Colgate-Palmolive Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning. Welcome to today's Colgate-Palmolive 2023 First Quarter Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com.

Now, for opening remarks, I'd like to turn this call over to Chief Investor Relations Officer and Senior Vice President, M&A, John Faucher.

[John Faucher, Chief Investor Relations Officer and Senior Vice President, M&A at Colgate-Palmolive]

Thanks, Allison. Good morning, and welcome to our 2023 first 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 related prepared materials and our most recent filings with the SEC, including our 2022 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 Table 6 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. Noel will provide you with some thoughts on our Q1 results and our 2023 outlook. We will then open it up for Q&A. Noel? Thanks, John; and good morning, everyone. As you can tell from our press release and the earnings materials, we had a strong start to 2023, and the momentum on our business gives us confidence to raise our net and organic sales growth guidance and to raise the lower end of our Base Business earnings per share growth guidance for the year. We did this because with the quarter of the year gone, we see less risk from some of the macroeconomic and geopolitical issues that we were concerned about earlier in the year. That said, there is still notable uncertainty surrounding the balance of the year, particularly in the second-half. Since the commentary focuses on the results, I want to focus my remarks on three of our priorities at Colgate people are focused on. Priority one is driving organic sales growth as we face tougher comparisons. We will utilize our enterprise-wide capabilities in innovation and revenue growth management, along with a firm commitment to marketing spending to return to a balanced algorithm of pricing and volume growth. The pricing we have taken over the past two years helps provide us with the flexibility to fund increased brand investment to support our pricing, build brand health and drive volume and household penetration. We know that the competitive environment is going to be difficult, but we have a brand portfolio that is built for times like these, and we look forward to driving growth and market share performance moving now. Priority two is delivering our productivity to fund the brand investment, while we're also delivering on our earnings targets. We had a strong start to the year for both funding the growth and our 2022 Global Productivity Initiative, and we are laser-focused on delivering against or exceeding our goals for the year. We still foresee year-over-year headwinds to earnings per share growth from raw and packaging materials, foreign exchange and below-the-line items. So driving productivity in the middle of our P&L is vital. And finally, we are focused on improving our cash flow performance. Again, we had a strong start to the year with both operating cash flow and free cash flow up, and we know there is still opportunity for further improvement. We will utilize this cash flow to fund the growth and capital expenditures to return cash to shareholders through dividends and to drive earnings leverage through paying down debt and repurchasing shares. So I'm pleased with how we started the year, but I'm also well aware of the challenges and uncertainty ahead for us. Colgate-Palmolive, however, has the brands, the capabilities and the people to deliver in this environment. So, with that, I'll take your questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question today will come from Dara Mohsenian of Morgan Stanley. Please go ahead.

[Dara Mohsenian, Analyst at Morgan Stanley]

Hey, guys. Good morning.

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

Good morning, Dara.

[Dara Mohsenian, Analyst at Morgan Stanley]

So, clearly, strong topline results in Q1, but we're also obviously, in a period of outsized pricing, and the question is sort of where do we land as the pricing trails off. So, just a -- I guess, can you discuss your confidence that volume will recover going forward as pricing drops off? I know it's a bit of an unanswerable question at this point, but how do you think about that dynamic ahead of time and manage your business to drive sustained volume growth as you look out longer-term? And B, maybe as a bit of a window, into that performance when category pricing drops off, can you just talk about your market share performance for Q1 in some of your key regions and product categories, and if the strategies are working in terms of driving improved market share trends? Thanks.

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

Yeah. Thanks, Dara. Let me come back again to the strategy that we've been deploying over -- obviously, the last couple of years and continues to execute against the initiatives that we've talked about, particularly at CAGNY, and that's driving the core, and adjacencies and channels. And you see the progress we're making against all three of those, obviously, delivering sequential volume growth in the quarter.

So, we had five of the six divisions sequentially up in the first quarter, North America was down. But if you pull the Fabuloso recall out of the North America business, North America would have been up sequentially as well. And all of this plays back to our belief that the strategy clearly is working to deliver improved volume, despite the fact that we continue to take significant pricing across all of our geographies and our categories.

So, quite frankly, we're very pleased with the progress we're seeing, and we expect sequential volume improvement as we move through the year to go here. Now, that is contemplated on a consumer environment that remains where it is. We shall see where the consumer goes relative to the level of inflation being absorbed in the marketplace. But we feel strongly that we've got the right portfolio of brands across price points, the right innovation, the right channel strategies, particularly where consumers are shopping today to continue to drive growth.

Importantly, as we saw in the quarter, our Oral Care business was up double-digit and that's both positive pricing and positive volume in toothpaste, and we saw a good share growth in the first quarter on toothpaste in North America, very strong share growth across Europe, flat shares in Europe -- excuse me, in Latin America, and good share growth in Asia. So overall, we feel good about where we are from a consumption standpoint and the strategies that we're executing, and expect a sequential volume improvement as we move through the back half of the year.

And as you said, pricing will get more challenging as we lap the back-half, and certainly in the second quarter, which was a strong quarter for us, where we had strong pricing and volume in that quarter, we expect a little bit of pullback from there. But overall, we feel good about the momentum behind the business right now.

[Operator]

Our next question today will come from Filippo Falorni of Citi. Please go ahead.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Hey, good morning, everyone.

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

Hi, Filippo.

