Colgate-Palmolive Company Q2 FY2025 earnings call

• Q2 results included growth in net sales, organic sales, and EPS despite raw material and foreign exchange challenges.
• Organic sales growth accelerated to 2.4% excluding private label, with positive volume in North America and Africa/Eurasia.
• Launched significant innovation across categories, geographies, and price tiers, and acquired Prime100, the #1 vet-recommended fresh pet food brand in Australia.
• Implemented a productivity initiative ($200 million to $300 million charge over 3 years) to prioritize incremental investment and build a future-fit organization for the 2030 strategic plan.
• Focused on sharpening offerings to appeal to value-conscious consumers, leveraging price pack architecture and innovation across all categories.
• Committed to long-term growth strategy, focusing on household penetration, brand health, and innovation, with investments in advertising, digital, data, analytics, and AI.

In Q2, Colgate-Palmolive grew net sales, organic sales, and earnings per share despite significant raw material pressure and negative foreign exchange. Excluding the impact of lower private label, organic sales growth accelerated by 60 basis points to 2.4% in the second quarter, with slightly positive volume driven by improvement in North America and Africa/Eurasia. Revenue growth management execution generated additional pricing in key markets. Hill's segment saw mid-single-digit organic growth across hubs, with Hill's ex private label achieving 5% organic sales, driven by volume (2%) and price (3%).

• Gross margin guidance is roughly flat for 2025, offset by lower tariff exposure, higher raw material costs, and lower organic sales.
• Organic sales growth guidance for the full year is around 2%, with expectations of modest acceleration in the second half driven by category improvement and strategic initiatives.
• EPS guidance factored in current raw material prices, FX rates, and market conditions, with confidence in delivering low single-digit EPS growth, considering the impact of tariffs, raw materials, and consumer uncertainty.

• Tariffs not yet finalized could potentially impact results, though preliminary analysis suggests no material impact.
• High raw material and packaging costs, including tariffs, continue to pressure margins.
• Consumer uncertainty, category volatility, geopolitical, and macroeconomic factors pose challenges to performance.

Q: First, just wanted to get a bit more detail on the restructuring program. What are the key operational changes? How should we think about the savings payback versus the charges? And why now? Is this just sort of a natural evolution after the conclusion of the prior program? And as you look forward to the 2030 strategy? And then, b, I was just hoping you could also touch on U.S. category growth. We've obviously seen a slowdown in household products. It seems fairly unique versus other parts of the world, keeping in mind your geographic diversity. It also seems fairly unique versus the broader U.S. consumer. So I'd just love a bit of perspective on what you think is occurring in the category in the U.S. And any thoughts on a potential recovery as we look going forward?

A: Noel R. Wallace discussed the productivity initiatives, stating it's to accelerate innovation, data analytics, and supply chain optimization. The charge is $200 million to $300 million over 3 years. On U.S. category growth, he mentioned a persistently cautious consumer in North America, with categories holding steady in the short term but expected to improve as 2025 progresses.

Q: I wanted to ask about the gross margin outlook for the balance of the year. Obviously, there's a lot of puts and takes, lower tariff, now $75 million versus your prior $200 million, but you mentioned offset by higher raw material costs. Can you give us a sense within the raw material cost, what is driving the increase? It seems mainly palm oil, but maybe give us a sense of the rest of the cost basket and any other offsetting factor that you can think in terms of offsetting the tariffs on the productivity front?

A: Stanley J. Sutula responded that gross margin was down year-over-year due to greater anticipated raw material inflation and tariffs. Raw materials like palm, veg oils, fats, and tallow are higher, with no immediate relief seen. Gross margin guidance is roughly flat, factoring in lower tariff exposure offset by higher raw material costs and lower organic sales.

Q: Can you talk maybe a bit about Hill's? We're seeing -- you're seeing a bit of an acceleration. There's been some kind of debate about the category, the pet food category in general on -- if it had been fading. So obviously, you have new products out and such, but is there a macro component to it? Or is it more some of the initiatives that you've made that's leading to some of the acceleration?

A: Noel R. Wallace stated Hill's had mid-single-digit organic growth across hubs, with 5% organic sales excluding private label in a flat category. Volume was 2% and price was 3%, with therapeutic growth outpacing wellness, driven by innovation in Prescription Diet and Science Diet, and broad-based growth across segments and geographies.

Q: I had a question on your FY '25 EPS guidance. You've previously talked about building P&L flexibility over the years, ultimately to deliver consistent performance year-on-year. So I guess I'm curious what gives you the confidence in your low single-digit EPS growth expectation this year? I guess if end market trends don't pick up meaningfully, the promotional intensity remains elevated and then tariffs certainly lower now, still weigh on margins. So I guess I'm hoping you could maybe walk us through the key growth drivers given all of that?

A: Noel R. Wallace and Stan Sutula responded that guidance factored in current raw material prices, FX rates, and market conditions. They feel confident in the guidance due to the strategy working, investment in the back half, and good innovation, with the team's ability to manage productivity and funding the growth to deliver the guidance.

