Colgate-Palmolive Q3 2023 Earnings Call Transcript

Presentation

[Operator]

Good morning. Welcome to today's Colgate-Palmolive Third Quarter 2023 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 Executive Vice President- M&A, John Faucher.

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

Thanks, Allison. Good morning and welcome to our third quarter 2023 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 Q3 2023 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 tables four, six, seven, eight, and nine of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the Q3 2023 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 Q3 results and our 2023 outlook and then we will open it up for Q&A. Noel?

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

Good morning, everyone. I want to give you my thoughts this morning on a very strong quarter of top and bottom line growth along with our raised 2023 outlook. As you can see in the materials we published this morning, our strategy is working and the continued execution of the strategy leaves us well positioned as we look out to the future. We believe this will enable us to deliver balanced organic sales growth going forward. Growing in all six divisions, all four of our categories, and with both volume and pricing growth. Organic volume performance improved in the quarter, which we believe puts us on our way towards a return to volume growth. And with the leverage from this balanced growth along with the global productivity initiative, focused cost containment, and our funding the growth initiatives; we now have multiple points of leverage in our P&L. This should enable us to deliver consistent operating profit and earnings growth going forward.

You can see this in our Q3 results as our gross margin was up both sequentially and year-on year driven by sales growth and overheads were down driven by logistics. This leverage allowed us to deliver another quarter of double-digit operating profit growth along with a 23% increase in advertising. Some of our markets remain choppy and the headwinds like foreign exchange and higher interest rates will continue to impact us. But we are leveraging the strength of [Technical Issues] and the global reach of our brands while driving scale advantages through our science-based innovation, digital marketing, revenue growth management. and best-in class on the ground execution. Our momentum leaves us very well positioned to deliver strong results with compounding top and bottom line growth as we look to generate consistent long-term creation -- value creation for all of our stakeholders.

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

Questions and Answers

[Operator]

We'll now begin the question-and-answer session. [Operator Instructions] The first question will come from Peter Grom of UBS. Please go ahead.

[Peter Grom, Analyst at UBS Investment Bank]

Thanks, operator. And good morning, everyone. I hope you're doing well. So Noel, I wanted to ask specifically on just kind of the return to balanced topline growth and kind of how you see that evolving over the next couple of quarters. I mean excluding H&H, you probably already would have been there in this quarter as you highlighted in the prepared remarks. So, is this something that you kind of expect to achieve, call it, in the near term as you kind of exit '23 or is it going to be a dynamic that you would expect to kind of play out over the next several quarters? Thanks.

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

Good morning, Peter. Thanks. Listen, we're obviously very pleased with the sequential improvement really throughout the entire P&L. Our volume improved and as you rightly pointed out if you take the Hawley & Hazel business out, which as we know we're working through a price increase in that market, our volume inflected positive in the quarter and we've seen that pretty consistent around particularly some of our emerging markets where we saw very positive volume. So, we're pleased with the sequential improvements. The category dynamics are consistent with what we talked about, but they're not necessarily linear. I mean we're seeing some puts and takes as we look around the regions and the different categories that we compete in, obviously taking more pricing across the pet food business as ag prices continue to stay high. But overall, the sequential improvement is playing out more or less as we anticipated. And as we move forward, our intention is to continue to drive balanced organic growth in the short and the long term.

[Operator]

The next question is from Andrea Teixeira of JPMorgan. Please go ahead.

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

Thank you. Good morning. Noel, you mentioned the full-year guidance of course was raised 7% to 8%, but it still implies a deceleration of course in the fourth quarter and you called out in your prepared remarks some of the puts and takes, in particular anniversarying the acquisition impact and then that would lead to a reduction in third-party manufacturing for private label. Can you break that down? Because it also implies I'm assuming the base business a deceleration and I understand that you're lapping a lot of the pricing. But just as we think about volumes and particularly North America, there has been a sequential improvement and you called out as well that you're expecting promo and more activations in trade. So, anything you can share with us in terms of the progress you've made to regain volumes in North America as it relates to the full guidance for the fourth quarter? Thank you.