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Good morning. Can you talk about the consumer health in your key emerging markets? Where are you seeing in terms of the response to recent price increases? And then as you mentioned, like the second-half obviously, a lot of uncertainty. Maybe can you compare and contrast how do you see the consumer environment evolving in emerging markets compared to your more developed markets like the US and Europe? Thank you.

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

Yeah, emerging was strong. You saw, obviously, double-digit organic in the quarter, sequentially again volumes performing better than they did in the first quarter. And if you look at the pricing that we've taken in emerging markets over the last three quarters, quite frankly, we're pretty pleased with the fact that the volume sequentially continues to improve.

Now, that being said, we've got strong innovation in emerging markets, and you've seen the level of advertising that we're putting back into the business. That gives us again confidence that we're able to sustain that advertising as we move into the back half of the year, and we intend to continue to do everything we can to increase that advertising support in the back-half, particularly in emerging markets in order to: one, support the innovation we have; second, drive the pricing into the market, and continue to accelerate volume growth in the categories.

So overall, emerging pretty good. We're really pleased with the progress in both Latin America, Africa and Asia, particularly in China. Strong growth in all three of those regions, particularly in the key markets of Mexico, Brazil and China and South Africa. So good progress across emerging markets, and shares holding up a little more elasticity as you would expect given the level of pricing that we've taken in emerging market. But overall, we feel pretty good about where we stand in that regard.

As it relates to the second-half, time will tell. As I mentioned upfront, we will see the compounding impact of pricing across many categories as we move into the back-half, and I expect a better balance between pricing and volume as we move through the back-half, but we shall see. The good news is we've got strong innovation. We've got the pricing in the P&L, which is really important in order to get the flexibility that we need to drive the business in the back half of the year. And we feel we've got a good channel strategy to ensure, as I mentioned upfront that we're capturing the omnichannel impact of how consumers are shopping today.

[Operator]

The next question will come from Peter Grom of UBS. Please go ahead.

[Peter Grom, Analyst at UBS Group]

Thanks, operator; and good morning, everyone. So I appreciate all the commentary on inflation in the prepared remarks, but maybe as a point of reference, Stan, is the $300 million to $400 million headwind that -- and we discussed on the last call, is that still a reasonable range? And I guess what I'm trying to get at is, the dollar impact from the 770 basis point headwind in the bridge, this morning we put you pretty close to that range from a dollar perspective. So -- and I realized there is more than just inflation in that line. But is there just any way to frame either what inflation was within that number or how to think about that component of the bridge more broadly as we move through the balance of the year?

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

Yeah. Thanks, Peter. So, first, as we look at that inflation level, that $300 million to $400 million range is still the range that we're seeing on commodities. But there's really a tale underneath this. And in particular, around ag, that affects predominantly Hill's, those prices still remain elevated. We don't see a lot of relief coming on those, and we see that kind of continuing as we go through the year. That's the main driver of a range, which is why we haven't seen it come down more.

If you look at the other categories like we do for toothpaste, Home Care, Oral Care and Personal Care, those have moderated more, and that was reflected in our guidance for the year, and they stayed reasonably balanced. So as we look out, remember, we're essentially locked in here for Q2, we have locking already in place for Q3 and a little bit less for Q4, I still see that as the viable range going into the back end of the year.

Now what happens is, on a year-on-year impact, we wrap around on the very significant increases last year. The pricing that we've taken helps to moderate this. And then, as you saw, we had an exceptionally good start to funding the growth this year, and that has also helped to mitigate that. That gives us the confidence to say that we will increase margins as we go through the year, despite the fact that we expect that the commodities are still going to be in this range due to inflation.

[Operator]

The next question will come from Kevin Grundy of Jefferies. Please go ahead.

[Kevin Grundy, Analyst at Jefferies Financial Group]

Great. Thanks. Good morning, everyone, and congrats on the strong result here. Noel, a question for you on reinvestment. So, obviously, strong results here. You guys are getting the topline payback that you hope for. You're seeing gross profit come through. You've made a point since you came in, just increased advertising levels, and in that, the advertising and marketing as a percent of sales was high, even by historical standards. That's a good thing, of course. How are you thinking about reinvestment levels, should you exceed on gross profit? Number one.

And then number two, realizing that it's topline payback and profit growth that's sort of driving the decisions and not necessarily as a percent of sales. But are you comfortable with where you are? I mean, it's high -- 12% of sales is high relative to historical standards, which dipped to 9% at -- if we go back year to '15-'16. How are you thinking about that? How should we think about that as gross margin begins to improve? So thanks for all that.

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

Sure. Thanks, Kevin. Yeah, we're really pleased with the level of advertising we're getting in the P&L, and that is obviously driven by the circular nature of how we're driving the business. Obviously, more advertising is driving the topline and we're able to get more leverage through the P&L to continue to support that. And we feel as we move out, getting the pricing in the P&L was critically important to sustaining and increasing our levels of advertising.

We've obviously moved more money into digital. We're seeing great ROIs on digital, and are programmatic in the personalized content that we're delivering in the market. We're seeing growth in market shares relative to where we're spending the money, particularly, around the Hill's business and our Oral Care and skin health businesses. So we're really pleased with the fact that the advertising levels continue to deliver against the expectations that we have. And we balance that off with obviously a broad portfolio of offerings that we think are attracting and building the brands that we speak. We have high household penetration with many of the brands around the world. Our ability to drive reach and continue to sustain that reach is very, very important to the growth that we're seeing in the business.

