Q1 2021 Colgate-Palmolive Co Earnings Call
And first quarter earnings release conference call.
As John Associate Chief Investor Relations Officer.
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 our most recent filings with the SEC, including our 2020 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 app.
Actual results to differ materially from these statements.
This conference call will also include a discussion of non-GAAP financial measures, including those identified and table six 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 stance and Tula Chief Financial Officer.
I will provide commentary on our Q1 performance as well as our latest thoughts on 2021 guidance before turning it over to Noel to discuss our 2021 priorities.
We will then open it up for Q&A.
As usual, we request that you limit yourself to one question so that as many people as possible get to ask a question. If you have further questions. You are welcome to reenter the queue.
We started 2021 and positive fashion with strong organic sales growth. Despite a very difficult comparison, which included some consumer pantry loading in March of last year.
Our net sales grew 6% and the quarter organic sales growth of 5% was driven by <unk>, 5% organic volume growth and a four 5% increase and pricing.
Foreign exchange was a 1% tailwind and the quarter.
While the tough comparisons, particularly impacted our trends in developed markets, which were flat on an organic sales basis and the quarter, we delivered double digit organic sales growth and emerging markets with volume up five 5% and pricing up 6%.
We also delivered organic sales growth in three of our four categories.
Oral care home care and pet nutrition, while personal care organic sales.
Decline due to difficult comparisons.
We believe our strategy to deliver more impactful premium innovation, which Nolan Pat Byrne and and talked about at Cagny is bearing fruit and.
And we will continue to focus in this area to drive future growth.
Our efforts on premium innovation and pricing along with our focus on productivity like our funding and the growth initiatives drove improvement year over year, and our gross margin, despite a worsening and raw materials environment.
This gross margin expansion was a key factor and allowing us to deliver base business earnings per share growth in line with our full year guidance.
Slight higher logistics costs incremental advertising spending and investment to build capabilities.
And the first quarter, our gross profit margin was 67% on both a GAAP basis, where we were up 50 basis points year over year, and a base business basis, where we were up 40 basis points.
For the first quarter pricing was 170 basis points favorable to gross margin.
Well raw materials were a 310 basis point headwind. This has a large impact for first quarter and it was driven by increases and the cost of raw materials like resin fats and oils agricultural related costs and the transactional impact from foreign exchange.
Productivity was a 180 basis point benefit.
Our SG&A was up 90 basis points as a percentage of sales for the first quarter on both a GAAP and base business basis. This was primarily driven by a 50 basis point increase in advertising to sales as we drove strong activation on brand building innovation and E Commerce.
Our SG&A ratio was also impacted by increased logistics costs, primarily in the U S and investments behind growth and innovation.
Excluding advertising and logistics, our SG&A ratio declined year over year.
For the first quarter on a GAAP basis, our operating profit was up five 5% year over year, while it was up 5% on a base business basis, our EPS was down 4% on a GAAP basis and up 7% on a day business basis are.
Our free cash flow was down year over year and the quarter against a very difficult comparison.
The decline was primarily driven by the negative impact of accounts payable and other liabilities, which was mostly due to changes and the timing of payables and income tax payments.
A few comments on our divisional performance.
North America net sales were down <unk>, 5% and Q1 with organic sales down one 5% or.
A 50 basis point benefit from the Halo acquisition, and a 50 basis point benefit from foreign exchange.
Our volume declines and the quarter were primarily due to a combination of category deceleration and the face a difficult comparison, because we cycled last year's COVID-19 pantry loading logistics.
Logistics issues related to a warehouse transition on our U S business that impacted our shelf availability and our market shares and the winter storms in February.
And logistics issues lessened over the last month and the quarter service levels improved and we expect service levels to return to normal by the end of the second quarter.
Pricing grew mid single digits and the quarter as our efforts and revenue growth management drove pricing growth across all our categories.
The combination of higher raw materials costs.
Higher underlying logistics costs and costs related to remediate and the company's specific logistics issues crushing pressured margins and the North America Division.
Despite these headwinds we continue to invest and advertising, particularly behind premium innovation like Colgate renewal and the Colgate optic white overnight teeth, whitening pen and behind the continued strength and Colgate optic white renewal.
Latin America and net sales were up 2% is nine 5% organic sales growth was mostly offset by the negative impact of foreign exchange.