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

Good morning, Andrea. Let me take the North America piece of that question first and then I'll highlight more across the enterprise. So North America is on pace with exactly what we talked about in the Q2 call, continued sequential improvement across the board and we anticipate that they will see sequential improvement in their business as we move through the fourth quarter. A lot of that was getting the promotional cadence right and we started to implement some of that promotional opportunity in the back end of the third quarter. Most of that will come through in the fourth quarter and we're pleased with it. Obviously the important part about North America is the oral care business. That inflected positive with high single-digit growth in oral care and positive volume growth on that business in the quarter as well and we anticipate that will continue as we move through the balance of the year.

So North America overall trending as we expected. We're still not pleased with some of the scanner shares. But as we said, we'll get the promotional opportunity right as we move through the balance of the year. And importantly, our non-promoted volume which reflects I think the strong advertising that we're putting into the North America business is continued -- continues to inflect positive. Now strategically around the world, we're seeing volume improve across the world. Now that is based on a lot of the geographies. We've seen the pricing start to subside a bit as we're not taking more pricing in some of the markets. Really pleased to see in markets where we took pricing early like Latin America where we've seen very positive inflection in volume, volume was up 5%.

And if you look at Mexico and Brazil specifically; Mexico was up mid-single digits, Brazil was up high single digits in volume. So again I think a reflection of the strong advertising innovation and the fact that over time as pricing settles out in the market, you see the volumes come back and that's pretty consistent. Europe likewise, a little improvement in volume. So we're proceeding exactly as we expected to see volume start to sequentially improve, but it's not necessarily linear and I want to leave that point. We'll watch that carefully as we move forward and we'll continue to implement our strategies of strong innovation across the core adjacencies and channels and we'll see that play out as we move forward.

[Operator]

Our next question will come from Dara Mohsenian of Morgan Stanley. Please go ahead.

[Dara Mohsenian, Analyst at Morgan Stanley]

Good morning. Can you guys discuss market share performance in your key geographies and product categories in Q3? How you're performing on the share front? And given you've taken robust pricing, what are you seeing competitively in terms of the pricing and promotional environment and how might that play into your share performance? Thanks.

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

Sure. Thanks. Good morning, Dara. Overall shares look good. We're up on a global basis. Let me just take toothpaste, which we track globally, shares were up about 100 basis points. That's driven by strong performance in Europe where we've seen record high shares, particularly behind the strategy of pushing our higher-end therapeutic brands on the premium side with elmex and Meridol as well as strong innovation on the Colgate side behind whitening. So, Europe delivering very strong. Africa, Middle East: we're up in 10 of 11 markets in market shares there so continue to show nice performance. Pleasingly, Latin America where as you know we have very high shares, shares are stable. We've seen share to grow in Brazil. Slightly down in Mexico, but tracking up in recent periods so we're pleased with that.

US in the recent weeks, we've started to see some of the promotional volumes come back as we very thoughtfully put promotions in the market. We're not just going to buy share back for the sake of buying it back. We're going to get a much healthier category as we move forward and that's been very deliberate in how we thought about that business there. Africa -- excuse me. Asia, shares continue to be strong for us in China so we're pleased with that. And likewise as you go around the region, share is pretty good in India. We've done some really good work on our core business in the last couple of months and we anticipate that's going to inflect positive for our core business overall.

Pleased with market shares on the Hills business likewise, very strong volume and value share growth in pet specialty and neighborhood pets, which is where we track. We're one of the fastest growing brands in both those retail environments. So, we're pleased with obviously the strategy of bringing innovation and the increased advertising support we're bringing into the business. A little softness on our home care business in the US and that again attributes right back to the promotional cadence and we're addressing that as we move through the fourth quarter.