As we look forward, we would anticipate to continue to spend behind those businesses. We still have some businesses, in my view, need more support, particularly businesses in parts of Europe, and some of the categories in the US, and we would expect to continue to fund those as we get more gross margin accretion through the back half of the year, because we're seeing the results and automate the brand equity, which is obviously the big testament to the brand support and how we're getting what we want out of it, continues to show a strengthening of our brands. And that bodes well for continuity and sustainability of the growth moving forward, and that's how we're kind of running that flywheel right now, continue to invest, drive leverage in the middle of the P&L, accelerate the topline, and ultimately, deliver better margins, better earnings per share for our shareholders.

[Operator]

Our next question will come from Olivia Tong of Raymond James. Please go ahead.

[Olivia Tong, Analyst at Raymond James]

Hello. Thanks. Good morning. I wanted to talk a little bit about gross margin. Clearly, funding the growth start of the year was really better than expected. I imagine it's a function of supply chains improving a bit; if you could expand on that a bit. And then usually, your savings contribution builds as the year progresses. So could we assume sort of a regular quarterly cadence from here or is there something one-time-ish that happened this quarter to result in the strong funding of growth contribution? Thank you.

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

Yeah. Thanks, Olivia. This was very intentional as we went through the back half of last year, we were deliberately looking to make sure that we had projects in place for the first half of this year in order to accelerate gross margin accretion, given the inflationary pressures that we were seeing. In addition, I would say that we've done a lot of work on getting our facilities to run far more efficiently, whether that's the Hill's facilities, where capacity utilization has come down, which has allowed us to put more funding to growth projects onto the line to determine their feasibility. We've had the teams obviously, very much focused on the opportunities that we see in the first-half in order to ensure that we get that gross margin back in quickly to once again sustain the advertising and the increases we want to see in the back half of the year. So it was deliberate and strategic to make sure that we got more of that funding to grow with upfront. And the teams have really done a wonderful job in that regard, as you saw in numbers, and we would certainly expect that focus to continue as we move through the balance of the year.

Let me turn it over to Stan. He will give you a little bit more color on what we're seeing again around commodities and some of the other projects that we have underway, particularly around our global productivity initiative.

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

Yeah. Thanks, Noel. And just a quick comment on the FTG. Noel highlighted that we had a very strong start here. That SKU I think is going to be a little bit different than prior years. In prior years, you saw build through the year. This was a very deliberate. Supply chain has moderated in terms of the volatility around that. In particular, the Hill's team has actually had time to work on some of these, as we've had a little bit better improvement on capacity utilization.

So the strong start we have to the year, I think, you should think that this would be more equal as you go through the year versus growing through the year, so from an SKU point of view. And this is important, because, as we look at the materials cost, there's still going to be a headwind as we go through the year. So we need that to help offset that impact. And then, we have our GPI program, we continue to get a benefit from that into a small charge in the quarter. But the team is driving productivity throughout the P&L, not just in the GP line, but also in the MBO line as we look for things to offset that materials headwind.

[Operator]

Our next question today will come from Chris Carey of Wells Fargo Securities. Please go ahead.

[Christopher Carey, Analyst at Wells Fargo Securities]

Hi. Good morning.

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

Hi, Chris.

[Christopher Carey, Analyst at Wells Fargo Securities]

So, Stan, I just wanted to confirm one comment about commodities. I think, it was somewhat clear, but to Peter's question just around the $300 million to $400 million range, is that what you're expecting for the full-year from an inflation standpoint?

And then, just little bit related on the North American operating margin that has been stepping up kind of sequentially and then slowed a little bit this quarter, obviously. I would have thought maybe with the transportation and logistics, relief and building productivity and a little bit of easing inflation, maybe that can keep going, but I know there is obviously some noise with the North American business this quarter with recall and otherwise. So is there any way you can maybe just unpack that North American margin performance and where you see things going? So thanks for that clarification on commodities and the comment on North America.

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

So, why don't I start here? On North -- first, let's start with the commodities. So, as we said, still $300 million to $400 million range on that impact. I don't see that moving a lot in the short term. And keep in mind our locking, right? So we're already into almost May, so 2Q is largely locked, and as we go into the back half of the year, hopefully, we'll see a little bit of relief come through. But keep in mind, the closer we get, the more we lock in order to ensure we have supply.

If we think about the North America margin and go through, so North America margins here are still improved on a year-on-year basis. They also improved on a sequential basis. So as you look at the progress on what we're doing from a GP point of view, that's important. We do see some logistics benefits here. Logistics have come down versus the start of the year, but again, we start to lock in some of that activity. We've seen it mostly in the ocean side of logistics, which will certainly help the overall margin. And if you think about North America in total, clearly, Fabuloso recall had an impact in the quarter. That's getting largely behind us, so we expect that we'll see improvement as we go through the year.

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

Yeah. Maybe a couple of things. So, as Stan said, obviously, operating profit was up nicely, which has been the big focus for our North America business. We were up roughly 300 basis points on operating profit in the first quarter. So we feel we're making the right step, taking the right decisions and making the right progress against the middle of the P&L, particularly around gross profit and controlling our overheads and managing logistics. So that was an important element, and we're making sure that that progress has been reinvested in the business.

