Colgate-Palmolive Company (CL) Earnings

Management highlights

- Overall Quarterly Results * Delivered broad-based strong top and bottom line growth in Q2 2026, with organic sales growth across most divisions and categories * Base business EPS came in ahead of internal expectations, alongside double-digit increases in advertising spend * Free cash flow grew 18% year-over-year, with $1.4 billion returned to shareholders through the first half * Growth was led by emerging markets, with strong contributions from Europe and Hills Pet Nutrition * Management was dissatisfied with U.S. domestic performance, and has implemented targeted actions to improve trajectory in H2 2026 - Strategic and Operational Initiatives * Scaling up 2026 and 2027 product innovations, including the recently launched Optic White Pro Series with Active Shine technology and new Fabuloso product formats, with increased distribution and brand support * Implementing surgical, category- and channel-specific actions to improve market share, while executing core revenue growth management (RGM) strategies * Increasing brand support for core businesses to strengthen brand equity and improve point-of-purchase performance * Continued global investment in scaling innovation, data, analytics, digital, and AI capabilities to deliver differentiated products and accelerate growth * RGM, promotional AI tools, and growth funding strategies enable increased advertising investment while driving profit and EPS growth even amid cost inflation * Continued execution of the company's 2030 strategic growth and productivity program - Hills Pet Nutrition (Prime Fresh Launch) * The Prime fresh pet food business delivered strong acceleration in Australia in Q2, and lessons from the Australian launch (particularly around consistent high-quality fresh product manufacturing) have been integrated into the upcoming U.S. launch * The U.S. fresh product launch is focused on science-backed single-protein diets, with a thoughtful phased rollout led by veterinary professional endorsement; management is prioritizing brand building over near-term significant volume growth - Regional Updates * In China, the company is leveraging local innovation and go-to-market learnings globally (such as the China-developed Optic White Purple launched worldwide), with incremental share growth and continued investment in the Darlie brand turnaround; the overall market is down 1-2%, but Colgate outperformed this trend * In Latin America, growth is broad-based across categories, with sequential share recovery for Colgate Total, particularly in Brazil, after 2025 formulation-related headwinds * In Europe, the company has outperformed peers by focusing on super-premium oral care innovation (led by the Elmex brand), capturing growth in the fast-growing premium segment; overall growth remains solid even amid broader regional macro headwinds * In India, the business delivered double-digit organic growth, balanced across modern and indirect trade, with a focused push into premium product lines that delivers long-term growth opportunity - AI Capability Building * The company has built a centralized internal AI hub, trained 70% of senior leadership in AI capabilities, and is integrating AI across R&D, innovation, marketing content creation, operational productivity, and demand generation

Guidance

- Gross margin guidance for full-year 2026 was revised upward from a prior expectation of a year-over-year decline to roughly flat year-over-year, driven by better-than-expected Q2 2026 execution * Cost of goods and tariffs are expected to peak in the second half of 2026; Q3 2026 costs are largely locked in and in line with prior guidance, while Q4 2026 raw material costs are tracking slightly below prior assumptions due to lower oil prices * Organic sales growth guidance was maintained at its original range, despite year-to-date organic growth of 2.6% that is near the midpoint of the range; management retained the existing range due to ongoing market volatility, and will revisit guidance after Q3 results if performance improves * Management expects a shift in growth driver mix in H2 2026, with a greater focus on volume growth relative to the first half which was largely driven by pricing * Management expects marginal sequential improvement in U.S. North American performance in H2 2026, after soft Q2 results

Segment performance

The transcript does not provide separate absolute financial results or revenue contribution percentages for individual product segments. It notes that broad-based organic sales growth was achieved in 5 divisions and 3 of 4 categories, with the Hills Pet Nutrition segment delivering 4% organic sales growth ex-private label (outperforming a flat overall pet category), with strong growth in its therapeutic business segment and mid-single digit organic growth for international Hills operations. Emerging markets overall delivered mid-single digit organic sales growth, led by double-digit growth in India and solid results in Brazil, Mexico, and China. Latin America as a region delivered 5% total growth, split between 2.8% pricing growth and 2.6% volume growth. Europe delivered consistent organic growth and market share gains, with overall broad-based growth across the region even against a 1% headwind from Middle East volatility. Greater China delivered mid-single digit organic growth, outperforming an overall market decline of 1% to 2%. U.S. domestic results were below expectations, with soft category performance and market share declines in the quarter.