We continued to deliver broad based organic sales growth and Latin America with organic sales growth and all three categories and and every hub.
As we highlighted at Cagny, our innovation and Latin America is driving growth and the premium segment of the toothpaste category and.
And Brazil, Colgate total is gaining share behind Colgate total and he's harder and our natural extracts line is gaining share, particularly behind charcoal.
Our toothpaste value share is flat year to date in Brazil, and measured channels and is up year over year and ecommerce.
Europe net sales grew 6% and the court.
Organic sales were down 2%.
Volume declined three 5% and the quarter as we lapped strong shipments and a year ago period, which was driven by COVID-19 related demand and pantry loading.
Pricing was plus one 5% because we took pricing across all categories to help offset raw material inflation.
For launching equity campaigns across our core oral care Act with Colgate Merit al and Am Alex.
And we're excited about the launch of sand and microbiome, which Pat talked about a cat.
We delivered 16, 5% net sales and 11% organic sales growth and Asia Pacific.
Led by volume growth across our biggest markets greater China, India and the Philippines.
While China and India benefited from comparison that included COVID-19 related shutdowns in 2020. Our innovation continues to drive improved underlying performance, particularly in e-commerce.
Over the next several quarters, we will begin to roll out more premium innovation and brick and mortar and China.
Our Colgate enzyme whitening toothpaste.
Leveraging the success, we've had online and transforming our portfolio.
Africa, Eurasia and net sales grew eight 5% as we delivered strong organic sales growth throughout the division.
<unk> grew 5% and the quarter, while pricing was up 8%.
Foreign exchange was a 4.5% headwind.
This growth was led by our toothpaste and manual toothbrush businesses. Although we also delivered organic sales growth and personal and home care or.
Our business and Turkey delivered strong sales and market share performance and launched significant premium innovation and naturals charcoal and white.
He'll started the year with another quarter of strong net sales and organic sales growth despite lapping significant growth in the year ago period.
Developed markets led the growth, particularly in the U S, Canada and Europe led by E Commerce.
Emerging markets grew organic sales greater than 20% and the quarter.
Or a combination and volume and pricing growth.
We're very excited about our hills equity campaign addressing pet obesity.
This global campaign is leveraging digital in store and office and traditional media assets to drive growth and our weight control products across both our prescription and wellness businesses.
And now forgotten.
We still expect organic sales growth to be within our 3% to 5% long term target range.
As we think about our current.
Organic growth assumptions versus where we were three months ago.
And we're probably a little more cautious on developed market.
As you have seen from the scanner data our categories move negative more quickly than we had anticipated and we expect that to continue and the short term.
Hopefully this allows for some of the volatility to play itself out sooner and the air and we will see trends stabilized more quickly.
I mean into this year and categories, where consumption rose last year due to COVID-19, we expected 2021 consumption levels to be below 2020.
But above the levels, we saw in 2019.
That is the case, so far across our developed markets businesses, although year to date. These categories are slightly weaker than expected.
Categories like toothpaste, where usage did not spike in relation to COVID-19 should normalize more quickly as we move past some of the aggressive pantry loading and March and April of last year, and we're beginning to see that happen.
And in the scanner data has returned to growth and the last several weeks.
We're encouraged by how we started the year and emerging markets.
We saw broad based organic sales growth and our emerging markets across all the divisions.
And with a good balance of volume and pricing.
Comps will get more difficult as we go through the year, but we believe we have solid momentum.
Please note that given the widespread COVID-19 outbreaks and countries like Brazil, Mexico and India.
We could still see and impact from government actions to stem the spread of COVID-19 and other disruptions related to COVID-19 and this is not in our guidance.
Using current spot rates, we expect foreign exchange to be a low single digit benefit for the year.
Although slightly less favorable than when we gave guidance in January.
All in we still expect net sales to be up 4% to 7%.
Our gross margin guidance remains unchanged as we expect our gross profit margin to be up year over year and 2021 on.
And on both a GAAP and base business basis.
As we mentioned on our 2020 year and call.
Raw materials began the air moving higher and faster than we had expected.
This trajectory has continued through the first quarter as you all know.
We are still laser focused on driving our gross margin higher.
But the significant increase and cost across our materials based <unk>.