So a couple other highlights on North America. Obviously, ex-Fabuloso volume would have been up on the quarter. A great quarter for toothpaste. Toothpaste was up double-digit in the quarter for North America with growth including volume growth on that business. Toothbrush is a little softer. You remember we were lapping re-supply of our product last year and some out-of-stocks from some of our competitors, so volumes were a bit down there. Personal Care, up high-single digits; Home Care was soft, as we mentioned, due to the Fabuloso recall, but overall, really good progress.

The other aspect to North America that I would call out is the significant progress we're making in non-measured channels. And again, this is part of our strategy of growing in faster growth channels, where we saw significant growth in non-Nielsen channels, which was terrific for North America, and that's obviously helped to drive some of that topline growth. So overall good quarter for North America, very focused on the middle of the P&L moving forward, and we see opportunities, but the good news is we're seeing good progress on the topline and that's translating to the P&L.

[John Faucher, Chief Investor Relations Officer and Senior Vice President, M&A at Colgate-Palmolive]

Just one point of clarification on that. North America volume would have been up sequentially from Q4 to Q1. Performance from Q4 to Q1 not up year-over-year ex Fabuloso.

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

Correct.

[John Faucher, Chief Investor Relations Officer and Senior Vice President, M&A at Colgate-Palmolive]

And then Stan on the --

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

Yeah. On the operating margin, it's up year-to-year. Versus fourth quarter, you see it's down about 100 basis points or so. And that's really driven by the Fabuloso impact combined with the increased investment in advertising, as we're bringing both innovation to market and supporting the pricing that we've taken in the market.

[Operator]

Our next question today will come from Nik Modi of RBC Capital Markets. Please go ahead.

[Nik Modi, Analyst at RBC Capital Markets]

Yeah. Thank you. Good morning, everyone. If I could just ask a quick clarification on the raw material, the ag stuff. Stan, can you just give us any more detail on exactly what ags are causing the pressure, and what's driving that?

And then my broader question is, Noel, on the whitening innovation and just the whitening strategy. I'm curious if you've done any halo work on the impact it has on the core Oral Care franchise, toothpaste, toothbrush, any perspective around that would be helpful. Thanks.

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

Sure. Let me -- Nik, let me take that and then we'll have Stan get to some more specifics around the Hill's commodities and particularly, the ag prices. Yes, the strategy that we have on whitening is very much about building the brand, particularly here in -- if you take North America, the Optic White brand and as we've expanded into at-home whitening at very significant premium prices and the significant efficacy that those products deliver in the market and to the consumer, we've seen very nice halo impacts across the entire Optic White range, as well as the Colgate brand. So the short answer to your question is, clearly, the halo effect is transferring to the entire Optic franchise, as well as improving the Colgate brand.

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

Yeah. And Nik, on the commodities, it's kind of across-the-board with most of the ag. So corn, wheat, soybean, the risk of the drought in the US and the effect on crops, even though some other areas of the world are a little bit better, the risk of Ukraine, all has been pushing pressure on that. Don't forget as well that the protein side of this, things like chicken livers, etc, with some of the impacts have been out there has all put pressure on Hill's that remains the real driver of that $300 million to $400 million range.

[Operator]

The next question will come from Jason English of Goldman Sachs. Please go ahead.

[Jason English, Analyst at The Goldman Sachs Group]

Hey, good morning, folks.

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

Good morning.

[Jason English, Analyst at The Goldman Sachs Group]

And that's a great segue because I wanted to talk about Hill's and actually [Indecipherable]. Good quarter, obviously, not for Hill's with the profitability and the margins. We've lost over 1,000 basis points in margin in the last two years. I was hoping you could unpack the components of it, and the cadence at which you can recover if you fully recover that.

So how much are we looking at from the mix effects of recent acquisitions? And what's the cadence of bringing your capacity on there and improving that? How much is related to like the slack capacity and underutilization of the assets that you're standing up, and maybe some of the stress in the supply chain as a result of capacity utilization? And then I think the third bucket -- and tell me if there's other buckets. I think the third bucket is the pricing at a cost. How large is that bucket of roughly 1,000 basis points? And is it reasonable to think that could come back, and if so, when? Thank you. Sorry for the multipart small questions.

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

No. Thank you, Jason. So, let me topline Hill's a bit and then Stan can provide a little more specificity that you were looking for. But structurally and strategically, this business continues to perform very well. Continued sequential improvement in volume and strong organic growth despite the difficult comps that we continue to come up against. So, overall, pleased with the 14%, and again that's 14% on 13% last year, and pricing of 11.4% or 9% last year, and obviously, sequential improvements in volumes. So a couple of things there.

Stan will get into obviously, the key drivers of the operating margin dilution, which would be the following. Obviously, ag cost, the manufacturing integration of the three Red Collar facilities, plus the Italian facility that we have as we move through the variances associated with that. Red Collar in the current quarter is a significant portion of that, the private-label business. We've continued to obviously, significantly increase our advertising support. We said we would do that as we built-up more capacity that is very strategic and deliberate, and we're seeing the results of that in the marketplace, particularly as we drive new innovation into the market and we drive pricing in the market. The ability to sustain and elevate that moving forward is going to be largely driven by our ability to sustain the strong levels or even increase our advertising levels.

As we look forward, strategically, margins will improve sequentially as we move through the back half of the year. Plant efficiencies will continue to deliver progress in that regard. We'll get the constraints out of our existing plants, which we're running at full throttle. That will allow us to be far more efficient in those plants, put more funding and growth into those plants as we look forward. So, overall, strategically, the business is doing very, very well. And we feel all of the steps we've taken to improve capacity ultimately delivering good strong loan growth, we need to focus on the middle of the P&L, as you rightfully say, and the progress is there to do that.

