Q3 2020 Colgate-Palmolive Co Earnings Call

Right.

Third quarter.

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Currently.

We appreciate your patience.

[music].

Good day.

<unk> company.

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It's called.

Hi, <unk>.

Well.

Now for opening remarks, I would like to turn the call.

<unk> Chief Investor Relations Officer.

Please go ahead.

Thanks.

Good morning, and welcome to our third quarter earnings release Conference call. This is John O'shea, Chief Investor Relations.

Today's conference call will include forward looking statements.

Actual results could differ materially from its good.

Please refer to the earnings press release, and our most recent filings with the FCC, including our 2019 annual report on form 10-K and.

And subsequent SEC filings.

All available on Colgate's website.

Our discussion of the factors that could cause actual results to differ materially from these days.

This conference call will also include a discussion of non-GAAP financial measures, including those identified in table eight and profit.

Yes.

A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is it.

Oh on Colgate's website.

Joining me on the call this morning, or no Wallace, Chairman, President and Chief Executive Officer, and how do you Dockets and Chief Financial Officer.

I will provide commentary on our Q3 performance and full year guidance before turning it over to know for his thoughts on how we're planning to sustain our growth momentum into 2021.

We will then open it up for <unk>.

As usual, we request that you limit yourself to one question, but as many people as possible get to ask a question for.

If you have further questions you're welcome to reenter the queue.

We delivered very strong results in the third quarter consistent with our focus on generating sustainable profitable growth.

We delivered both volume and pricing growth.

We delivered growth in all four of our kind of oral care personal care home care and <unk>.

We delivered organic sales growth in every division.

Developed markets organic sales growth was 6.5% and emerging market organic sales growth was 8.5%.

The choices, we've made in terms of revamping our innovation processes.

Continuing to drive our digital transformation and investing in our brands are paying off.

And there's no will discuss we have further opportunities out.

Importantly, this growth is driving our piano.

Our ability to expand our gross margin helped us deliver a double digit percentage increase in base business earnings per share. Despite continued increased investment in advertising negative foreign exchange costs associated with the cold the crisis and headwinds from higher logistics costs.

Our net sales grew 5.5% in the core.

Organic sales growth of 7.5% was driven by 3% organic volume growth and a 4.5% increase in price.

The acquisitions of Florida, Hello, when the Nigerian joint venture how did an additional 200 basis points to volume growth as.

While foreign exchange was a 4% headwind.

Our gross profit margin was 61.2% of.

220 basis points year over year on both a GAAP and a base business basis.

What a base business basis. This was our best year over year performance in several years.

For the third quarter pricing was 170 basis points favorable to gross margin.

Raw materials were 230 basis points.

Driven by increases in raw materials, like fats and oils.

And the transactional impact from foreign exchange.

Productivity with a 250 basis point benefit.

Other was plus 30 basis points.

On a GAAP basis, all rest your name with a 20 basis points as a percent of sales.

Got a base business cases are rest today was up 90 basis points soccer sent to sell basis driven.

Driven by a 70 basis point increase in advertising to sales.

Advertising spending was up 13% year over year on an absolute basis.

By a moderate increase in logistics costs as a percent of sales as we work to meet heightened demand due to covert 19th.

On a GAAP basis, our operating profit was up 19% year over year while.

Well it was up 11% on a base business basis.

Our EPS was up 21% on a GAAP basis.

Up 11% on a base business basis.

We continue to deliver free cash flow growth in the quarter.

5% year over year and up 29% year to date.

We resumed share repurchases during the quarter as well.

And now I'll have a few comments on our divisional performance.

North America delivered strong growth in the quarter, driven by a combination of pricing and volume growth.

Well care growth was driven by two days and improved performance in toothbrushes.

Aided by the launch of our home by Colgate Electric rushed later in the quarter.

The focus on premium innovation like come by Colgate, Colgate optic white renewal toothpaste, and Colgate optic white overnight teeth whitening pen.

Helping drive strong pricing growth in oral care.

Our personal care and home care businesses continue to benefit from cobot related demand.

Particularly in liquid hand soap and dish so.

Although our skin health businesses were a drag on growth in the quarter.

Overall, we are seeing promotional levels in our categories returning to normal and we planned for that to continue going forward.

We were very pleased with our performance in Latin American to CIRCOR.

Latin American net sales were down 5% in the quarter as 2% volume growth and 9.5% pricing growth were offset by significant foreign exchange headwind.

We delivered organic sales growth in every hub in the division, including strong growth in Mexico and Brazil.

Volume performance for the division improved sequentially, if we return to a more normalized promotional cadence due to higher consumer traffic.

Benefits from a strong innovation calendar and increased demand for personal and home care products due to cover it.

Our innovation in naturals, and white meat across the division is helping to drive premiumization in toothpaste as part of our revenue growth management strategies.

Our Protex brand is benefiting from heightened consumer interest in antibacterial products.

The relaunch of Protex with the new Flaxseed oil formula.

