Colgate-Palmolive Company (NYSE:CL) Q4 2022 Earnings Call Transcript

Colgate-Palmolive Company (NYSE:CL) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Good morning. Welcome to today’s Colgate-Palmolive 2022 Fourth Quarter and Year End 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: Thanks, Allison. Good morning. And welcome to our 2022 fourth quarter and full year 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 2021 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 eight and nine 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 his thoughts on our Q4 results and our 2023 outlook. We will then open it up for Q&A. Noel?

Noel Wallace: Thanks, John, and thank you all for joining us this morning and I wish all of you a very Happy New Year. So I mostly wanted to focus on the year ahead today, as I think we are well positioned to deliver strong results in 2023, even as we plan for a difficult macroeconomic environment and continued uncertainty. That said, as we mentioned in the prepared remarks, we are pleased with the progress we made in 2022. We delivered organic sales growth in all four of our categories, including double-digit organic sales growth in Pet Nutrition and high single-digit organic growth in Oral Care. 2022 was our fourth straight year of delivering organic sales growth either in line or ahead of our 3% to 5% long-term target range and we delivered within or ahead of that range in every quarter over that time period, 16 consecutive quarters in all.

And is the continuing strengthening of our strategy that has allowed us to grow consistently through different operating environments, as each year has presented its own challenges and its opportunities. But if we stay focused on driving the core, leveraging our capabilities across our portfolio, innovating in faster growth adjacencies and tapping into faster growth channels and markets, we will continue to grow. And in 2023, as we continue to execute on our strategy, we expect to accelerate earnings growth and generate incremental cash flow to drive shareholder value. Why are we well positioned for this year despite all of the uncertainty in the world today? It starts with our portfolio. We operate in four highly focused categories. Growing categories that consumers use every day and where they look to trusted brands to help themselves and their pets lead healthier lives.

The focus on healthier lives means these consumers are motivated by science-driven innovation with professional endorsement, which is an area of particular strength for us. And the importance of trust in our categories helps keep private label penetration relatively low and allows for premiumization behind differentiated benefits. And within these categories, we have strong market shares. With most of our revenues coming from brands that have a number one or number two market shares on a global basis. The second reason is our focus on building, sharing and scaling capabilities to drive growth. I will continue to talk about our digital transformation as it impacts everything we do. This year we benefited from continued efficiencies in our digital media spending through data-driven modeling.

Our efforts on innovation need to deliver over the long-term, not just the launch year, and we have shifted our resources to deliver more breakthrough and transformational innovation. In our prepared commentary, we talked about the share gains we are seeing in the whitening segment of the toothpaste category. It’s a long-term strategy of launching Optic White Renewal and then Optic White Pro Series in the U.S. or our new MPS whitening technology where we are launching around the world, which leverages our superior R&D capabilities to drive long-term share growth. And on top of that, we continue to launch at-home whitening and professional whitening products to enhance our credibility and expand our presence in the premium segment. And our focus on building revenue growth management capabilities, particularly through increased use of data and analytics is driving our pricing growth in ways beyond just list price increases.

And the third reason is our strong balance sheet. Our combined financial resources provide us the flexibility to reinvest in our portfolio or pursue value-enhancing acquisitions like our pet food acquisitions, which enables us to drive faster growth. The final reason we are well positioned is the efforts we have put into offsetting the extraordinary cost increases we have seen over the past several years. We have driven consistent pricing and we look to take additional pricing in the first half of this year. Our Funding the Growth program delivered another strong year in 2022 and we expect even higher levels of savings in 2023. We announced our global productivity initiative one year ago and we began to see the benefits in our numbers in the second half of 2022.

We expect even greater savings in 2023 to help fund investment and drive operating margin expansion. So we believe we are well prepared for 2023, but there’s still a lot of uncertainty in the world. The macroeconomic environment outlook remains volatile, which can impact consumer spending. China remains a question mark as the country emerges from COVID lockdowns. While raw materials and foreign exchange remain headwinds, they look less onerous now. But as we learned last year, that can change quickly. So we head into 2023 with topline momentum and a proven strategy, with the right brands, the right capabilities and the right efficiency drivers to deliver topline growth and improve our bottomline performance. And with that, I will turn it over to the questions.

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Q&A Session

Operator: Thank you. And our first question today will come from Dara Mohsenian from Morgan Stanley. Please go ahead.

Dara Mohsenian: Hey, guys. I just wanted to touch on the organic sales growth guidance for next year coming off a strong Q4 result and the strong pricing we are seeing. I am assuming more than all of that perhaps is driven by pricing and volumes will be down slightly, A, maybe is that correct, and then B, it just be helpful to get a bit of commentary on each of those areas. What are you seeing from a competitive standpoint on the pricing front, and then B, as you think about volume and the demand elasticity you are seeing from a consumer standpoint to pricing, any changes sequentially at all and how are you feeling about that front heading into 2023 here? Thanks.

Noel Wallace: Yeah. Thanks, Dara. Good morning. So, again, let’s recap quickly, obviously, the strong topline growth or organic growth that we have seen across the business. We are very pleased, obviously, with finishing the year with strong momentum. Obviously, the pricing that we put into the P&L, particularly if you look on a two-year stack basis up to 15.5%, so sequentially up as we moved out of the quarter. So we have continued to take a lot of pricing and we will continue to see the benefits of that as we move into 2023. Volume continues to be a challenge across the world, as you have heard, I think, throughout the earnings season, categories have pulled back and that’s expected given the magnitude of pricing that we have seen go into all geographies around the world.

Our sense is will see continued pricing in the first half of this year, which we think will have a drag on volumes for the categories that we have seen particularly in the back half of this year, but that will begin to improve in the second half of the year. . I think the other aspect on the organic guidance is really a question mark on the economic vibrance of the various markets around the world. We have seen Europe obviously under significant pressure with double-digit inflation. Categories have been soft. Elasticity is a little bit higher in Europe than the rest of the world. Obviously, China is a big question mark. Infection rates remain high. Yeah, a lot of euphoria about China reopening, but as you have seen in the fourth quarter, volumes have been very soft in China for the categories in which we compete, and we see that continuing, quite frankly, in the first quarter, that will improve as we move through the back half of the year to be sure.

But that will bring, I think, a question mark to everyone in terms of uncertainty on where China goes and the impact that has. Pricing will need to continue to go through the categories in the first half of this year. As we announced in the prepared remarks, we will be taking more pricing and there’s a real question mark, given the magnitude of the pricing that we have seen in the back half of 2022 and the pricing implementation in 2023, the impact that we will have on the consumer. So far, if I give an overarching comment to elasticities, they have been very much in line with where we have expected. So, overall, we think we feel good about the organic range. We feel very confident that we are within that range and if things continue to stay where they are and we continue to see the share growth that we are seeing across the world and the response to our innovation, hopefully we could be at the top end of that range or better.