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

Yes. Let me pick up here. So first, if you take a look, these investments and the business and if you look at the net sales, keep in mind, you go back just a couple of years ago, we were up well over $200 million a quarter versus first quarter of 2021. So the investment in the brand is paying off. If we look at margin, the private label has -- well, we said, that's a 90 basis point impact to the total Company, it has slightly over 400 basis points impact to Hill's. So, as you take a look at that margin impact, that is a material impact to Hill's on a GP basis. Now, through time, that private label will wind down, and that will be over the next couple of years as we slowly wind down that contract and then backfill it with Hill's volume and Hill's margins.

Now, as we've already talked about, all of the raw material impact inflation has predominantly been against Hill's also impacting their margin. But keep in mind, they've taken a significant pricing here over the last several quarters and that is helping to mitigate this. And the fact that we're now as the Red Collar facilities have come on, that's helping us manage utilization, not just of Red Collar, but of the entire manufacturing footprint. That's enabled Hill's to contribute materially to the funding the growth savings. So, I think where Hill's is right now is well-positioned. I think we'll see sequential improvement in margin as we go through the year. We're going to manage that carefully, so we can continue to supply our clients and we saw material improvement in case fill rates coming out of first quarter.

[Operator]

Our next question will come from Bryan Spillane of Bank of America. Please go ahead.

[Bryan Spillane, Analyst at Bank of America]

Hey, thanks, operator. Good morning, everyone. I got a quick clarification first for Stan. I think in the guidance, we talk about net interest expense may be going higher than your original plan. So could you put some -- if you can, just put some color, put a number on that? And I'm assuming is this related to the refinance? I think you refinanced some debt in March, so was it just related to the refinancing of the debt, or is it exposure to, like, short-term financing variable rates? Then I have a follow-up.

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

Sure, Bryan. Thanks for the question. So first on interest here, as we looked, this is -- well, we want to call it out, because we saw rates going up. This is not a large number, so you should think around $20 million for the year. It's not really related to the first quarter debt issuance. We are very happy with that. We had very good demand on that bond. It's really the assumptions on the number of rate increases and predominantly in Europe. So, as we look at the ECB and the changes there, the slight difference to what we had anticipated coming into the year. As we all know, that's a moving target and it's going to depend on inflation, moves with central banks, but that's our best guess right now. So that's a modest impact for the year.

[Bryan Spillane, Analyst at Bank of America]

Okay. Great. Thank you. And then question for Noel. Just -- you talk about, I guess, risks in the second-half, and maybe if we just kind of think about that at a higher level, it sounded to me from listening to the Q&A and reading the prepared remarks that a lot of that risk is what the consumer may or may not do less so than concerns about volatility in input costs or supply chains. And risk has got a lot of definitions, right? So if you could just maybe talk a little bit about like what the specific risks are, and maybe how Colgate is in a position to manage that risk, maybe a little bit more -- with a little bit more agility than maybe was the case two years ago.

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

Sure. Yeah. Good morning, Bryan. Thank you. So, clearly, the consumer environment is the one that's the big unknown I think to everyone. And that's been a consistent theme through the first quarter trend by most in terms of what's really going to happen in the back-half and the compounding impact of pricing. I'll address the fact that historically when we've seen significant inflation in our categories, we've weathered those periods really, really well. A combination of great value-oriented innovation and the fact that our -- the breadth of our portfolio at various price points affords us the opportunity to really push different segments at the appropriate time anywhere around the world. So, we're pleased with that.

We're also pleased with the fact that you tend to see in times like this, a squeeze in the middle of the category with premium growing and the value growing, and that's been our focus quite frankly. Premium has been the key focus for us and we're seeing great progress, particularly across our toothpaste business in new channels and the premium end of the market. And we obviously, have a very strong Base Business that is well-positioned based on some of the relaunches we have.

In the raw and packing materials, we shall see. We've seen a stabilization across at least the Colgate side. You've heard a lot about the ag prices that continue to elevate, but we've seen a stabilization on those as we move. So we've got more predictability on that, hence the reason why we felt more confident with the raising guidance across multiple dimensions there, because we see a little bit more transparency to that.

As Stan mentioned, we've got some contracts that will obviously come off. Now the unknown there is what our suppliers would do. They are facing rising wage inflation and we'll have to deal with that as it comes, particularly in the second half of the year, relative to how they decide to adjust pricing on some of the key commodities that we will ultimately be purchasing.

The other aspect is China. We will see where China impacts, not only the Asian business but the world, quite frankly. We expect obviously, a slow progress in that market. I don't expect it to be vertical. I expect it to be a progress from quarter to quarter. We have not seen the travel retail business come back yet, and that is an expectation that we will probably see in the second half of 2023, not in the first-half, but we shall see. Now, we'll get into Asia and China, I'm sure as the Q&A progresses, but we had obviously, a very strong quarter there, and we think we're well-positioned as that economy comes back to deliver on it.

The last is foreign exchange. That clearly is always a risk. As you saw in the prepared remarks, with low-single digit foreign exchange impact through the P&L, we'll see where that moves. The Latin American currencies have come back a little bit here, as has the euro. But it's been very volatile and we'll adjust to that going forward. But that has been a big driver in the past as you well know. We think we're well-positioned right now from the fact again of gaining strong pricing into the P&L, both in the fourth quarter and in the first quarter.

