Colgate-Palmolive Company Q2 2023 Earnings Conference Call Insights

Key highlights from Colgate-Palmolive Company (CL) Q2 2023 Earnings Concall

Management Update:

• [00:02:35] CL said organic sales growth accelerated on a two-year stack basis, with growth in all six divisions and all categories.

• [00:04:22] Free cash flow was up more than 50% in the quarter.

Q&A Highlights:

• [00:05:57] Dara Mussinian of Morgan Stanley asked about the balance of organic sales growth going forward, given that previous growth was driven by pricing. Noel Wallace CEO said that the company aims to achieve long-term balanced growth by restoring GM through revenue management, pricing, and productivity measures, and is optimistic about its positioning moving forward. Despite challenges posed by cost inflation, CL believes consistent and deliberate pricing is necessary to fund investments in capabilities and brand building.

• [00:06:12] Dara Mussinian of Morgan Stanley also asked about information on global oral care share and performance in the quarter. Noel Wallace CEO replied that toothpaste market shares are up globally, with strong growth in Europe and Asia. Shares are flat in North America, but CL is addressing this. Overall, toothpaste shares are good.

• [00:11:24] Filippo Falorni of Citi enquired about the incremental pricing CL has taken, including the categories, countries, magnitude, and response. Noel Wallace CEO answered that the company will continue to take pricing in some higher inflationary markets in the back half of the year, but the majority of pricing actions have already been taken.

• [00:13:23] Bryan Spillane of Bank of America queried how much of the SG&A investment has been effective in each geography, and if it’s fair to say that Europe is ahead of North America. Noel Wallace CEO replied that CL is increasing its advertising investment in Europe, Latin America, and Africa, and seeing positive results in terms of brand health and non-promoted volume share. In North America, it is taking more time to see results, but the company is confident that the investment will pay off in the long term.

• [00:17:01] Andrea Teixeira with JP Morgan asked about details on the brand support above the line in North America and when CL expects to see volume share rebound. Noel Wallace CEO replied that CL is reallocating promotional dollars to ensure that list price increases are effective and to reduce reliance on unprofitable promotions. This will lead to a slight decrease in promotional volume in the near term, but the company is confident that it will be able to maintain margins and grow share in the back half of the year.

• [00:17:41] Andrea Teixeira with JP Morgan queried how will the cadence of inflation impact CL’s margins going forward, given that its margins rebounded in 2Q despite the negative impact of RM and packaging costs. Noel and Stan said CL is pleased with the progress it is making on margins, despite the headwinds of rising raw material costs. The company expects margins to improve in 2H23, driven by productivity savings and continued pricing actions.

• [00:21:30] Olivia Tong of Raymond James asked about the impact of logistics on CL’s performance, and what the company’s plans are for 2H23 in the U.S. Noel Wallace CEO said CL expects a slightly heightened promotional environment in 2H23, but will be deliberate in how it allocates promotional dollars to ensure that it maintains margins and grows share.

• [00:24:01] Jason English of Goldman Sachs asked how will the new price increases and the elevated degree of inflation translate into margins, and what is the right level of profitability for the business on a normalized basis. Noel Wallace CEO answered that CL is taking aggressive pricing across the Hill’s business to offset inflationary costs. The company expects gross profit and operating margin to improve in 2H23 as pricing flows through the P&L and cost pressures ease.

• [00:26:20] Steve Powers of Deutsche Bank asked how is the efficacy of advertising holding up in the current environment, and how is CL planning to adjust its advertising strategy accordingly. Noel Wallace CEO said CL’s focus on digital advertising is yielding a higher ROI, and the company is seeing the efficacy of its advertising in terms of brand health and non-promoted volume share.

• [00:31:15] Lauren Lieberman of Barclays queried how is CL managing the premiumization of its oral care products in Latin America, where there is significant inflation and a demand for affordable products. Noel Wallace CEO said CL is seeing volume growth in Latin America after five quarters of double-digit pricing. This is a good proxy for how pricing in other markets will affect volume, and CL is confident that it can continue to grow volume by coupling pricing with strong advertising and innovation.

• [00:33:37] Mark Astrachan of Stifel asked about the category dynamics for Hills and how will pricing, mix, and volume contribute to improving margins in the long term. Noel Wallace CEO said that Hill’s had another strong quarter, with double-digit organic sales growth despite lapping 18% growth in the year-ago period. However, the company is cautious about the category’s future volume growth as pricing increases continue.

• [00:39:25] Peter Grom of UBS enquired about the moving pieces that could affect organic revenue growth in 2H23. Noel Wallace CEO said  CL is confident in its ability to achieve its guidance for second-half organic sales growth, as the comps get easier from a volume standpoint and the company has hedged its bets with the Hill’s business. However, CL will be watching the categories closely as the consumer remains fickle and pricing becomes more challenging in the back half.

• [00:41:19] Peter Grom of UBS  asked that should CL expect sequential improvement on a two-year stack for volume. Noel Wallace CEO said the company expects to see a return to volume growth in 2H23, as the two-year stacks have continued to accelerate and pricing actions taken this year will flow through.