And the entry into new segments with products like <unk> Protex based in Brazil.

Well, it's actually a great example of driving growth in both the core and in higher growth adjacent segments.

Europe delivered double digit net sales growth in the core.

Organic sales growth of 3% was primarily driven by volume.

As retail foot traffic improved.

And slightly positive pricing.

Net sales also benefited from the inclusion of Florida and favorable foreign exchange.

Organic sales growth benefited from strong performance in personal care, driven by cold weather related demand and strength of the Sandmaxx brand behind Sanuk their upper side.

And Sanuk sterno product.

Oral care performance improved sequentially, we saw less pantry Destocking and also through increased brand support.

We returned and that sales growth in Asia Pacific in the third quarter.

Organic sales growth of 4.5% was driven by an extra volume and pricing.

The organic sales growth was driven by our biggest tops with greater China, India, and South Pacific all growing year over year.

Our Kobe, China business continues to benefit from the premium innovation all talking about at the Barclays Conference in September.

While our South Pacific business delivered continued strong performance, who killed it related demand and innovation.

Africa Eurasia also returned to net sales growth in the quarter as mid single digit volume and pricing growth were only partially offset by a low double digit foreign exchange headwind.

Organic growth was broad based.

With growth in all three categories and across every hub.

Turkey continues to benefit from strong growth across all categories.

Sales once again delivered stellar results.

Double digit and that's an organic sales growth led by the U.S., Europe, Australia and Canada.

Higher consumer demand in E Commerce continues to be a significant driver of growth.

Although brick and mortar growth in the U.S. improved sequentially in the third quarter as foot traffic increased.

Hill's continues to benefit from increased brand support which is driving higher brand awareness and market share gains on the wellness products.

Did that channel remain subdued due to colder headwinds that prescription diet sales growth was robust given the shift to ecommerce.

And now I'll move to guide.

We are providing annual guidance. Despite the fact that rising cap rates are rising in many of our markets.

We still believe the government actions to control the spread of COVID-19 are the biggest risk to delivering on our financial plan.

And shutdowns like we saw in China, and India earlier in the year, meaning.

Meaning significant impacts to our ability to manufacture and distribute our products.

Not built into our forecast.

I want to note that we will not be providing any discussion of 2021 guidance at this time.

We expect net sales to be up mid single digits for the year.

Organic sales are expected to be up at the high end up mid single digits.

Foreign exchange is expected to be a mid single digit headwind for the year.

At current spot rates, putting us towards the lower end of that range.

We expect gross margin expansion for the whole year and advertising as a percent of sales is expected to be up for the year.

With an even larger increase in advertising year over year in the fourth quarter.

On a GAAP basis, our tax rate is expected to be in the range of 21.5% to 22%.

On a base business basis.

Our tax rate is expected to be in the range of 23.5% to 24%.

Our share repurchase plans remain unchanged as we plan for less benefit from share repurchase this year, because we pay down debt.

On a GAAP basis, we expect earnings per share to be up double digits.

On a base business basis, we would expect earnings share to be up earnings per share to be up 67%.

And now I'll turn it over to <unk>.

Thanks, John and good morning, everyone I hope, everyone is doing well and staying safe. So I'll keep my comments are quite brief. This morning. So we have plenty of time to get to the Q and a.

Clearly, we're pleased with the results in Q3, and obviously the progress we made throughout the year.

I think the results speak to the tremendous work of Colgate people and our partners.

When you think about from our labs to the production lines charges, she used to getting product in stores and the incredible work. Our teams are doing working virtually all over the world.

In that regard I can't continue to show incredible strength their compassion for driving the business for the collaboration there showing and importantly, a disciplined and professionalism behind the strategy is clearly reflected in the results. So my immense gratitude from all of us to their teams on the ground and their families.

So John summarized the results I think quite well and because of the core it to some extent speaks for itself I'll keep my comments quite brief again and I'll focus on where we're going next.

You heard me say many times that our growth mindset is really about delivering sustainable profitable growth and you clearly saw that well the trends related to coal bed.

Certainly boosted our sales organic sales growth turnaround was well on its way as we headed into 2020.

So as we look at 2021 and beyond will continue to evolve our strategy to deliver this type of growth do you expect to obviously growth to drive superior shareholder value.

To that point I want to expand on three areas. This morning are revamping our innovation process, you've heard me talk about that quite a bit our digital transformation, which is well underway and all and then clearly investing differently to build our brands in the current environment.

First let me start off by revamping, our innovation process, you'll recall, we talked quite a bit about that Barclays and we focused on delivering that strategy through the quarter, it's about delivering transformative and disruptive innovation across our entire portfolio showed.

Do this we need to become less reliant on line extensions by pursuing innovations it really build incremental category growth and market share gains, which is ultimately vital for us to continue to drive gross margin.

And we see incredible opportunities quite frankly across the Mega trends all over the world that we're seeing on the ground naturals and sustainability to give an example, the urbanization that we're seeing in the big markets aging population in developed markets are younger population. It per capita consumption opportunities and developing countries and clearly.

