Colgate-Palmolive Company (NYSE:CL) Q4 2023 Earnings Call Transcript

Colgate-Palmolive Company (NYSE:CL) Q4 2023 Earnings Call Transcript January 26, 2024

Colgate-Palmolive Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Welcome to today’s Colgate-Palmolive Fourth Quarter and Full Year 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: Thanks, Betsy. Good morning, and welcome to our fourth quarter in full year 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 Q4 and full year 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 4, 6, 7, 8, and 9 of the earnings press release.

A full reconciliation to the corresponding GAAP financial measures is included in the Q4 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 Q4 and full year results and our 2024 outlook. We will then open it up for Q&A. Noel?

Noel Wallace: Thanks, John, and good morning, everyone, and thanks for joining us to discuss our strong finish to a very good year in 2023 and our positive outlook for 2024. Over the past two years, we’ve been particularly focused on sustaining our strong organic sales growth while rebuilding our margins and improving our cash flow performance. We delivered on all three of those goals this year while still investing behind advertising to strengthen our brands and building and scaling capabilities to deliver future growth. 2023 marked our fifth consecutive year of organic sales growth either in line or ahead of our 3% to 5% long-term target range. We delivered balanced organic sales growth, growth in all six divisions, all four of our categories, and with improved balance between pricing and volume as we exited the year.

Volume rounded to flat in the fourth quarter and was up for the quarter, excluding the impact of lower private label volumes at Hill’s. Our market share momentum is improving behind strong innovation, higher levels of brand investment with a focus on improving the effectiveness of each dollar spent. We’re also seeing the benefits of our digital transformation as our efforts with data analytics continue to proceed. Our commitment to revenue growth management and the strength of our funding the growth efforts combined with our global productivity initiative drove gross margin expansion, double-digit-based business operating profit growth, and high single-digit based business EPS growth. We delivered these results while increasing the investment in marketing and strategic capabilities and absorbing the headwinds from higher interest expense, pension and tax.

We drove greater than 60% free cash flow growth, allowing us to invest behind our brands, increase capacity and buy back stock. We also increased our dividend for the 61st consecutive year. I am deeply proud of the results Colgate people have delivered in a challenging operating environment. 2024 will offer many of the same challenges as 2023, geopolitical unrest, foreign exchange headwinds and a challenged consumer, continued softness in China, and a large number of political elections around the world. We enter 2024 with strong momentum and the plans in place to deliver in this environment, as well as greater flexibility in both our income statement and our balance sheet. As we have mentioned over the past few quarters, we’re focused on returning to consistent, compounded EPS growth, and our 2024 guidance reflects this ambition.

We will continue to invest to drive high-quality, balanced organic sales growth and with both volume and pricing growing. We plan to deliver our productivity to fund this incremental investment while growing earnings per share. This should enable us to deliver strong cashflow growth to invest back in the business and return cash to shareholders. I look forward to discussing our 2024 plans in further detail at CAGNY next month, so you can share the confidence the Colgate-Palmolive team has in our continued growth. And with that, I’ll take your questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Dara Mohsenian: Hey guys. So just wanted to focus on market share results in Q4 and as you look ahead, oral care share was obviously strong again and you delivered healthy expansion for the full year. Can you just talk about your forward positioning on the share front in oral care? You’ve got a tougher comparison here. So how do you think about the sustainability of those share gains as you look out to 2024? And then a similar question on pet. Obviously some industry pressure points, can you sort of juxtapose your market share relative to those industry pressure points and if the unlocked capacity is a significant driver of market share opportunity in the longer term in that business? Thanks.

Noel Wallace: Great. Good morning, Dara. Thank you. So let me start a little bit broader on the categories, particularly oral care. We’re really encouraged to see the inflection of positive volume growth in the categories around the world. And in many of the regions where we had seen negative volume growth, we started to see an inflection of that towards the end of the fourth quarter in the category. So that gives us great confidence that the category and the pricing that we put in place is continuing to turn. And importantly, we’re going to see that growth continue in 2024. As you bring that back to our business, a really strong quarter for oral care, as you mentioned, both from a organic and sales standpoint, but likewise, as that transferred into better market share growth.

If I take oral care in general, we were up double digits in the quarter. That translated into strong market share growth, particularly in regions like Latin America, Europe, Africa, Eurasia, and you saw some improved scanner data in the US as well. I think this is a reflection of the core business strategy that we have in place, the increased advertising that we’re putting behind the business, as well as a strong innovation pipeline that continued in the back half of 2023 and will continue in 2024 as well. So market share is around the world strong and we would anticipate that, that will see continued growth as we move through the balance of 2024. And I would caveat with some of that, obviously the markets will be challenged given some of the upfront issues I mentioned, but pleasing to see the strong volume growth in some of our bigger regions.

If you take Latin America, particularly three strong quarters of strong volume growth, very much driven by oral care, but quite frankly, that was a cross section of all of our categories, and you see that volume improving across all of our divisions. So again, I think we’re well positioned on that. Let me talk a little bit about pet, because I think there’s some important context to our strategy and why what we’re doing is different for the market and what we’re doing is working for the marketplace as well. We talked about Colgate being the most penetrated brand in the world. We also know that Hill’s is low penetration, so we will continue to execute a series of differentiated strategies on Hill’s in order to continue to accelerate our growth on that business.

So, if I take the three aspects that we think about for Hill’s, reach, awareness, and conversion, reach obviously is a reflection of the strong advertising that we’re putting in place to get the message out. With low single digit penetration on Hill’s, we want to ensure the awareness of our superior science is well understood, hence the strategy to drive more TV spending, more digital spending consistently through the quarters. We’re spending a lot of time on the effectiveness of that reach to ensure that we’re getting the awareness of it. We’re using obviously a strong professional endorsement that we have behind vets and continue to accelerate our science and our clinical communication with that key opinion [really] (ph) is critical to the success of the brand.

And importantly, as we think about conversion, a lot of non-users in the category, as I mentioned I think on the third quarter call, 5% of consumers are using a therapeutic nutrition, but theoretically 80% should be using a therapeutic nutrition. So a lot of opportunity to continue to drive share. The dynamics in the category, hence you’re seeing a little bit of trade down from wet into dry. I mentioned that on the third quarter call, treats have suffered. Now we’re not immune to the category softness, but if you take a step back and look at our principal retail environments, pet specialty, neighborhood pet, we’re growing share nicely across all of those environments, which means we’re helping our retail partners grow category dollars. Penetration was up roughly 10% in the US, our biggest and largest market, so we’re very pleased with the progress we have there.

Yes, the category is a little softer, but we have the right strategies and differentiated strategies in place to continue to accelerate growth.

Operator: The next question comes from Bryan Spillane with Bank of America. Please go ahead.