Obviously requires additional pricing and productivity.
Advertising is still expected to be up on both a dollar and a percentage of sales basis.
Logistics also continues to be a headwind, particularly in the U S where costs also have risen faster than anticipated.
We expect these costs to remain elevated and the near term, but tomatoe rate later in the year.
Our tax rate is expected to be between 23, and a half and 24.5%.
We point out that our guidance does not account for any changes and U S corporate tax rate given the recent change in administration.
On a GAAP basis, we still expect earnings per share growth and the low to mid single digits.
On a base business basis, we continue to expect earnings per share growth and the mid to high single digits.
The adverse moves in foreign exchange and raw materials, and moved up slightly lower and that range over the past few months.
But it is still early in the year and.
And with that I'll turn it over to Noel.
Thanks, Sean and good morning, everyone I'll keep my commentary briefs and so we'll have plenty of time for the Q&A I think the results for the quarter really speak for themselves.
And obviously, we're really pleased with our performance and the first quarter. Despite the significant volatility and headwinds we delivered strong results around the world and up and down our P&L.
And we've made progress on our strategic areas. We've been discussing we still have a lot to do and the balance of the year here are key priorities for the remainder of 2021.
Continue to drive broad based growth our priority share the same as we've discussed for the past several years, we need to grow volume and pricing, we need organic sales growth and every category and in every division and both emerging and developed markets.
In order to do this we will continue to ramp up our breakthrough and transformational premium innovation.
We delivered high single digit growth and toothpaste and the first quarter, despite lapping solid growth and the year ago period, which helped us drive high single digit growth and our oral care business.
And we're driving growth through innovation like Colgate renewal and the U S. Colgate enzyme whitening toothpaste in China, and our natural extracts line and Colgate total anti Tartar line and Latin America.
And Pat and I discussed at Cagny. You know this is a marathon not a sprint, but we're making good progress which will continue as we shift our resources continue to build new skills and even adapt how we motivate our teams.
Pricing is also an important element of growth and behind our revenue growth management efforts. We continue to drive strong pricing as we look to increase our price index versus the market as well as offsetting rising costs.
You're hearing about rising costs from every company this quarter and we're seeing inflation on pretty much every line of the P&L, but especially raw materials warehousing and logistics.
Actually our pricing plans are focused and we just discussed we're battling the cost inflation across the board. We're also driving savings through funding the growth and other efficiency initiatives, which helped to offset these headwinds and efforts and our new CFO is spearheading for US we do not expect these headwinds to abate anytime soon so we have to continue.
To invest in marketing and building capabilities for future growth, while delivering on our earnings guidance, we know we need to be disciplined and efficient and this area.
The third is maintaining our focus on building out the key pillars of our long term strategy, while simultaneously managing through all of the volatility.
And that includes building our capabilities and innovation E Commerce, digital and data and analytics progressing on ESG, including increasing our commitments on D E and I and advancing our 2025 sustainability targets.
And then also be navigating co returned to work for most of our office based employees.
We are building a team and a culture at Colgate that is focused on adapting and changing to this volatile world, we're embracing new strategies and new ways of working and it's paying off and we've had a good start to 2021 and we're looking to maintain our momentum through the rest of the year. So with that why don't I open up to questions.
Alright, thank you so much.
You would like to ask a question.
Excuse me.
Today's question and answer session will be conducted electronically for the telephone audience. If he would like to ask a question you may do so by pressing the star or Astra keep followed by the digit one on your Touchtone telephone and we also asked and if you were listening to the conference on the Internet and Thank you. Please turn down the volume on your computer speakers when asked.
Keith a question once again, if you'd like to ask a question press Star one we'll pause for just a moment to allow everyone an opportunity.
Okay. We will take the first question from Dara Most C D and with Morgan Stanley.
Hey, good morning, guys.
And there.
So can you give us an update on category growth rates and some of your key emerging markets is recycled COVID-19, obviously theres a lot of volatility short term, but I'm thinking more looking out longer term.
Just an update here on volume growth and and per capita consumption development opportunity going forward as well as any thoughts on pricing mix and trade up potential.
Is there anything changed here longer term more structurally as we think about the consumer and what are your strategies adjustments and obviously and won't be a monolithic answer. So maybe you can compare and contrast, some of the different emerging markets and and how that might be different.