The rapid growth in channel focus that we have as we've seen channel expansions, particularly in ecommerce and pharmacy for us.

But you can imagine these demands new skill sets, a new incentive structures and new processes to get it right and we brought in outside talent to help US change how we think about innovation and we're really encouraged by the risk taking in collaboration that the teams are showing.

Courage by the new financial models and approach they are taking to innovation and empowering our teams importantly on the ground to take action.

So not surprisingly Colgate people are clearly stepping up and embracing the change that we're trying to implement in the last six months, we've launched the Homesmart toothbrush. The milk are we fair to baseline and sheer owes the Colgate optic white whitening pen and Hill's science diet perfect digestion just to give you a few examples of that John mentioned Protex.

Another Great example of how we're changing the way we innovate while its a brand you probably less familiar with it has a strong anti bacterial skin health credential.

Before cold it we felt the segment was becoming highly commoditized, an overly promotional and we were highly dependent on line extensions. So what do we do we focused on real differentiation for the brand. We launched we launched the entire core line apotex far sells to the flat sheet based antibacterial formula.

That flaxseed all those sure natural skin debentures, which is a really interesting idea in the current environment, particularly in Brazil, and it's truly differentiate us in this environment and we think positions us well for growth moving forward we.

We also at the same time launched a line of Protex face products, which is positioned in the premium and the ACMI segment.

Hi growth adjusting for sure and we're driving incremental sales share and margin for the brand with that innovation.

While in the short term, we're benefiting from some of the covert related demand and in the space I believe this innovation leaves us well positioned to continue to drive incremental category growth and share for our business.

So next time, we're continuing to drive our digital transformation, you've heard me talk a lot about that over the last six to nine months and we're making great progress. So what do I mean, when I talk about digital.

It's about changing how we work every day across the company, we discussed our moved <unk> safety, that's for Hana, which.

Which is just allowing us now to analyze our business all over the world effectively with one global standard. We're also now installing new systems to accelerate our revenue growth management efforts.

About changing how we interact as well with our customers and consumers.

Generating much better insights through data and analytics, which allows us to better understand the consumer path to purchase.

As an example in hills from pet adoption to the first bit.

Visits at first it to their ability to byproduct ultimately in store really understanding that entire journey is allowing us to drive far more growth and efficiencies with our media and as well as with our partners.

It's about changing how we execute our communication as well, we're improving our digital marketing through programmatic media buying through more personalized content and we're doing testing that allows us to more accurately predict the effectiveness of our media driving higher ROI in yen. So.

Starting small and scaling rapidly is a big mindset that we've adopted in our digital strategy.

Channel Wise, the biggest beneficiary of our digital media investments is clearly E commerce, and we're developing much more sophisticated content to draw attention increased consideration for our brands ultimately secure the purchase and importantly earn loyalty for our brands going forward and that's driving share gains in key markets, particularly in the <unk>.

Wes and in China, as we've increased our investment in that area.

Well also continue to build the digital muscle across the entire enterprise, that's really important for us and if you think about marketing to a consumer on Amazon or Alibaba, it's not the same or marketing to a consumer on Tesco dot com or through the last mile or is in Latin America. This is where the focus I'm deeply understanding Nixon.

Tumor journey will truly pay off for us so we need to make sure we built flexibility into our model and went across all the different platforms.

Well E Commerce requires some specialization and we brought into talent to do that we need to ensure that we have training across the entire organization to raise the skill level to ensure that we build that muscle for the long term.

Let's talk about innovation and I've talked about digital transformation. So let me talk a little bit about brand investment.

We're spending behind ideas now and capabilities that will broaden the growth in our portfolio in terms of the brands the categories. Likewise, the channels, which we just spoke about and the geographies or innovation will be more successful if we invest in marketing that lets consumers know what's truly different and we're very focused on.

On that well also winning E commerce should be more consistently for more consistently at the top of the first page and delivering the right personalized content.

Revenue growth management strategy in driving Premiumization will also be more successful if our advertising clearly demonstrates how products are delivering excellent value.

And we'll continue keep Colgate is the most penetrated brand in the world at over 60% of households by consistently keeping our brand top of mind and prefer.

So these changes I've discussed today already helping us deliver the better results that you've seen in throughout the year. The successive optic white renewal. We've talked about is a great example of pairing the right innovation with the right digital strategy with increased brand levels of support.

[laughter] Hill's science diet relaunch this fueled a lot of the growth that hill. Likewise, a good example of that so all these efforts are paying off for us as we head into 2021 and building building the momentum throughout the year and we believe it will continue to drive the growth, particularly as we build those skill sets across the organization for the longer term.

So before we move into the queue and I want to offer a word about our announcement. This morning that stands up to about will be joining the company in November 9th as our Chief Financial Officer said.

Sad joint Justin Pitney, Bowes and previously I B M and brings a wealth of experience in finance and strategy to this role.

