will be contributing based on the opportunities that we've identified.

So you'll see pricing move through in the second quarter Funding the Growth consistent across the year. And we believe quite confident that margins will begin to accelerate as we move into the back half of '22.

[Operator]

Our next question will come from Jason English with Goldman Sachs. Please go ahead.

[Jason English, Analyst at The Goldman Sachs Group]

Hey. Good morning, folks. Thanks for slotting me in.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Hi, Jason.

[Jason English, Analyst at The Goldman Sachs Group]

Congrats on your success as you're accelerating Oral Care and delivering another rock solid year in Pet Care. But based on results and what we see in the market and where we hear you spend your time and energy on calls like this, it feels like you may be neglecting the Pomaloside of business. Well, P&G is out there clearly spending a lot on advertising, they're innovating a lot and they seemed to be executing quite well.

First, do you think I'm being too harsh here? Or do you see some truth in this? And second, and I guess either way, can you share some of your initiatives and investments you've got planned for this business this year? And how they may compare or contrast to what you've been doing in the last couple of years? Thank you.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Yes. Thanks, Jason. So listen, we had, obviously, really strong performance in '21 -- excuse me, in '20 across our liquid hand soap, our Personal Care categories, which include Palmolive overseas as well as our Home Care categories here in North America. Obviously, that -- those categories, as I mentioned earlier, are falling off quite significantly, but we believe have stabilized and will provide more continuity as we move forward.

We had some challenges, obviously, getting some of the innovation executed what we wanted to do. Obviously, that's had a short-term impact. But we feel very good about the plans we have in place in terms of not only getting the pricing through the category, but making sure that we continue to deliver an entrepreneurial approach to these businesses because we have isolated pockets of strength, North America being one, Latin America being another, where we find the opportunities on the ground that we can execute against.

So overall, we feel good about it. We know some of our competitors are spending significant money in these categories. As we talked about earlier, we've increased advertising in the '22 plan. That will support all of our key priorities mainly Oral Care as well as Hill's, but we will look selectively in some of our core markets to ensure that we have competitive spending levels to address some of the softness that we saw this year coming out of a very robust 2020.

[Operator]

Up next, we'll take a question from Kevin Grundy with Jefferies. Please go ahead.

[Kevin Grundy, Analyst at Jefferies Financial Group]

Great. Thanks. Good morning, everyone. I have a follow-up question on pricing. Two areas, please. On the elasticities, which I think Steve spoke to and then on pricing ladder specifically.

So number one, on elasticities, just to drill down a little bit because I think the general view would be that the elasticities have been better than expected, at least so far. So if we do see a mean reversion on elasticities, could that represent downside potentially to your outlook? Or have you already sort of reflected that? So I think additional commentary there would be helpful.

And then also to an earlier question, just on the state of consumer. My question is on sort of your pricing ladders, I guess, at this point and the potential for consumer trade down to mid-tier value brands or even private label. Have you included some elements of that or not really and that's just something that the company will have to react to and could potentially result in some negative mix implications whether this is around lower-priced brands or additional promo, etc.? So just maybe drilling down on those two areas would be helpful. Thank you for that.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Sure, Kevin. So again, let's talk to pricing elasticity. It's early days right now, as I mentioned. But we expect that we will not see as much pricing elasticity in our business, specifically our own business, as we've seen in the past, given that everyone is taking pricing, it seems pretty consistently across all of our categories and across the world. Time will tell on that, clearly.

The elasticity assumptions that we built into the P&L are quite conservative. I mean we wanted to be very careful there to ensure that we were able to adjust and have enough flex in the P&L based on how we saw the consumers react. So my sense is we're covered there, but we shall watch this carefully to ensure that our assumptions are accurate. And we will pivot as necessary as we see what's happening in the marketplace.

As I mentioned earlier, it's not only just taking pricing, it's how we go about executing that in the market relative to our promotional cadence, relative to our new product cadence. And that really fits into the second part of your question, which is the pricing ladder.