Q: I heard another CPG company mentioned higher food prices in Brazil as putting pressure on consumer spending in their category. And now you're raising prices in Brazil. Can you give us like just kind of ballpark, like how much are you raising prices? And what's your confidence level that competitors follow your increase and that the elasticity will be strong. Raising prices in the U.S. hasn't worked out so well. What -- why will the Brazilian consumer absorb it better?

A: Noel R. Wallace stated they've taken prices consistently in Brazil, with brand strength and innovation (e.g., Colgate Total relaunch) giving confidence. Brazilian consumers are more accommodating to price increases due to brand health investment and innovation on the premium side, with expectations of benefits through the back half.

Q: Noel, I wanted to pick back up on the prioritization of innovation within the 2030 strategy because it's been a big focus of the 2025 strategy. So as we look forward, when you think about doubling down and stepping up innovation capabilities, is it simply objective of more and more broad-based innovation? Is it specifically more premium innovation? Is it innovation better aligned to unique insights to enhance ROI? Probably a combination of all of the above. But I'm just curious if we could home in on exactly where you see the most opportunity for further innovation efficacy? Again, in the context of what I think has been a pretty good innovation advancement story over the last 5 years?

A: Noel R. Wallace responded that they need to step up H2 and H3 innovation, focusing on breakthrough and transformational innovation, incubating more such innovation globally, and allocating resources to do so, with a focus on agile and quick execution in geographies where improvement is needed.

Q: I wanted to unpack a little bit of the evolution in Asia. India has been a topic this quarter. You called out maybe some softening in urban markets. Where are you seeing this business going from here? And can you just maybe balance the Colgate China versus JV performance and also just how you see the evolution of that important business going forward as well?

A: Noel R. Wallace stated Asia was softer than expected, with Hawley and Hazel in China and India showing weakness. In China, Colgate's business performs well with revamped go-to-market and digital strategy, while Hawley & Hazel needs adjustments in go-to-market and online presence. In India, they're relaunching core brands, addressing price pack architecture, and seeing growth in e-commerce, optimistic about second half improvement.

Q: I was wondering if you could talk about the sales run rate and the expectation to improve slightly in the second half versus first half to get to sort of a 2% for the full year. If you could talk a little bit about what's going to drive that acceleration? Is it more of a view of a slight rebound in the category growth or more of your initiatives to improve your share? And then on the restructuring, a lot of the things you discussed on the restructuring sound like things you were already doing. So is there a component of it that's new? Or is this more of a fast track of existing initiatives? And is there any headcount reduction or a particular look at a region or category that will be more of a focus?

A: Noel R. Wallace stated sales run rate expected to improve in H2 due to category rebound and initiatives, with focus on innovation and share improvement. Stan Sutula mentioned the restructuring is a productivity program to accelerate strategic imperatives, with focus on supply chain optimization and resource allocation, disclosing more as programs execute.

Q: I wanted to go back, Noel, to the prepared remarks on this call, not the published ones, when you talked about sharpening offerings, value to the consumer and so on. So I was curious -- and that was in the tactical kind of bucket. So I was just curious, any particular markets where you would call out the need to do that? And then in tandem, you also mentioned needing to drive -- find ways to drive incremental pricing with RGM because there's less inflation. So sort of -- it's a bit of like trying -- needing to do 2 things at once. So I'd just love to understand better how one can approach that if we're sharpening value but also needing to find incremental price. So first is the markets we're sharpening price point, the other is kind of pursuing these 2 kind of different streams, if you will?

A: Noel R. Wallace responded that price pack architecture is consistent globally, with sensitivity in emerging markets (e.g., INR 10 in India). Balanced approach includes competing at opening, mid, and premium price points, driving premiumization as the biggest growth opportunity, with examples like Colgate Total relaunch and premium innovation.

Q: So Noel, I wanted to come back to North America, but I wanted to ask in the context of balance. That balance between top line growth and margin restoration. We spent a lot of time on these calls talking about the appropriateness of focusing on profit dollars and not necessarily margins. But for -- given the competitive landscape, softness in consumer, market share issues, you kind of had both where it's been top line has been not where you'd like it to be and margins are down considerably. So as we think about and as you think about where you'd like the North America business to go, how much of a priority is restoring some of the North America profit margins where we've seen a considerable amount of erosion here in recent years? So your thoughts there would be appreciated?

A: Noel R. Wallace stated restoring North America profit margins is a significant priority, achieved through innovation strategy, ramping up premium innovation, and allocating resources to drive innovation, with focus on all categories (Oral, Personal, Home Care) and productivity initiatives to enhance margins.

Q: So I wanted to just round out the category commentary. Noel, you mentioned that you expect categories to get modestly better as we move through the balance of the year. And I would be curious, is that a broad-based comment? Or are there certain markets where you have greater confidence in that improvement? And conversely, are there any markets where you see category trends moderating or at risk of moderating?

A: Noel R. Wallace stated it's a broad-based comment, with categories growing 2%-3% on constant dollar basis globally, volumes slightly positive. Expect modest acceleration across all, with Home Care categories potentially moderating slower due to longer usage amortization and consumer caution, while Oral Care and Personal Care expected to improve more quickly