Excited to welcome stand to call I think his experience in building technology related businesses without a tremendous value to our digital transformation well underway.

Many jackups and we'll be talking Colgate and December 31st and we are grateful that he is going to stay with us to ensure a smooth transition.

With stand out throughout the balance of the year before returning to his family and Denmark.

And he's been with US for 25 years in service to our company has been exceptional heading is served in a number of general management and finance roles throughout the globe and each country too much to Colgate not just in the finance function as an executive but also a thoughtful business leader across the latest leadership team. Most recently it's been instrument.

No in our efforts to drive organizational efficiency I, especially want to thank him for his help in my transition just t. over the past few years and behalf of all of US at Colgate, We wish him and his family all the best and with that I'll open it up to questions.

Yes.

Thank you and if you would like.

Good question.

Star one on your telephone keypad.

If you are using.

Sure.

And it's turned off.

Okay.

As a reminder, please limit yourself to one question.

Again that is star one to ask a question.

Well take our first question from.

No.

Morgan Stanley.

Please go ahead.

Hey, good morning.

So corporate pricing was very strong in the quarter really the best result, we've seen a decade Latin America strong the second straight quarter books prove sequentially. So two parts to the question Hey, just short term can you give us a sense for how much of that strength is due more to list price increases that are more during.

First is short term changes in promotional cadence and what you're seeing on production from a competitive standpoint.

But really goal I was I was interested more in the longer term.

Taking a step back and thinking about price against the strategic lever.

It does seem pretty all day system level of pricing you took in Latin America during a pandemic and obviously volumes seems to have held up well.

Could argue that scale globally also so sort of kudos to the success, but help us understand what's enabling the higher price say and if the recent success at bolt ons you at all in terms of how you think your belt pricing in your approach going forward.

Yeah. Thanks, Darrin, let me take the it helps you a two part question the short term easy to answer obviously as we've seen significant foreign exchange, we have consistently communicated externally that the important objective of our general managers on the ground as recouping, the transactional impacts of foreign exchange and.

What is particularly pleasing as you pointed out is Latin America following strong pricing in the second quarter at 9% delivered another 9% pricing in the third quarter in parallel with getting volume back into the business. So again I think a great result to see the volume coming back in Latin America are behind us.

And two quarters of strong pricing and obviously delivering the margin that was required to sustain higher advertising levels in that division, which is certainly playing out. So short term. It was a combination of list and promotional oh pricing to a certain extent, but very much a lot of the revenue growth management discipline that we're putting in place around the.

World and Latin America as an example has done an exceptional job as has Europe as says Asia and bringing in competencies to ensure that our teams on the ground are really digging deep into our promotional spending and working together with our trade partners to find ways to drive both category.

And revenue for ourselves and I'm, particularly encouraged with some of the analytics coming out of the <unk> revenue growth management teams around the world and you're seeing some of the short term benefits of that and that will clearly play out for the longer term. So if I take a step back now and a longer term question.

Derek getting pricing into the P. emails and new categories is a critical initiative for us.

We will continue to find ways to do that with the mechanisms that we have to revenue growth management. Obviously list price is one of them, but long term, we continue to see opportunities to get pricing up in the markets. We've long talked about the under index of Colgate Colgate toothpaste portfolio, we still have an opportunity to drive a lot more.

Our premiumization there you've heard us talk quite consistently about the importance of premiumization across our innovation pipeline and a lot of innovation that we put into this market into the market in the third quarter. Likewise was very premium based I'll use. The example of Protex acne a the acne line in Brazil all.

Premium price that we launched the whitening pen in the U.S. premium priced optic white renewal lower ounces, but very premium priced as well. So again I think as the long term strategy. We continue to find the pricing is a key mechanism within our P. nelnets enough. It's obviously integral to the fact that the.

Gross margin expansion you saw in the quarter is allowing us to continue to invest more aggressively behind a a a quite a plentiful pipeline of new products.

And our next question will come from Andrew.

JP Morgan.

[laughter].

Thank you and good morning, Congrats on the results. So if you can help us they can file the volume growth and basically shipments to to hear when we had the shot and always had but still you know replenish themselves. He said he bluff consumption the wallets [noise].

And then on your last comment no and I'm All for instance, Latin America, how much do you think is if it's bringing innovation basically mix. These let me just explain pricing.

Sure Thanks for the.

The question, obviously, a again, becoming let me take the Latin America question first the strategy that we've been talking for quite some time, it's obviously getting the core business just relaunched it allows us to take pricing moving into adjacent she's in premium brands.

I was just too obvious she premiumize the category and get more margin growth look.

Looking at certain channel expansion opportunities, particularly across the pharmacy channel, which allows for more premium therapeutic.

Portfolios to to get us that was sold to the consumer the consumer base. There. So all those elements to help Latin America as an example drive or the margin growth drives the pricing in the quarter and there's no question that strategy that we've been deployed throughout the year continues to take hold.