[Operator]

Our next question will come from Lauren Lieberman of Barclays. Please go ahead.

[Lauren Lieberman, Analyst at Barclays]

Thanks. Good morning. So two questions, sort of like everybody else. The first was -- is just pretty basic, and I was curious if you could offer any perspective on volume performance by categories that you've seen. I know that's not typically something you discuss, but as we kind of think about that path forward, and that shift towards a more balanced revenue [Indecipherable] just curious where you stand on kind of volume growth by segment.

And then the other question was, Noel, in your prepared remarks, you mentioned something about you knowing the competitive environments would be difficult. And I just -- we haven't heard that in a lot of other companies, and I didn't know if it was sort of a particularly pointed comment or just a general commentary on your ability to compete and confidence in the innovation pipeline and the advertising support. So just curious on a little bit more color behind that commentary on the competitive environment. Thanks.

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

Sure. Thanks, and good morning, Lauren. Let me take the second question first. The competitive environment will likely intensify, particularly as you see cost come down, and that will be a function of both local brands and private label getting more aggressive. The good news is our categories, if you take North America and private label, we're benign, no progress in private label shares, so to speak, with the exception of a little bit in liquid hand soap and a little bit in cleaners, a little bit more acute on private label growth in Europe. As you saw price discrepancies or the gap between private label and global brands increase, we'll see how that translates in the back-half as we expect them to have to take pricing in the first quarter as we did as well.

So, we think local brands and private label likely to elevate in terms of their competitive nature in the back-half. And as cost stay flat in the back-half, which is what I think we're hearing from most, we expect the competitive environment to increase in that regard. Obviously, you'll see more promotional volumes probably come into the category, but it's been quite constructive so far, I will say that. But we need to anticipate that things could worsen based on where the costs are and we are well-prepared for that.

On your first question, volumes. So, category volumes, if I take just the market volumes, in general, flat to slightly negative across most of the world. On the volume side, obviously driven by the fact that there's so much pricing that's gone into both Oral Care, Personal Care and Home Care. If you look at us specifically, really strong growth on the Oral Care side, as I talked about, double-digit growth across most markets. In toothpaste, a good volume progress in most markets on toothpaste. So we're really pleased with what we're seeing there.

Personal Care up mid-to-high single-digits, depending on the marketplace both, from a pricing standpoint, a little bit more challenged on the volume side, given the strong pricing we've taken there, particularly in categories like liquid hand soap and bar soap. And on Home Care, mid-single digits to low-single digits in terms of growth, depending on the marketplace. And that one has experienced a little more elasticity, particularly around the cleaner side of the business where we've seen more price competitiveness in that side of the business and a little bit more trade-down. But overall, again, sequentially up, and really pleased with the sequentially up given the fact that we had a lot more pricing in this quarter than we had in the fourth quarter. So good progress overall. We'll have to watch the volumes carefully and we're all over that.

[Operator]

Our next question will come from Mark Astrachan of Stifel. Please go ahead.

[Mark Astrachan, Analyst at Stifel Nicolaus]

Yeah. Thanks, and good morning, everybody. I wanted to ask about EBIT margins in North America and Europe. If you take a look at where you are today versus where you were a few years ago, it seems like it's -- outside of Hill's, one of the biggest drop-offs relative to historical levels. I appreciate inflation, FX, etc, but it also seems like maybe those markets are a little bit more competitive than some of the others. Is it levels the spend that is potentially impacted that? And how do you think about progression of margins? Is it realistic to think that you can eventually no sort of timeline around that to get back to those levels, why or why not, would be helpful. Thank you.

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

Yeah. Thanks, Mark. Yeah. Your answer is clearly around the spending. That's the answer. The spending is up quite notably in North America, that's very strategic. We see that as a growth market for us moving forward, not only on the topline, but on the bottom-line. We really wanted to reinvest behind the business in some of our brands, and we're clearly demonstrating that as we've gone through the last couple of quarters.

Getting gross profit in the middle of the P&L sorted out in North America has clearly been a key focus, and we've had good gross profit progress in North America. We're getting better overhead leverage through the P&L. We're getting a lot better efficiency in our plants, and so we will see that translating moving forward. But we will continue to invest behind that business moving forward to drive the topline.

Europe, a little bit driven obviously by the foreign exchange environment to a certain extent, and obviously, more increased inflation in Europe than we've seen in other markets around the world, particularly, around the high gas prices and the fall-off effects of higher gas prices and some of the raw materials that we purchase into our European plants. So, overall, there's been a little bit more pressure there, but again, we've taken strong pricing in the back half of 2022 and pleased that we were able to execute our pricing in the first quarter of 2023 towards the latter end of the quarter, and we'll see that benefit us as we move forward. So overall, your observation is correct. We feel we've got a good handle of getting the gross margins and the operating profits up sequentially as we move through the back half of the year, and importantly, sustaining or increasing our advertising levels to continue to drive the topline.

[Operator]

Our next question will come from Stephen Powers of Deutsche Bank. Please go ahead.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, thanks. Good morning.

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

Hi, Stephen.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good morning. Just a couple of clean-ups, I guess. Just the first one on -- just on the Fabuloso recall, because we see some confusion in my inbox during the call. Is there a way to quantify what the impact was in the quarter? And does that reverse out as a benefit in the second quarter? That's question number one.