Yeah. Thanks Dara.
Go back obviously it depends on the geography, and what we've talked about consistently I think is the volatility that we're seeing all over the world and and highly dependent on how countries are treated and dealt with COVID-19 and the rate of incidents and those countries. Obviously, if you start with Asia. The categories are coming back although still not bad.
Back to where we were pre COVID-19 due to some of the store closures and we continue to see across Asia, particularly China and southeast Asia coming back in terms of category development standpoint and that.
Based on the fact that particularly in China do you see the COVID-19 issues being put to rest and consumers returning to some level of normality.
Thailand continues to be a challenge and you've heard I think consistently from others that that market highly dependent on tourism. So it's impacted that category and.
We won't talk a lot about India, as we Havent announced yet, but suffice it to say that they had easy comps from last year from a category standpoint, but you're starting to see those numbers come back quite nicely and moving on to Latin America again. It was surprisingly we've seen it very resilient Latin America, particularly our business there in terms of where our wish.
And the category playing out toothpaste and starting to come back although it started off quite slowly, but we've seen particularly and the recent readings and the category and returning to growth which is good.
Africa continues I think to perform okay. I think Africa is a real uncertain environment right now relative to.
The rate of vaccinations and that are in that geography, so that will have an impact, but if you take that holistically across emerging markets I think the important air area. Here is that obviously those markets were from a GDP standpoint severely impacted and 2020 as you see oil prices come back those tend to benefit and emerging markets and that will.
Lay out and higher GDP. Some inflation, obviously allows us to continue to take pricing and those markets and I think as you see the rate of vaccinations increase those markets are likely to come back quite nicely, particularly in the back half of this year, you know from a pricing standpoint consistently across all emerging markets, we've been able to take strong.
Pricing given the strength of our businesses and that really started back in 2020, and you've seen the competitive environment is obviously, having to offset a lot of the raw material inflation that we've seen taking pricing, which has allowed the emerging markets to take it a little bit more value and their categories and and clearly there from a per cap standpoint, we continue.
To be investing and our per capita programs, particularly across Africa parts of Asia, and Latin America, and that is consistent and I think that and margin growth that we've had has allowed us to continue to invest in areas like per cap, which we think obviously bode well for the long term.
And we will take the next question from Lauren Lieberman with Barclays.
Great. Thanks, good morning.
And I was curious if you think and I know pricing obviously is a key part of your strategy now that I was particularly intrigued by the pricing in Europe. This quarter I know it was discussed is in relation to cost inflation, and maybe a little bit less on the side of the longer term strategic.
Revenue growth management initiatives and but.
And I was just curious because you know the ability to get pricing through in Europe, even from a consumer from a competitor standpoint is pretty notable and I believe one of your large H P. C and food player. This week talked about and actual a tougher pricing environment in Europe. So I'd love some more color on that if possible. Thanks.
Sure.
Two things I think the <unk>.
Rice and environment and Europe, historically has been extremely difficult as we all know.
And that being said if you go back to a lot of the strategies that we've been putting in place around revenue management, which is a discipline that we're really trying to embed.
Across broadly across our commercial organizations, we're finding ways to get pricing into the P&L, particularly if you are how we manage gross to net.
Also in Europe is the strength of the <unk> brand. So obviously merit, all and <unk> been strong premium brands with a strong brand loyalty allow us to take more aggressive pricing and those markets and we've been disciplined to do that on a pretty sequential basis across that continent. So that has obviously played nicely through that.
And now so I'd say, a combination of revenue growth management discipline, and really taking hold more work to do to be sure and some of the strength of our toothpaste equities in that region, which have allowed us to take more pricing and to a certain extent as we saw more lockdowns early on and the year. The promotional environment was probably a little bit more benign.
And but we've anticipated that will continue to accelerate as our store traffic increases and the back half of the year.
All right once again that is star one if you would like to ask a question. If you find your question has been answered you may remove yourself from the queue by pressing star to we will take the next question from Andrea Teixeira with J P. Morgan.
Hi, Good morning. Thank you I just want to go back to the pricing.
Comment.
I think what do you what you said, obviously, it would have being able to price and inflation and some of this country's any particular, you sound and Noel you sounded very positive about Latam.