Through to all the divisions, let me take the question about replenishment I mean, it really has it's a function of more of the markets, where we've seen significant demand in some of our category. So if I take North America. As an example, liquid hand soap dish continues to be about replenishing the shelves.

Demand is in excess of some of the capacity that we had in the second and the third quarter, that's starting to <unk> to.

Mid to reduce itself as we move into the fourth quarter as we improved our capacity, but we still have some opportunities to replenish shells, we're still trying to meet some of the excess demand that we have there, but by and large you know a good portion of the volume.

In certain categories only not that's not the case in oral care, where we're not seeing obviously co bid.

Drive a a lot of extra purchases or behavior changes and we had good volume growth on oral care through the quarter and again I think Thats. A result of the innovation strategy that we're putting in place as well as the increased investment.

And our next question.

I'm from Wendy Nicholson with Citi.

Hi, Good morning. My question is on Shell's on number one I know you won't give guidance for 2021, but just as we think about kind of the underlying trends in that business and I'm. Just wondering if you can sort of parse out for us how much is being driven by category growth versus market share gains because I get so all of those people who have adopted.

Pets during cold that they're not going to get them up next year or some sort of assuming that the robust category growth will continue is there any reason you would disagree with that and then if you'll indulge me just cause I think it is a big deal.

This is my first time, we've seen Colgate higher a senior person externally on in a while and I'm. Just wondering you know lets you settling in and can you think about sort of the organization and the culture of the company is this the beginning Alex maybe more new blood coming into Colgate or was it.

The specific God you thought was right for the role of CFO, when it's kind of a one off thanks sure. Let me address those questions first listen Hills is continues to hit on all cylinders, we've talked a lot about big core our renovations, which obviously you've played out very nicely, we talked about the Premiumization asps.

Second going into adjacent cheese, which continues to be an emerging growth 17, if you take the wet the west side of the business and they're doing an exceptional job capitalizing on those trends we've talked about the low brand awareness. It hills has an office she that the significant upside that still exist as we as we expand or increase our advertising.

Spend to drive relevance to the brand.

You talked a lot about the channel expansion opportunities they've done an exceptional job with E commerce.

All of that is leading to increased market shares when you take the E Commerce shares when you take brick and mortar shares around the world. All in all we are driving good share growth across that business. You mentioned, obviously the pet adoptions are up significantly in the U.S. a as a result of coal that so we think that will obviously bode well for the.

Category.

Moving forward as we move into 2021 and she is a continued acceleration.

Pet adoptions are particularly in the current environment. So good category growth combined with good share growth, that's driven by an underlying strategy. That's a very solid on your on your second question you know listen we have an opportunity to bring in someone with some really unique experience a wi.

We looked obviously at that opportunity very carefully.

Particularly someone withstands background to the incredible experience he has that IDN and as well as the transformation that he was helping drive that pitney and as I mentioned in my upfront comments, a big focus for US is really driving our digital transformation across the entire enterprise.

Not just from a consumer standpoint, but how we operate internally through our back office systems through like the technology that we used to say P and the things that we're bringing on stream as we speak and stand is very well positioned to do that and we walk you know as we look for opportunities to continue to elevate our skills as we.

Think about our strategy moving forward, we'll identify candidates on the outside to do that we've done that in the digital space a very very successfully we've done that in the E. Commerce space very very successfully that being said, we have an incredible pipeline of talent in the company.

We are developing a broad based skills across the organization and will continue to offer she encourage and develop our talent from within which has been a key success factor for the company for many many years.

And next we will hear from Jason English with Goldman Sachs.

Hey, good morning books, they get started much appreciate it.

[noise] happy Friday to.

Congratulations on a great results, it's great to see organic sales growth gross margin phenomenal dump the reinvestment of advertisers obviously welcome.

As we walk through the key and now we are seeing some more leakage, though outside is advertising was yesterday, particularly in developed markets I think in your 10-Q your site overhead.

Inflation as the drag of 130, Bips in Europe, or others, I do Gibson North America, I know, you're still running up all year, but North America looks like a sharper flagship what's what's driving that is it we definitely capabilities is under long deflation would love to get some better understanding of where the market pressures galliprant how durable it maybe.

Yeah listen I mean, it's John outlined to you know a lot of the S.G. They increases obviously is largely driven by advertising, we had a little bit of increased related to cold and related costs in.

In the quarter related to some compensation costs in the quarter as well you know, but overall, we feel the overheads are well under control well under control around the world. We are making the changes necessary. You mentioned, obviously were bringing in some skill sets as we just talked about with with Wendy.

Two certainly elevate our game and the digital and E commerce space of the by and large obviously the focus right. Now is continue to drive the gross margin as you saw keep the overheads, where they where they've been and we've consistently can we find productivity opportunities in that area and invest behind the business overall with we feel like we're in a good place Jay.

Yeah.

And next we will hear from Olivia Tong with Bank of America.

Please go ahead.