Question number two. On the logistics topic, I don't know if there's a way to quantify what the benefit was, or how you're thinking about the expected benefit over the course of the year, but that would be helpful as well.

And then the last piece is just to kind of build on Jason's question on Hill's margins, but I was specifically on the Tonganoxie plant, just where that is, and what the timeline is to get that up to scale. And is that a material driver of the margin bridge as well, or is it more on the margin? Thank you.

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

Great. Thanks, Stephen. Let me take the Fabuloso and the Hill's question, and I'll have Stan come back to you on logistics. So, the Fabuloso impact was Q1. It was a material impact to the North America volume line. We're not going to quantify that, but it was quite significant to the volume performance in North America. That is behind us as we move through into the second quarter. So, we'll see the benefits of the Fabuloso business coming back into the P&L as we move forward. Again, if you take the Fabuloso business out of the North America number, they were up sequentially versus the fourth quarter of 2022 in volume. So, it was a very time-driven event in the first quarter. And the good news is that's behind us.

Tonganoxie progressing. As you know, strategically, that's a very important plant for us, given the strong demand we have on the vet side of the business at Hill's, and our inability to supply the current demand for wet products all around the world. So getting that plant up and running will be strategic for the continued growth of that business. That will happen towards the tail-end of the third quarter, and we anticipate obviously, we'll have some start-up costs associated with that as we move through the transition of that facility. But overall, we should see that benefit us moving into 2024, particularly at the margin line as our vet business is margin-accretive to us and will certainly benefit the Hill's business longer-term.

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

Yeah. So let me pick up on logistics here. So you saw logistics was 9.5% of sales. And if we look, it's been an incremental headwind to our overheads. Remember, it's in our overheads and SG&A for several years. And in Q4, we saw the first year-on-year decline as a percent of sales in 12 quarters, and it was down again this quarter and we expect it to be down for the year. I expect, as we kind of look out through the remainder of the year, it's going to come down slightly. I don't see it's coming down materially. So we're at 9.5% now. I still think that will probably start with the 9% as we go through the remainder of the year. So certainly, a help year-on-year, but as we kind of look out through the rest of the year, I think, that's how you should think about as a percent of sales it will moderate and stay just above 9%.

[Operator]

Our next question will come from Robert Ottenstein of Evercore ISI. Please go ahead.

[Robert Ottenstein, Analyst at Evercore ISI]

Great. Thank you very much. Two follow-ups. The first one, a quick one. You mentioned that you were very strong in non-measured channels in North America. Was that more e-commerce or club stores? And can you give us some metrics around that? That'd be helpful.

And then my core question is really on the advertising spend pickup. 14%, it's a big number. You mentioned for the full-year that you would be up absolutely and as a percent of sales. So can you give us a little bit more sense of where that money is going? Is it more innovation and longer term focused or maybe more short-term? And then following into that, do you expect to see this elevated level going forward, either because you have very high return projects or you need to catch up? Just trying to get a sense of what the income statement may look like longer term. Thank you very much.

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

Sure. Yeah. Good morning, Rob. Let me take both those questions. First on the non-measured channels, again, this plays back to the strategy that we've been talking about for quite a few years now, and certainly, I highlighted again at CAGNY that we are very focused on growing channels that particularly are not measured by Nielsen, which are the faster-growing channels, as you mentioned, e-commerce, club stores, discount stores, value discount stores, some of the big-box stores that we're seeing emerge in Latin America. So overall -- and some of the new obviously, platforms that we're seeing coming out of China. So this has been strategic and deliberate for us.

And if you take the North America number, we've seen significant growth in non-measured channels to the tune of 4x to 5x what we're getting in measured channels. So obviously, good growth there. The key is to sustain that growth. Our e-commerce business was up double-digit in the quarter, now, roughly 14% of our total sales. So, overall, we're seeing good share growth in those businesses. In fact, if you take some of the progress we're seeing in China, very much driven by the strong e-commerce shares that we had. I demonstrated that at CAGNY. And in fact, since CAGNY, we've continued to increase our e-commerce shares in China, and likewise in the brick-and-mortar business. So overall, we feel the strategy is working for us.

Again, largely driven by the fact that we're supporting our businesses, we're using a widespread of different mediums to grow brand awareness and brand penetration, obviously, TV for a lot of reach and frequency given the scale and scope of our brands in many markets, but really fine-tuning behind our digital transformation, our ability to drive higher ROI spending in the digital space. And clearly, as we see more ROI coming, we see continued growth in terms of penetration, in terms of consumption and in terms of ultimately, delivering share growth and category growth for our retailers will continue to elevate our spending. We're measuring that very quickly. This is not just for the sake of increasing spending, we want to be sure and absolutely deliberate, and making sure that the spending is returning back to the brands, driving category growth.

So there's not a specific number we're aimed at, Rob. We're looking to obviously continue to accelerate and sustain the topline and grow the health of our brands, and we're seeing good results from the strategy we've put in the marketplace.

[Operator]

Our next question today will come from Fulvio Cazzol of Berenberg. Please go ahead.

[Fulvio Cazzol, Analyst at Berenberg Bank]

Yes. Good morning, and thank you for taking my questions. Mine is on the medium-term outlook for the pet nutrition category. How should we think about the medium-term growth prospects as the tailwinds ease from increased pet ownership during COVID etc? And I was also interested in your view on the competitive standpoint like if you are making some investments on capacity and I think some of your peers are making significant investments, I think, Nestle is doing quite a bit on manufacturing. Is there a risk that the supply-demand balance turns less favorable in the coming years and result in softening industry pricing power? So that's my question. Thank you.