[Operator]

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

[Filippo Falorni, Analyst at Smith Barney Citigroup]

Hey, good morning, everyone. So clearly, you returned to solid volume growth at Hill's and solid results despite a more challenging category. So Noel, can you maybe comment about how your business is positioned compared to the category weakness that we're seeing, which seems concentrated more on the wet side and the treat side? And then just thinking about Q4, how should we think about the progression of volume in Hill's considering you're going to lose some of the private label volumes both from a topline, but also from a margin standpoint? Thank you.

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

Yes. Thanks, Filippo, and good morning. So, again a great quarter for Hill's obviously with strong balanced pricing and volume growth in the quarter. That growth was quite pervasive across the world as we saw a good growth in the US as well as in some of our emerging markets and likewise in Canada. Category has slowed a bit as you've heard from others. That said, you mentioned a combination of sustained pricing in the category over the last four or five quarters and ag prices still remaining high and so it's not to be unexpected that the volume would slow a little bit. As you rightfully point out, you've seen some conversion from wet into dry, that lowers the volume. You've seen obviously treats, which is more discretionary. And you'll recall, as we said in the Q2 call, we don't have a significant business at all in the treat segment.

And likewise, I would say the non-science brands continue to perform quite well, but are not immune to the continued challenges that you highlighted in the category. But as I mentioned just a moment ago, we continue to grow share and for us, this is a share gain. We only have 5% to 6% penetration in our largest market in the US so we have a lot of upside still. Hence the reason why we continue to bring strong innovation in the market. Hence the reason why we continue to advertise very aggressively to drive household penetration. Likewise, we see opportunities continued in the prescription diet. Our studies show that only about 5% of pet owners are using a prescription product whereas potentially up to 80% could be using it. So, that affords us an upside.

We've talked about wet, obviously some conversion from wet into dry, but we have very low shares in the wet segment, which has been one of the historically growing segments and we have plans, as we talked about in the past, to continue to grow that. So overall we feel we're positioned well, but not immune to some of the softness that we've seen. But likewise, as I mentioned, we're very focused on driving share and ultimately expanding this business internationally. We'll watch the category carefully. We know our retailers are very focused on nutrition and the science segment continues to perform well and that's where we're putting our strategies in order to continue to drive penetration.

[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. Thanks for slotting me. And let's stay there -- stay on pet nutrition for a minute, but let's pivot to maybe the bottom line. It looks like gross margins for that segment down 360 bps this quarter kind of bringing two year to down 900 bps, very consistent with what we saw last quarter. And I get the mix benefits of the acquisitions, I get the plant start-up expense, I get the inflation; like these are all obviously factors that have been contributing to the pressure. But I'm expecting all of them to sort of subside as you start to rotate the product out of the Red Collar assets as you start to pivot some of your resources from starting up plants to attacking some of the efficiency and hopefully as some of the input cost pressure subsides and price catches up. Well, we haven't yet seen progress yet. What is a reasonable expectation for us as we try to level-set our own expectations? When should we start to see the benefits of all those dynamics come to fruition? And how much recovery should we be expecting?

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

Thanks for the question. Again sequentially, things are moving in the right direction and that's exactly what we've talked about in previous calls and obviously operating profit and EBIT continues to inflect where we want it. We continue to support the business with a disproportionate amount of our total increase in advertising as we talked about. That is again strategic based on the low penetration and the real headroom that we continue to see in the category for us. As we see, ag prices have somewhat flattened out and that's good news for us given a lot of the pricing that we've taken. We anticipate that that will start to inflect more positive in our gross margins as we move forward.

As you rightfully pointed out, we have a significant amount of cost that's still moving through the P&L on getting our new facilities ramped up. The new wet facility will start to ramp-up here in the fourth quarter so we'll have some costs associated with that. But ultimately over the longer term, those costs will subside and we feel good about where we are with the new Red Collar plants, getting those integrated in. So overall with pricing continuing to flow through, with ag prices holding and continuing to drive premiumization in the category, we feel good about the long-term trajectory of operating margins in this business.