Great. Thanks, good morning.

We see a lot has happened in the last couple of months or so since dependent it starting to take hold and watching a number of new products as problem.

But you have already started to talk a lot more about innovation in that.

No I'm just curious how the current environment has impacted.

Your longer term can you and your strategy going forward, obviously, an oral care, but then also pet owners I think creates or how is that impacting your innovation.

After the tails soaps, and then could be higher quite some time, so just thinking through innovation strategy.

Given the changes thank you.

Yeah. Thanks in Libya, so if.

If I go back to Barclays.

Quite frankly, if I go back to in the last 12 to 18 months, we've talked a lot about how we're thinking about innovation and a real concerted effort to organize ourselves both from a structural standpoint, as well as the processes and the resource allocation moving away from those close in line extend.

She wants to more incremental breakthrough innovation.

And that has been very deliberate and a very focused effort across every division in the world and we're starting to see obviously the benefits of that but the intention is obviously it sets us up for long term.

Sustainable it's sustainable growth moving moving forward.

If I take a you know the current environment clearly, we have an opportunity to continue to drive premium pricing and that's why a lot of innovation as I mentioned earlier is on the premium side of the business and we're looking for ways to disrupt the category. We're looking for ways to think about oral health differently than just a toothpaste line.

An extension and you're starting to see that play out in some of our innovation or in the quarter, particularly in North America.

You know relative to Hill's Ah interesting addition to science diet, we launch has been a big driver, but they are seeing great benefits coming through with some of the innovation they brought in.

In early days on prescription diet with a far more therapeutic formulas metabolic as an example doing extremely well and if you take some you know the innovation opportunities that we see in the West segment moving forward, we continue to find ample opportunities to drive to drive growth with that and as a pet adoptions in pet ownership and.

Creatures and clearly we're seeing a trend in the marketplace. Likewise with a move back to science based real biology based products and that can both obviously plays very well for the Hill's business. Both here in North America and around the World and we have an innovation pipeline that is very a very robust as we look.

Getting to ensure 2021 other aspect of that is certainly a bet that visits are down as a result of mobility issues in the U.S. related to two co bid and the traffic is down or hills home is certainly a great innovative idea that were.

Bringing into that business to continue to allow that to send a product to a to their pet owners directly and we'll see that increase as we move into 2021, particularly as we see more and more traffic move back into the veterinary space going forward.

And next we'll hear from Kevin Grundy with.

Jefferies. Please go.

Great. Thanks, Good morning, everyone and congratulations on strong results I'm not talking about on gross margin or two components to it really more near term ABS like these little longer term orientation. So of course. It was historically good core I think is a high watermark for the company and.

You talked about pricing in earlier question, how to gross margins come in relative to your expectations. It beat the street pretty handily.

It was largely on the pricing component as well as funding the growth and so I'm not asking for guidance, we'll get trouble picking up freight freight costs, moving higher commodities likely less favorable even without asking for guidance is how should we be thinking about about this line item sort of in the intermediate term and health and Colgate felt they thinking about it and then longer.

Sure well.

65% gross margin ambition, we would come up from time to time on on these calls is that still still realistic is that a significant priority for the company and if so how quickly do you think that that you can get there. So thanks for all that.

Sure.

Yeah, let me start there.

Can't take a step back and for US it's very much the violins focusing on growth you know the growth moves to the P. and now we get increased the margin dollars in it the PML, obviously that allows us to support the businesses.

More consistently and brought more broadly as we've communicated in this quarter.

You've seen four quarters now gross margins in the sixties and sequentially up from quarter to quarter. I think that's a result of a couple of things one a much deepened focus behind our revenue growth management, we've talked about that quite a bit we talked about the importance of premium pricing and innovation that supports that and weve.

Talked about our ability to react quickly to an extraordinary foreign exchange headwinds as we've seen both in Latin America and some of the the markets in Africa, Middle East and getting that into the P. now allows us to really control, how we want to manage the business more effectively how we want to spend the money both from a a below.

It was a line and above the line basis, how we want to look at our promotional strategy. So getting that gives us a tremendous amount of clarity on how we want to evolve in the quarter and allows us to kind of dictate where we want to spend relative to.

To the expectations on obviously the revenue goes managements coming in better than we expected a show a little bit better there. The funding the growth aspects continues to be very very gushing, if I walk through the margin roll forward again for you you know we started a if you go back to third quarter last year at 59, we developed a delay.

170 basis points of pricing also but if you follow that off the second quarter, which was at 130 basis points. So again solid pricing, but the quality of that pricing again to some of the earlier questions was consistent all around the world and by category, which was really nice to see funding the growth came in at 250 a pause.

It had been in the quarter offsetting material prices at 230.

Obviously that a little bit of benefit from.

Next but not a lot. So again, you know coming down to 61, two which is one of our obviously our high point on the margin line, but we want to see that continue to grow but first and foremost is about getting the top line continued to sustain.