One of the aspects of our business that we feel very good about is how we have clear distinction at price tiers and value add across the multiple price years in which we compete. And we have innovation planned across all those price tiers. Innovation that will not only get us pricing, but brings value add to the consumer should there be any temptation to trade down, particularly in the premium side of the business. But the important piece there is that we're looking to innovate across all of our price tiers to ensure that we continue to bring value to those consumers as they address obviously, a significant headwind around inflation in their markets.

[Operator]

We'll now hear from Wendy Nicholson with Citi. Please go ahead.

[Wendy Nicholson, Analyst at Smith Barney Citigroup]

Hi. I wanted to go back and revisit the productivity initiative a little bit. Kind of just taking a bigger step back, I know, obviously, when you came in as CEO, there was a little bit of a margin reset as you decided you needed to reinvest in the business, and that's worked really well because the top line has come in for the last few years in line with your goals. But we've seen margins under pressure, and I know there's COVID and currency and obviously commodities and logistics and all of that. But just kind of longer term, I guess my question is, how do you feel about the kind of 22%, 23% operating margin level for the company? Is that the right level? How much of the global productivity initiative savings this year are going to be reinvested versus drop to the bottom line? And give us the margin expansion and kind of all related to that, and I'm sorry for the long question.

Again, back to Laurence's point, it's really unusual for us to see just a one-year initiative. And I think that's probably a good news because it's not that disruptive to the organization. But bad news if you have to have multiple of these. And so I'm wondering, is this really just a one-off? Or do you sort of say, "Oh, we might have more in '23. We might have more in '24." Just a little bit more color to sort of say, what's the goal here? Is this margin expansion? Or is this cost of business has gone up and we just need to keep reinvesting? Thank you.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Sure. Thanks, Wendy. It's kind of all of the above. But let me take a step back for a moment. Obviously, we came out of a pretty significant restructuring program that ended in 2019, the better part of five to six years of that. And as we have obviously started to think about our 2025 strategic plan, it's only good business to continue to look for ways to optimize.

We've made a lot of changes in the organization around our structure around innovation, our digital transformation, our back-office centers, how we're thinking about SAP S/4HANA, how we're thinking about our manufacturing footprint and our manufacturing strategy moving forward. All of those are the right things to do to continue to drive efficiency across the business and ensure that we continue to execute against our strategies.

So this is a very focused program. We believe -- I mean it was in response to what we needed to deliver for our 2025 plan to get ahead of this even faster. I mentioned earlier, our overhead structure is pretty well managed right now. You saw overheads down, our fixed costs down in 2021. You saw them down quite considerably in the fourth quarter. That bodes well for us as we move into '22, but we need to continue to optimize and reallocate resources into the key growth priorities we have across the company. And you've seen some of those growth priorities. Obviously, the advertising piece has been a key driver of our top line sustained momentum. And our intention, as we laid out in '22, is to accelerate that advertising, not only across Oral Care and Pet Nutrition business, but our Skin Health and some of the other categories that I mentioned earlier in the discussion.

So again, we intend to reinvest most of this money, but we want to have levers available to us as we go through the year. We brought Stan in. A big purpose of bringing Stan in was not only his technology background to help us with our transformation, but to help us think about where we can optimize our structure going forward.

So why don't I turn it over to Stan, and let him share a couple of his thoughts on this?

[Stanley J. Sutula III, Chief Financial Officer at Colgate-Palmolive]

Wendy, first of all, thanks for the question. As we look at gross profit, last year, certainly a great year benefited from COVID-driven categories. But where we landed in 2021 on a full year, I think it's important for a little bit of context, that's equal to where we were pre-pandemic. So it hasn't fallen off from those levels. There's obviously a big mix impact from the categories that drive that. But this productivity program will help us accelerate our actions through our 2025 strategy. We think they're in the right places. Again, there'll be timing here. These will start to benefit us in the back half of the year. And on annualized rate, $90 million to $110 million is a meaningful number.