[Operator]

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

[Olivia Tong, Analyst at Raymond James Financial]

Thanks. Good morning. Wanted ask you a little bit more about North America given a couple of things. First, the pricing accelerated on a two-year stack. If you could talk about the drivers of that, I assume promotion is a big piece of that. You mentioned advertising was up 25% in North America. Was that the highest amongst the divisions? And just if you could talk a little bit more about how you think about the ROI and the timing of the impact of that higher advertising? Thank you.

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

Yeah. Thanks and good morning, Olivia. Again, as I mentioned earlier, we're pleased with the progress. Again this is a very deliberate and strategic execution of how we're trying to get the health of our brands and the health of our P&L in a better place. And as I mentioned in the second quarter call, we may have pulled back a little bit too far on some of the promotional cadence, but we're adjusting that, but adjusting it very prudently where we see the ROI and where we believe we can drive sustained volume and share opportunity moving forward. The 25% increase was not the highest. As I just mentioned, Hill's continues to receive a disproportionate amount of the advertising increase. But North America, again given the vibrancy of that market and the long-term strategic importance of that market, we will continue to invest for the long term. Great progress on the operating margins as you saw move through that P&L. That is a reflection again I think of a much more prudent approach to pricing in the market and our promotional cadence. And we feel good about the sequential growth that we saw in the quarter and the sequential growth that we'll continue to see in the fourth quarter.

[Operator]

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

[Bryan Spillane, Analyst at Bank of America Merrill Lynch]

Thanks, operator. Good morning, everyone. I had a question on ad spend. I think year-to-date now we're over -- we're running at a rate that's about a little over 12% as a percentage of sales. And so given the increase that we'll end the year at, is this a good base to think of in terms of ad spend going forward or would you consider taking up further? So, just trying to get a sense now if we kind of rebased or if it's just a new base in terms of ad spend.

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

Yeah. Thanks, Bryan. Listen, it's not as much as a percent to sales. It's really about how we're getting -- what return on investment we're getting for that. And clearly you've seen that play through the P&L on the strong organic in the business, the continued growth on market shares around the world particularly in those strategic categories that we're pushing more deliberately with the advertising. So it's really about an ROI and as we see that play back through the P&L, which we clearly are, we'll continue to invest. So we're really focused now I'll say on making sure we continue to optimize that investment. We've put a lot more focus on programmatic buying, a lot more focus on personalization and getting content right. You heard Edie talk about when we were down in Florida with regards to the importance of advertising creative and content development. So putting a lot more focus to get better ROI for what we're delivering so not necessarily a percent, but overall we're getting the performance through the P&L and through our businesses on the ground.

[Operator]

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

[Steve Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Great. Thank you and good morning. Maybe just two questions if I could. One is to follow up and round the volume conversation. You talked about line of sight to improvements in North America and in Asia Pacific. The other area of softness in the quarter was Europe. Just love some perspective on sort of your path to volume improvement in that region. And then more broadly stepping back, I guess just a little bit on the question Bryan was just asking. But you've had just tremendous success this year in driving underlying margin improvement, which has allowed the A&P reinvestment that we've seen year-to-date. I guess as your scenario modeling and starting to plan for the year ahead, how do you weigh the puts and takes on margins as you look ahead? And what's your level of confidence you can continue to drive that underlying margin improvement to enable the investment should the ROI exist?

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

Good morning, Steve. Thanks. So, let me talk again a little bit on volumes. Globally, as you've heard from others, volumes in the categories tend to be down around 2% to 3%. This is a function obviously of the aggressive pricing that you've seen sequentially over the last three or four quarters. So, that continues to improve and in my view that will continue to improve as pricing moderates over the next couple of quarters and we lap some of the aggressive pricing that we've had certainly within our P&L. But from a category standpoint, there's going to be obviously a shift from more pricing driven organic growth to more volume driven organic growth.

And it's very difficult to actually predict exactly at the pace that's going to happen by geography because we've taken pricing, competitors have taken pricing at different points in the year. So over time sequentially though, we see volume returning to a more normalized level and we see pricing returning to a more normalized level and that's more or less how it's playing out. Difficult to predict from geography to geography or from quarter to quarter. On the margin, obviously a lot of focus as you know across the business. We've got a lot of levers in the P&L now to drive operating margins and gross margins. Why don't I let Stan talk to you a little bit about that. He's been very focused on driving that across most of our regions.