The healthy growth that you're seeing that gives us the margin dollars and gives us the leverage and ultimately as we implement more disciplined around revenue growth management, we take action quickly to offset foreign exchange, we see opportunities to continue to drive margin moving forward.

Our next question comes from ours, that's what you mean.

Please go ahead.

Thanks, Good morning.

Well you know could you go a little deeper into what you've seen in Latin America, I guess, what you're really looking for whats them. Most reassuring across your your major markets in that region. The past few months and what's allowed you.

To reinstate guidance for the fourth quarter, when when a quarter ago, you Didnt feel like you have that same visibility into the first quarter. Thanks.

Well listen we've got one quarter last quarter, obviously, just finishing up October and that you know we felt comfortable you know based on what we're seeing around the world. Obviously case counts continued to be a real concern and a will inevitably we could see more locked down in core markets around the world and as a result of that we want to be very clear.

Sure, but we felt pretty comfortable I guess.

Given the line of sight that we have on the business right now and as a result, we gave guidance for the fourth quarter will come back as we always do following the fourth quarter and provide a you didn't necessarily thoughts on 2021, but we're not getting ahead of ourselves yet right now we're focused on delivering the fourth quarter will talk 2021 at the pro.

We have time.

Our next question will come from.

Lieberman with Barclays.

Great great. Thanks, good morning.

Hey, two things one was just to follow up you had mentioned freight in passing and I was just curious if you could give just a little bit more color on your outlook for freight I mean in the U.S. Its just that you know relevant seen kind of across the board and then secondly, more specific to your business like thinking about promotions.

In the last I think when you'd answered the question no about promotional activity in some of the resources. He put in on revenue growth management, you highlighted other markets.

And the U.S. Colgate historically been a heavily promoted brands I was wondering to what degree the environment is giving you an opportunity to accelerate efforts to kind of bring that down or if it didn't really the right time, but just curious on progress I'm I'm not finding the last thanks.

Sure. Thanks for let me take freight first or you know Frank obviously continues to be somewhat of a headwind, but we saw cost come in marginally better than they are they came in in the in the second quarter, but that being said a you know a big caveat out there as we see increasing case counts around the world are that ultimately lead.

Two more disruption along our lanes are all around the world. So we're going to be very walk mindful as we see that unfold in the balance of the year, but so far we've done a pretty good job in this quarter a mitigating some of the all in cost associated with with freight and logistics.

On your question relative to the U.S.. So you know a lot of work on the U.S. around revenue growth management, that's the team that really embraces data and analytics.

They've taken it on I talked about it you know I think over the last couple of quarters on how we're being far more disciplined normally in categories, where we're seeing excess demand, but more importantly, not chasing a lot of the price promotions that have existed in some of the categories, particularly in toothpaste, where we've seen high coupon in from some of our.

Competitors, we pulled back we don't necessarily want to go after that that consumer as much as we want to go after that premium consumer, which we believe has much more durability for the franchise moving forward. So we've been very mindful on our promotional spend in the quarter that being said its consumers come back into stores and store traffic increases we want to be sure.

There were there and president and we have the money in the p. email to adjust accordingly, but by and large it much more disciplined would be the message Archie M really taking on a new level of focus in the U.S. a combined with the obviously getting the dollar value or price.

Price increases that were seeing through our revenue goes manage initiatives planes.

Playing through the piano.

And next we'll hear from Bill Chappell with Trust Securities.

Please go ahead.

Thanks, Good morning.

When you know can you just talk a little bit more about kind of what you're seeing on consumer habits and.

Because of the lead people aren't watching their hands or maybe brushing their teeth as much as they were in March and April and didn't know if you've seen that kind of flatten out to a certainly an elevated level and then let's see mine you know your so to date gates fourth quarter guidance, what do you expect it to lock down to Europe. If you expect a kind of a spike back work.

Yeah, really different where you need it.

Don't really see expect a whole lot of surge in demand through a another locked down.

Especially in Europe.

Yes. So both you know specifically on some of the more cold weather related categories that weve seen an increase in category growth liquid hand soap wouldn't be one.

You know our research indicates clearly that behavior, what well say, perhaps not at the at the current elevated levels, but we'll certainly versus historical norms or be it at a higher level. Likewise, a you know a lot more people obviously cooking at home. So dislike was been significantly accelerated in that regard.

I think what is as long as we see locked down so as long as we see people working from home, which in our estimation would be to do at least half of next year.

We continue to see elevated rate you are not seeing a cold weather related impact on on oral care.

But if you see any panic buying going on in the market, you'll get a little bit of benefit, but I think consumers have adjusted themselves a far better than at the at the onset of cold bid to how they're managing their inventories and their pantries. So we wouldn't expect any significant changes on oral care likewise.

Based on pet food, a little panic buying at the onset right now I think it's it's more stabilized consumers understand what they have not a lot of de stocking coming out of pantry and I think that you know more importantly people would be more rational in how they manage and manage their purchase himself for behavior change liquid hand soap.