Now behind that, on the split of what goes to the bottom line versus what goes back into the business, we have some flexibility there. But part of this is going to get invested back into the business. As we've said, we want to continue to drive the long-term health of these categories and the long-term health of the business. So the margin as we went through the year, obviously, we wrapped on a very difficult compare, but we are confident in our ability to drive margin expansion in 2022.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Thanks, Wendy.

[Operator]

Up next, we'll take a question from Mark Astrachan with Stifel. Please go ahead.

[Mark Astrachan, Analyst at Stifel Nicolaus]

Thanks, and good morning, everyone. I wanted to follow-up on that question. Can you hear me?

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Yes, I can. Go ahead.

[Mark Astrachan, Analyst at Stifel Nicolaus]

Sorry. So I wanted to follow up on that question and just think about it on a longer-term basis. What is the right level of EBIT margin for the business over time? If you take a look, over the last decade, it's roughly flat, I guess, the puts and takes on input costs, FX, etc. But in absolute, investors expected to increase over time, given what you said about increasing investment. There's less balanced growth, especially if you look this year with Pet driving majority of growth. You cut ad spend in the fourth quarter as an example. And obviously, we see increasing competition coming from stand-alone consumer health care companies like GSK and J&J.

So just conceptually, how do we think about this? Or how do you think about it? If we look out to your 2025 targets, obviously, not having specific targets there, but can EBIT margins grow over time? And how should we all think about that?

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Yes. Listen, ultimately, our goal is to continue to drive EBIT margins up. And if you think about what we're trying to execute and what we've executed over the last couple of years, notwithstanding obviously some of the setbacks related to COVID, it's accelerating our priority categories. It's the Oral Care acceleration. We'll grow EBIT margins over time. Accelerating Pet Care, Premium Pet Nutrition, likewise. The Skin Health businesses, we continue to be very committed to those. All margin accretive to the bottom line of the company. So obviously, driving an improved mix in getting those three categories continuing to drive the top line of the company will ultimately deliver more EBIT margin. But we have to be proactive. I mean we're proactive in taking, obviously, the pricing we just discussed. We have to be proactive in ensuring that we have the resources internally to optimize our media spend. We'll talk a little bit about that at CAGNY, some of the great work that we're doing around driving ROI more efficiently across our advertising spend.

Now that may allow us to spend more against some of the opportunities we see or optimize our spending as we move forward. Likewise, as we talked about earlier -- most of the call today is the pricing aspect of this. And we will continue to be bold and ambitious with our pricing because we believe getting the gross margin in the P&L, ultimately, the EBIT up is the way to continue to fuel the investment that we need to sustain the top line growth.

So ultimately, the goal is to drive EBIT margins. Obviously, some challenges in the short term that we've seen. But we think as we execute against our 2025 strategy, the category that we compete in today, the pricing, the innovation that we have in place, all will contribute to that. The program that we announced is all part of that, obviously, looking at ways to optimize our structure to ensure that we find ways to improve the profitability through the income statement.

[Operator]

And our last question today comes from Robert Ottenstein with Evercore. Please go ahead.

[Robert Ottenstein, Analyst at Evercore ISI]

Great. Thank you very much. First, just a couple of follow-ups and then my real question. So just on the U.S. Oral Care business, can you talk -- can you dimensionalize kind of what the gap was between shipments and retail? And what that impact was maybe as a percentage? And then I guess related, maybe give us a sense of how much the U.S. Oral Care market grew in 2021?

And then can you also maybe put a little finer point on terms of the magnitude of the U.S. pricing that you're putting in. A lot of adjectives around it, but are we talking mid-single digit, healthy mid-single digit, high single digit, double digit, just kind of a little bit of sense on that. So those are just the follow-ups.