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

Thanks, Noel. Steve, it's a good question on driving margin. So if you take a look at what we've been able to do with the income statement this year, top to bottom the flexibility and the strength on all the different lines have given us a lot more opportunity to drive margin and it gives us flexibility and that allows us to react to market conditions, anticipate, and more importantly, invest in those areas of the business that can deliver value. When we look at all those collectively, we think that leaves us well positioned for expanding margin over time. And though we're not going to give guidance for '24 here today, we think that we are exiting the quarter with a stronger business model here than we entered the year.

[Operator]

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

[Lauren Lieberman, Analyst at Barclays Capital]

Great. Thanks. Good morning. So in the release or in the prepared remarks, you talked about some improvement in oral care, toothpaste specifically, in North America. But I was wondering if we could talk a bit about home and personal care. The advertising spend, like you said, up 25% this quarter. Just curious about how that is maybe being allocated across the different divisions within North America? How you're thinking about kind of innovation in home and personal care? I know you'd mentioned some promotional cadence dynamics improving for home care in the fourth quarter, but I was just curious of efforts beyond that to kind of get those businesses more on the right track. Thanks.

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

Hey Lauren, good morning. So, overall the bulk of our North America business is oral care and it received the bulk of that advertising increase. But pleasingly, we are supporting our home care and our personal care businesses, which is important. And clearly as we get the promotional cadence back on those businesses particularly here in the fourth quarter, we anticipate we'll see an improvement in shares. Now again we had a lot of unprofitable share historically where we were chasing share and buying share and we have -- deliberately as we see great health across our P&L in the geographies across the world, we have the opportunity to rightsize that in the US and get the shares much more profitable and get much more sustainable share growth moving forward. And the intention is to continue to support all those businesses in the US as we move forward. The other one is our skin health business in the US is getting good levels of advertising and that continues to perform well. If you take our skin health business outside of China, that grew double digits in the quarter for us. So, we continue to see a nice growth on that business and we'll continue to support that in the US market as well.

[Operator]

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

[Chris Carey, Analyst at Wells Fargo Securities]

Hi, good morning, everyone. I couldn't help, but notice the commentary around the currency impact carrying into 2024. At the same time, Noel, you were quite clear in your remarks today that Colgate has multiple levers to continue profit growth. This year you're going to be doing high single-digit earnings that would appear on low single-digit currency impact. You I think put up the best productivity number on a basis point impact that we've seen in almost 10 years despite raw materials, which remained stubbornly high. Well, I know there's conversion and other cost in there as well. But just as you think about next year, and. I know you're not giving guidance today, but does your ability to still deliver high single-digit earnings this year despite the currency headwind give you confidence on next year especially because some of these drivers like pricing and perhaps strong productivity and other levers at your disposal remain available to you going into next year? So, thanks for any perspective on that.

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

Yeah. Chris, thanks. Listen, I'm not going to get into 2024 or start predicting where things will evolve. But clearly foreign exchange moved more negative in the quarter for us and you've seen that obviously the dollar strengthening as we move into the fourth quarter. But as Stan rightfully pointed out, I think the important aspect here is that the levers within our P&L are better than they've been in quite some time. We have different aspects playing to our advantage now. Obviously we're getting the pricing executed in the market, we're starting to see volume flow through over the longer term. That will improve efficiencies in our plants. As we've gotten our forecast accuracy improved in the plants, that allows us to obviously run more of our funding the growth, which obviously came through very strong.

We have the productivity moving through the P&L. So, we're really trying to pull on all levers to give us as much flexibility as possible. Foreign exchange is obviously a big unknown as we move forward, but you've seen us historically be able to price against this. We obviously had some inflationary pricing in the P&L in the third quarter based on where we see the Argentine peso go, where we see part of the -- Nigeria foreign exchange has been an issue as well and likewise in Turkey. But over time, the important part is for us to drive flexibility through our P&L so we can adjust to market circumstances in the most efficient and prudent way.