Do you think you can still pull those levers.
And there and and and to to John's comment before like if you if you have to.
Take more pricing and some places is that like you're trying to price to inflation and so that he can go into the into the guidance because the two out their census is at the end of the prepared remarks and flight is if you're not tracking to the high end of your guide you were tracking more at this point until the lands to what it would take you to the high end of the EPS guidance.
Yeah, Yeah, two aspects to talk to there is obviously there.
Theres two applications and how we think about pricing there is the foreign exchange aspect, which obviously moves through transactional it into the margin line and we tend to try to offset that and there is obviously you think commodity inflation that we see locally and the markets and we obviously look to to gauge our price increases based on where the market is and what the.
Tumor will bear.
Take a step back for a minute is the strength of our brands I think and emerging markets that have really allowed us to do more on the pricing line you talked about Latin America. If you go back last year and Latin America.
Took nine 5% pricing and the third quarter at nine 5% pricing and the fourth quarter and I think and even if you look at it across emerging markets. It was getting ahead of some of the price.
And environment that we have occurred that raw material pricing environment. We've seen this year. So as you build that pricing into your P&L. It really set us up for strong growth on the pricing side and 2021, we've continued to take pricing as we've seen and elevated pricing and inflation environment around raw and pack and that's allowed us obviously to do.
Deliver the gross margins and the quarter. So again, we continue to look at the marketplace as I mentioned earlier, our competitors are facing the same level of inflation that we are and as a result that environment versus just foreign exchange and creates a healthier environment to take pricing, particularly in emerging markets.
Okay, and we will take the next question from Jason English with Goldman Sachs.
Hey, good morning, guys.
Thank you for slipping me in.
So I.
And I guess I'll come out to the gross margin questions and military.
Pushed into and it yet.
And the inflation rate this quarter 310 bps drag and it's almost 8% year on year Cogs inflation.
Is it safe to assume that that number should escalate as we progress through the year.
And assuming that's the case, which I think seems to be a reasonable assumption.
And what are the offsets that will escalate and kind to try to help you still get gross margin expansion in this environment, which would truly be phenomenal.
Or are we looking for more productivity that is typical and the year price continuing to climb or are there other offsets we should consider.
Yeah, Thanks, Jason and I think we would anticipate as we've built into our guidance that cost will continue to remain inflated as we move through the year and as we start to lap some of the increases that we saw later in the back half of last year. It will become a little bit more benign in that regard a couple of things obviously continued to be highly disciplined.
About taking pricing and taking it quickly and that will continue to be the case, we've got to be courageous and holds in that regard obviously, we watch that carefully based on what's happening and the local marketplace, but just straight price increases will continue to be an important element of that as we look at the back half of the year. The revenue growth management aspect, we've I've referred to a couple of times.
That is an important discipline that we really need to embed across our organizations and I think we've seen some fruits of that at least last year and coming into the first quarter. This year. So that will continue to happen. The other important aspect to look at is if you look at the mix of our business last year, we saw a significant lift from some of the lower.
And margin categories. It was driven by COVID-19, so things like bar soap and liquid hand soap as oral care begins to normalize and the category returned to historical trends that will certainly help from a mix standpoint, Likewise, our professional health business, which obviously was significantly impacted by closures.
Although that business is starting to come back quite nicely, it's still not back to where it was from a store opening standpoint, as well as travel retail and as that continues to unfold through the balance of the year that will likewise.
A bit and obviously as foreign exchange, we talked a little bit not we've seen the benefit we initially anticipated, but still somewhat of a benefit that will ultimately help through through the P&L. The other aspect I would say, Jason is moving and getting volume moving through the P&L and the back half, obviously, you're taking pricing allows us to support the advertising and innovation, which.
Critically important and we've always said that as part of our strategy and make sure we get the margin to support the advertising and the investment and that will obviously bode well for the pricing that we see and the back half of excuse me and the volume that we anticipate to improve and the back half of the year.
And the next question is gonna be from Chris Carey with Wells Fargo Securities.
Thanks, Chris.
Hey, good morning, how are you.
So and.
And if we're not mistaken this is the best two year stack and hills.
I guess and like 20 years and so.
And I want to understand just how.
You view the sustainability of consumption trends in the business today, whether you think.