And then the real question is really can you go into China a little bit. We haven't talked about that much today. In prior calls, there was some discussion of some disruptions that happened in some of the distribution tiers. I'd love to understand a little bit how that developed in the quarter. Thank you.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Okay. Thanks, Rob. Good morning. Listen, on the pricing, I can't be really any more specific than what I provided you earlier. Obviously, we've announced pricing in some categories in the fourth quarter in North America. We're taking the bulk of our categories were announced and will be effective in the second quarter and consistent with where we see inflation and our needs to continue to grow gross margins, that really dictates the level of pricing that we take and where we think we can take it with list prices and how do we do it through our revenue growth management initiatives and how do we do it through our innovation strategy. So it's a well-thought through approach to ensuring that we're getting the right pricing across the price tiers, able to drive value to the consumer through our innovations and making sure that we balance that with our promotional cadence. And ultimately, we'll see we have, you know -- obviously, visibility to our competitors who are taking pricing, we do this in isolation and we do it based on what we think is right for our business and we adjust accordingly moving forward.

On China specifically great success in China, in fact. i think we're still in the early days of that. We saw the Colgate business respond really nicely to a very distinct change in our strategy in that market, not only our go-to-market approach but more important, our innovation approach to really go after the premium side of the market in e-commerce. E-commerce is now 25% to 30% of the category and we're the fastest growing brand in e-commerce right now and that is all at a index of about 2.5 times to the market average. So it really is premium innovation that's driving our success there.

We've got more work to do. We've got some opportunities in the brick-and-mortar environment. We've seen that share stabilize and so the incremental growth has mainly come through online, and we see as we think about our distribution model moving for some ways to optimize that.

We're taking an important step with our Hawley & Hazel brand in 2022 with Darlie. We've got good innovation and good support levels for that business to continue to accelerate that. So we feel pretty good about China now. China, obviously, the category has been quite sluggish. I mean the brick-and-mortar category was actually down, whereas e-commerce was up. This was really driven by the lack of mobility in the marketplace that we've seen over the last year and the lockdowns that we've seen across that market in different provinces and that certainly had an impact on consumption. So things have slowed a bit. But I think as we move into 2002 and knock on wood that COVID continues to moderate, we'll see, obviously that category rebound nicely and where we believe in a much stronger position to capitalize on that than we were before.

[Operator]

And that's all the questions we have in the queue. I'll turn the conference back to the speakers for additional or closing remarks.

[Noel Wallace, Chairman, President and Chief Executive Officer at Colgate-Palmolive]

Well, thanks everyone. So let me close by extending my deepest gratitude to all the Colgate people that are listening today and those that aren't. Their resilience and their care and managing through just an extraordinary environment in 2021, which obviously continue to be disrupted by the challenges of COVID are nothing but impressive. They're staying so focused on the innovation, our revenue growth, management initiatives, as well as the brand building plans and accelerated and sustained top line growth of the company and continue to deliver strong results. So my gratitude and appreciation to all the Colgate people and thanks, everyone. I'll see you at CAGNY.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• John Faucher, Chief Investor Relations Officer
• Noel Wallace, Chairman, President and Chief Executive Officer
• Stanley J. Sutula III, Chief Financial Officer

Analysts

• Dara Mohsenian, Morgan Stanley
• Peter Grom, UBS Group AG
• Lauren Lieberman, Barclays PLC
• Steve Powers, Deutsche Bank Aktiengesellschaft
• Andrea Teixeira, JPMorgan Chase & Co.
• Kaumil Gajrawala, Credit Suisse Group AG
• Chris Carey, Wells Fargo Securities
• Jason English, The Goldman Sachs Group, Inc.
• Kevin Grundy, Jefferies Financial Group Inc.
• Wendy Nicholson, Smith Barney Citigroup
• Mark Astrachan, Stifel Nicolaus
• Robert Ottenstein, Evercore ISI