[Operator]

Next question today is from Mark Astrachan of Stifel. Please go ahead.

[Mark Astrachan, Analyst at Stifel Financial]

Yes. Thanks and good morning, everybody. So yesterday a competitor of yours sort of in certain categories talked about refocusing the business on product superiority. Obviously a large US competitor successfully pivoted the business towards that strategy with success in recent years. Curious how you think about or would assess the portion of your portfolio in innovation that meets the criteria. Have you adjusted R&D as a focus to spending towards these product areas? And as sort of a second question that might be related, might not be. The issues you bring up with the H&H business in China, maybe I'm naive in assuming that some of it could potentially relate to this where you're taking prices up, but not necessarily innovating. If that's wrong, obviously talk to that. But just kind of talk generally about what's going on there and how much is price and how much is other stuff? Thank you.

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

Yeah. Thanks, Mark. Let me come back to the core of our strategy, which was innovating across our core in adjacencies and channels and all of it is underpinned by science-based innovation. And that has always distinguished our portfolio historically and we absolutely dialed that up in terms of how we focus our R&D efforts across the organization. Good examples of that is obviously the growth that we've had in the whitening segment. We have in our view some of the best efficacy based products in the category. We're very pleased with the growth that we've seen in whitening at the premium side with our peroxide based. We've obviously moved into pens, which is incremental consumption opportunity and an opportunity to drive regiment and a premiumization. We moved into our RGM distinct strategy, which is anchoring science-based whitening through the profession as well.

So, science continues to play very importantly into our growth strategy and you've seen that play out in oral care, certainly seen it play out in our pet nutrition business as well as very recently in skin health. And likewise, as we look at some of the innovations coming in our home care business. We've seen some great innovation on concentrates, some great innovation on tablets in Europe. So we continue to use science as a way to drive differentiation and certainly drive our premiumization. Specifically on the Hawley & Hazel business, as I mentioned, in the second quarter we took pricing. That has taken longer to actually get executed in the market given the multiple levels of our go-to-market strategy on the Hawley & Hazel business. And obviously you've seen a slowdown in the category in China, which has also come on top of that.

But the good news as we exited the third quarter, we saw the Hawley & Hazel business start to inflect positively and we continue to see that as we speak. So we're not completely out of where we wanted to be, but everything is moving in the right direction. Conversely, the innovation behind Hawley & Hazel is very strong. Once we have that pricing executed, we'll come in with a good first half plan of innovation and that will be science-based innovation as I mentioned. The parallel to that is obviously the great success we've had in China with the Colgate business. The Colgate business continues to perform very very well, growing share in e-commerce, the fastest growing channels, and that is driven behind premium innovation with real science-based structures to that.

[Operator]

Next question will come from Rob Ottenstein of Evercore. Please go ahead.

[Robert Ottenstein, Analyst at Evercore ISI]

Great. Thank you very much. I'm wondering if we can drill in on the US and maybe talk a little bit about what's going on in the non-tracked channels, which channels are leading the growth and why do you continue -- do you expect that to continue in the future having a pretty big gap between the scanner results and the non-tracked? And then if you could put that also in the context of how you see the US consumer and the health of the US consumer developing over the next couple of quarters and any pivots that you may do or adjustments to potentially a weakening consumer outlook? Thank you.

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

Hey, good morning, Rob, and thanks. Clearly in the results and you've seen the scanner data, which continues to be soft and, as I mentioned, we're addressing that more sharply in the fourth quarter. Our non-tracked business continues to perform exceptionally well and that has been a strategy that we've talked about for quite some time. Those are some of the faster growing channels. We continue to invest in those channels. We continue to grow share in those channels. And overall, that's certainly leading to a broader-based healthier business for us moving forward. You talk club, you talk some of the discount channels, you talk some of the e-commerce channels as well. So overall, we think we're well positioned in the US to continue to leverage where the growth is coming from.