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

Yeah. Thank you very much. Let me take -- let me answer a couple of ways on the first part. First, obviously, coming through COVID, pet adoptions increased quite significantly. Those pets will continue to obviously age and we will have obviously therapeutic and wellness products delivered for an aging pet population, so we feel good about that.

You will recall, we've talked about the low brand penetration and brand awareness of the Hill's franchise. So we feel even if the market softens a bit which we have not necessarily seen, a little softness in volume, but not necessarily in value, as you see premiumization continuing to grow the market today, we feel we have the right portfolio of brands to continue to grow in the right investment strategy. Hence, the aggressiveness of the advertising to ensure we're building brand awareness and penetration off the lower levels that we have today. And we also feel we've got opportunities internationally that we have yet to exploit given some of the capacity constraints that we have. And so we'll continue to obviously go after those moving forward.

We feel -- I can't address the capacity issues or where the capacity is in the market. We're obviously putting capacity for our business, and we see that obviously as a real plus for us as we move forward, not only to drive better efficiencies in the plants that we currently produce in, but as we bring Tonganoxie up to line, as we bring the Italian facility up to speed relative to our recipes. We feel we have real growth opportunities to continue to expand those segments where we weren't competing nearly as aggressively in the past. And so, overall, that will not only drive our business, but will drive the category as well given the levels of support that we'll continue to bring to our retailers.

[Operator]

Our last question today will come from Andrea Teixeira of JPMorgan. Please go ahead.

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

Thank you. Good morning. I know, Stan, you appreciate the sequential improvement in volumes that you called out worldwide. Are you still seeing a premiumization playing out, starting to see consumers or starting to see consumers down-trade into the entry-level price points in some parts of the world? I know mix is part of your volume numbers, so I was wondering if you can speak apples-to-apples into the volume increase that you're seeing sequentially.

And then a clarification on the Latin America and European, including EMEA. I understood the share is stabilized, especially in LatAm, but assuming it was mostly value share given that obviously, you are the leader and you're leading in pricing. So how about the volume share in those regions? And how are you seeing that play out as you progress, especially, as you over-skew in Personal Care, in particular, hand soap and the other categories within that sub-category? Thank you.

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

Yeah. Thanks for the question. Clearly, as we've seen in prior challenging markets with a lot of inflation, you kind of have the tales of two cities, which is the premium segment continues to grow and that's the area where we're under-indexed in. So clearly that's fueling a lot of our advertising investment and our channel strategies, particularly in Oral Care and the skin health business. So we see that segment continuing to grow, the middle getting squeezed a bit and the lower-end with the point you made, a little bit more trade-down into the lower end.

Now, remember that some of our lower end businesses, while the absolute margin dollars might be lower, the margin percent might be as good or better than some of our premium segments. So overall, we feel pretty good about the mix of our business and that continues to be in our view, a real advantage for our portfolio relative to the breadth of our portfolio.

Relative to volume shares, particularly in the emerging markets, we have taken significant pricing in emerging markets, and we've clearly done that to ensure we get the flexibility in the P&L as quickly as we possibly can, that we sustain the advertising numbers or increase them to drive the innovation and deliver the pricing, particularly for the premium side of the market.

We've seen a little trade-down, particularly more in the Home Care businesses, the cleaners segment. I would point out that this segment, a little bit of a trade-down, particularly in Latin America. Personal Care holding up okay. Bar soap tends to be more price elastic than many of our categories. But we've seen a lot of constructive pricing from our competition, so there hasn't been a significant amount of trade-down at private label as of yet, but we'll watch that very carefully.

So Home Care, a little bit more challenged particularly around the cleaner segment worldwide and Personal Care in the bar soap segment. Oral Care looks okay, as I mentioned. We're up double-digit in toothpaste with both positive pricing and positive volume.

[Operator]

This concludes the Q&A portion of our call. I will now return the call to Noel Wallace, Colgate's Chairman, President and CEO, for any closing remarks.

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

Yeah. Thanks, everyone, for your interest in our Company. And let me just extend a personal thanks to the 34,000 Colgate people who have worked tirelessly to deliver a stronger momentum in the first quarter, getting us off to a strong start for the year. We greatly appreciate their steadfast resolve and the innovation that they're bringing to the market and the strong execution. So look forward to talking to everyone in the second quarter. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• John Faucher, Chief Investor Relations Officer and Senior Vice President, M&A
• Noel Wallace, Chairman, President and Chief Executive Officer
• Stanley J. Sutula, Chief Financial Officer

Analysts

• Dara Mohsenian, Morgan Stanley
• Filippo Falorni, Smith Barney Citigroup
• Peter Grom, UBS Group AG
• Kevin Grundy, Jefferies Financial Group Inc.
• Olivia Tong, Raymond James
• Christopher Carey, Wells Fargo Securities
• Nik Modi, RBC Capital Markets
• Jason English, The Goldman Sachs Group, Inc.
• Bryan Spillane, Bank of America Co.
• Lauren Lieberman, Barclays PLC
• Mark Astrachan, Stifel Nicolaus
• Stephen Powers, Deutsche Bank Aktiengesellschaft
• Robert Ottenstein, Evercore ISI
• Fulvio Cazzol, Berenberg Bank
• Andrea Teixeira, JPMorgan Chase & Co.