Risks & headwinds

- Ongoing global macro volatility, continued geopolitical uncertainty from active wars, and fluctuating consumer confidence driven by energy price volatility create unpredictable category demand swings from month to month * Persistent raw material cost inflation and tariff uncertainty continue to pressure gross margins, even as costs are expected to peak in H2 2026 * Heightened competitive activity across multiple categories, particularly in the U.S. market, has created pressure on market share and requires targeted pricing and promotional adjustments * Major retail inventory reductions amid soft consumer demand created shipment headwinds in the U.S. in Q2, and ongoing retailer inventory risk remains * The overall China oral care market continues to see a structural decline in brick-and-mortar retail that is only partially offset by e-commerce growth, creating ongoing category headwinds

Analyst Q&A

• Q: How is Hills Pet Nutrition positioned amid current soft pet category dynamics, can share gains continue, what is the outlook for continued pricing power, and how is the Prime fresh pet rollout progressing?

  A: Hills delivered 4% ex-private label organic growth in Q2, outperforming a flat overall category, with broad-based growth across all segments (except Science Diet Dog, impacted by shifting pet ownership trends). Hills' therapeutic pet food segment continues to deliver strong double-digit volume and pricing growth that drives margin expansion and positive product mix, with advertising spending as a percentage of sales growing heading into H2. The Prime fresh line is performing very well in Australia, and the U.S. rollout is proceeding as planned with a science-focused, veterinarian-backed approach that prioritizes brand building over near-term volume. Management believes the overall pet category has likely bottomed but will remain under pressure, and Hills has ample room to grow share in underpenetrated segments including wet food, cat food, small pet food, and international markets.

• Q: What drove the better-than-expected Q2 gross margin expansion, and what is the updated gross margin outlook for 2026?

  A: Q2 gross margin expanded 100 basis points year-over-year, with only a modest contribution from tariff refunds; the majority of expansion came from core RGM initiatives, productivity gains, pricing, and favorable product mix. Raw material prices are slightly below prior expectations, with higher costs partially offset by Q2 tariff refunds. Management raised full-year 2026 gross margin guidance from a decline to roughly flat year-over-year, even though raw material and tariff costs will be higher in H2 than they were in Q2. Q3 costs are largely locked in and in line with prior guidance, while Q4 costs are tracking slightly lower than expected due to lower oil prices.

• Q: Management maintained the full-year organic sales growth guidance range despite year-to-date growth running near the midpoint, why not raise guidance to reflect this performance?

  A: While the company delivered solid top-line performance in H1 that demonstrates the resilience of its business model, management decided to retain the existing guidance range to account for significant ongoing market volatility and consumer uncertainty. Management noted large monthly swings in category demand, including a sharp drop in North American demand in May that partially rebounded in June but remains below historical levels, driven in part by volatile gasoline prices and consumer confidence. Management is targeting higher organic growth and will revisit the guidance range after Q3 if market conditions improve through H2.

• Q: What is the outlook for the U.S. business after weak Q2 results, and what actions is management taking to improve performance?

  A: Q2 U.S. results were disappointing, driven by soft category demand in May, heightened competitive activity, and retail inventory reductions; demand partially rebounded in June and July but remains below historical levels. Management will scale up premium innovation (such as the recently launched Optic White Pro Series), step up advertising and brand support in H2, and make targeted adjustments to address select price gaps against competitors, while avoiding a race to the bottom on promotional pricing. Management expects marginal sequential improvement in H2 performance and is focused on stabilizing market share.

• Q: What is the current status of the company's AI initiatives, and how will AI support H2 U.S. growth improvement?

  A: The company has made significant progress in scaling AI across the business: it has built a secure internal AI hub, trained 70% of senior leadership in AI capabilities, and consolidated data infrastructure to enable AI deployment. AI is being integrated across innovation discovery, marketing content creation, demand generation, and operational productivity improvement to streamline manual processes and reduce work time. The company is moving from AI pilots to full-scale deployment, and will continue to roll out new AI-powered capabilities in H2 that are expected to deliver both productivity and top-line growth benefits over time.