The consumer continues to be resilient. I would say the promotional environment is constructive right now. We've seen a little bit of pickup in some categories, but overall still below pre-COVID levels. And as we continue to be, as I said, very thoughtfully prudent on how we elevate our cadence of promotions moving forward, we feel good about our ability to continue to drive non-tracked. Now I'll remind you that non-tracked are about 14% of the total company sales. And so while very important for us in the US and the team there under Jesper's leadership is laser focused on addressing that, we're going to get that back to a healthier share as we move forward.

[Operator]

Our last question today is a follow-up from Bryan Spillane of Bank of America. Please go ahead.

[Bryan Spillane, Analyst at Bank of America Merrill Lynch]

Hi, thanks again, operator. Stan, just a question around inflation. I know in the press release or the prepared remarks, you talked about -- or I guess the press release talked about still several $100 million of inflation expected for this year. Can you just give us some context of is it the same moderating? Like as we're exiting the year, just how we should be thinking about the trend on inflation? I know you called out inflation in pet. So just trying to get a sense of whether or not it's -- how it's trending. Is it trending better or worse than kind of where we were coming out of 2Q?

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

Yeah. Sure, Bryan. So as we said, our view on raw materials in total remains consistent with prior quarters and we still do see several $100 million of gross cost inflation in raw materials for 2023. While the overall total's in line, there have been some shifts underneath that. First, agriculture has not eased and in some cases it's actually gone up. That affects primarily our Hill's business. Offsetting that, some commodities such as resins and oils have actually softened a bit. But when we look in total, that basket is roughly still in line. And while it hasn't gotten worse, it hasn't gotten a lot better. The one we continue to watch carefully is obviously energy with all the volatility in that market. And then also just keep in mind, some of our raw materials are not pure commodities, but specialty; flavors, fragrances, those tend to have less volatility.

But I think if you pull back, our teams have done a great job driving productivity to mitigate some of that inflation and you saw in our funding the growth. This has really helped us balance the margin. You combine that with RGM and it's resulted in that margin expansion. So if I pulled that back while that's been relatively steady in total, the pieces moving around underneath, that has -- our gross profit in total for the company has gone up 140 basis points year to year and that's a combination of pricing and RGM that's been able to more than compensate for the raw materials going through. So as we look at that heading into the last quarter, we haven't actually seen a lot of change in the commodity basket. So, we expect that to continue through the end of the year.

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

Yeah. Bryan, I just reiterate. Again that 140 basis points, you add another 50 basis points for private label and if you add logistics in there which others including cost of goods, that adds roughly another 130 basis points. So north of 300 basis points of margin improvement in the quarter and that's terrific in terms of how we saw things ultimately playing out. And as we see hopefully a more benign cost environment over the medium term and our ability to hold pricing and continue to innovate at the high end, we feel pretty good about the continued ability to sustain high margins in the categories in which we compete.

So thanks, everyone, for joining the call today. Let me just close out by saying we really appreciate your interest in the company. We hope you agree that we have the strategies and the plans in place to deliver consistent compounded profitable growth to drive value for all of our shareholders. And I would be remiss not to thank all the Colgate-Palmolive folk around the world who have delivered a very strong quarter for us in the third quarter of 2023. So thanks, everyone. We'll talk to you in January.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

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

Analysts

• Peter Grom, UBS Investment Bank
• Andrea Teixeira, JPMorgan Chase & Co.
• Dara Mohsenian, Morgan Stanley
• Filippo Falorni, Smith Barney Citigroup
• Jason English, The Goldman Sachs Group, Inc.
• Olivia Tong, Raymond James Financial
• Bryan Spillane, Bank of America Merrill Lynch
• Steve Powers, Deutsche Bank Aktiengesellschaft
• Lauren Lieberman, Barclays Capital
• Chris Carey, Wells Fargo Securities
• Mark Astrachan, Stifel Financial
• Robert Ottenstein, Evercore ISI