But certainly a change there just like we did at least through the first half of next year and oral care you know starting to normalize that coming out of the strong first quarter panic, but much more on a on a historical basis and we're seeing good growth on the on the innovation side, that's driving more category dollar growth.

She is good to see.

Next we will hear from Rob.

Great. Thank you very much base based on the analytical work that we've done that we see a very high correlation.

Between E commerce penetration in terms of the category.

And gross margins, which would suggest at least in the U.S. that would suggest that oral care.

Good rapidly moved to E Commerce and answer the question is.

You know base based on what you've learned and seen in China.

Are there things that you can do to be better prepared for that and the U.S. and and how do you rank or how do you rate you know your ability and momentum in E commerce in the U.S. if that happens that you.

Yes. Thanks, Rob you know, we you've heard me mention a couple of times the incredible digital E commerce capabilities that our Hill's Hill's business has and how important it is that we are.

We share learnings across the broader enterprise, we very deliberately are shifting resources back and forth between hills and Colgate.

We're obviously getting the same type of learning now out of Asia in terms of the skill sets and as I mentioned I think a very deliberately and in my comments, we feel very strongly that upskilling or the entire organization around E Commerce and that's not it's our innovators, that's not our marketing and our customer development.

Because they can that everyone from logistics and supply chain to packaging, so everyone truly embrace it and understand that channel. We think is very important to our long term growth as we see more and more consumers moving into that so the skill sets are there. The transfer of knowledge is there and I mentioned also there were some.

Supplementing quite a bit of that by bringing in house I talent as well to ensure that we close any gaps that we might have in certain geographies around the world you.

You are seeing the benefits of that our ecommerce business obviously up.

Close to 50% in Q1, another close to 50% in Q2 and a a very strong growth in Q3 shares are up across our categories. Both in North America as well as China, our two biggest markets and we're seeing some <unk> accelerated growth Likewise in Europe Hills, obviously doing exceptionally.

Well in this in this space. So we think we're well positioned but we recognize we have a a in a ways to go given the opportunities we see to build the skill sets across the company and continue to grow our market share where we're seeing significant growth.

And we will take our final question asks Chan with Stifel.

Go ahead.

Thanks, and good morning, everybody.

I wanted to ask about the market share so yeah.

Yeah, I get the numbers in the release that or.

Transit about $1. So mechanically it looks like you're you're losing share I guess, maybe is there any way to parse out here and some of the key markets on a local currency basis, and maybe more broadly.

Broadly could you just talk.

Talk about what you're seeing growth within your categories globally.

Hi level World here.

So I want to personally and household wealth had been directional comments on how you're.

Portland relative to those little quickly.

Sure Mark you identified obviously, the the impact of foreign exchange. So they so let me give you a share summary.

On a constant currency basis. So we're a year to date were flat or up in every single Division X Asia, We've talked a lot about Asia, obviously that we're in a you know re looking at our go to market our portfolio, we talked about the progress that we're making in the in the second quarter. We saw that's playing through likewise that progress accelerated in the.

Third quarter. So we think we're well on our way there but across the board our shares are flat up or flat or up in every division on a constant currency basis last 13 weeks to North America, we've seen good progress on our toothpaste share, particularly as we've seen the investment behind renewal or take hold and some of the the.

Other innovations that we brought into the category you look around the world a lot of our focus on on our premium businesses in Europe, both merit all in L. Mack and the investment we're putting behind that are seeing some good growth good share growth in the very short recent term in both Brazil and Mexico.

Behind some of our innovations there Mexico now back above 80, and 80 share and likewise or Brazil, or not chasing the bottom end of the market, but getting some good premium pricing as we mentioned earlier and seen that translate into two more sustainable share growth across the board relative to categories by.

By and large most of the categories that we compete in an accelerated obviously, some kobe driven others very pricing driven and from an innovation standpoint.

We faced in the U.S. and now you know back up into that four to six range on a year to date basis.

Europe still around the you know the zero to 2%, but again driven by some good pricing Latin America up or down a little bit versus 2019, but again I think driven by a real softness in the categories in the first and second quarters, but starting to come back a little bit better in the third quarter, which is encouraging.

So overall a good category, we talked hills. Likewise day, you know very good growth across the category and hills messed seems very sustained no matter, where you Oh you look at it around the world the overall.

Category seem pretty good right now and I think with the innovation process, we have in place and the focus on Premiumization and revenue growth management will continue to bring dollars into the categories in which we can be.

So I guess that's a the last question, let me just close off by again thanking Colgate.

Colgate people around the world to a really strong quarter and a a continuation from the progress we've had.

Over the last four to five quarters executing our strategy of building skill sets across the organization and all that she collaborate in ways that we've we've never collaborated before so a great. Thanks to everyone I wish all of you a safe and healthy a Thanksgiving and I look forward to catching up again.

No on the fourth quarter results. So thanks, everyone.

And this concludes today's conference. Thank you for your participation and you may now disconnect.

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