There are incremental distribution opportunities.
Pet ownership has increased or if you're just gaining market share. Obviously this one is a little bit harder for us to track.
Given the channels and which it says but basically the concept here is.
It's quite a bit of momentum and just wanted to get your thoughts on sustainability and what you see as the opportunities going forward. Thanks.
Yeah, Thanks, Chris and clearly really really happy with the progress because it really underscores and gives us confidence and our strategy, 7% organic on 'twenty.
Comping 20 last year is terrific. So a couple of the aspects that excite us relative to the category one.
You mentioned that the pet ownership is up.
And annuity quite frankly for the category.
Pet ownership increased obviously, those pets need to be fed and that will ultimately play back and the dynamics of the category moving forward.
Second is the aspects associated with our business low penetrated business for Hill's low brand awareness business for Hill's so that again underscores and underpins the strategy that we have continued to increase investment continue to drive core innovation and continue to drive premium innovation on the prescription diet, particularly as we see consumers return.
<unk> into the vet space or returning to visit their bets that will oversee bode well for the prescription diet business, but again tough comps moving forward to be sure, but the business has real momentum not only in the U S, which continues to perform exceptionally well, but emerging markets. Likewise had a terrific quarter and a lot of <unk>.
Space, there for us, but we're being very methodical and thoughtful on how we generate this growth. We're looking for long term sustainable profitable growth building, the brands and markets and doing that the right way and we have the momentum to do that and the flexibility and the P&L. Obviously, we've seen some rising prices on agricultural.
Commodities and we need to take some pricing as we did but overall the health of the business underscored by pet ownership although.
<unk> brand awareness and penetration that we have gives us confidence that we can continue to drive this business forward.
All right and your next question comes from Wendy Nicholson with Citi.
Hi, good morning, and.
Hey, Randy to housekeeping Hi.
And the plants in India.
I think correct me, if I'm wrong, but I think that there's a fair bit of export business throughout the rest of the region. So just wondering.
If you're worried about that if you think there could be any disruption there you should be getting people to the plan I know you don't want to comment on the operations and just thinking about your business in the region and whether that plant is still a big deal from an export perspective, and if there could be any pressure from the outbreak right now, but then my other question is you haven't talked much about the skin care business.
And I'm just wondering.
Sort of Big picture, how are how are trends there again apart from COVID-19, but I know you were going to distribute.
And distribution for example, and China, how is that going how are you feeling about the prestige skin care business et cetera, et cetera, if we could just get an update there. Thank you.
Sure. So obviously.
Concerned about India, obviously, given what's going on with the case counts and the country.
That being said you've heard us talk time and time again for the last 15 months that are the health and safety our employees and employees remains number one we have taken significant precautions.
<unk> across India to ensure the health and safety of our employees is there and with those efforts. We're pleased to say that we continue to operate all of our plants and India with no disruption our most significant plant there a good percentage of the employees have been vaccinated.
Which is terrific and we're seeing obviously the performance of that plant relative to not only India for the region.
<unk> continued to deliver our guest expectations that being said we can't control.
Whatever the government decides to do in terms of further lockdowns.
But at this stage.
The plant is being run extremely well and the business across the region is benefiting from and from.
And that capacity.
Relative to the professional skin.
Obviously, you had a tough tough year for professional skin, particularly given the channels that we're focused on whether it be spas.
Dermatologist or or a travel retail, but all of those businesses are slowly coming back and we saw good performance of the skin health business and the first quarter and fact that business was up double digit we're seeing a return to offices and the foot traffic going back and the professional space.
Increasing month in and month out obviously not back to where we were pre COVID-19, but the trends are positive and particularly across North America. The one outlier is obviously still the travel retail business in China, while travel retail has moved and internal to China.
The real travel retail historically, which was a good part of the business has not returned and we expect to start to see that loosen up a bit and the back half, but again, we spent a lot of time and 2020 building capabilities and really learning the business getting the innovation profile right to set us up for good growth and 2021.
Okay and your next question comes from Kevin Grundy with Jefferies.
Great. Thanks, Good morning, everyone. No. My question. This morning relates to profitability and your North America business.
Sales growth clearly under pressure cycling some difficult year over year comparison, so you have volume deleverage higher commodities logistics and supply chain issues, but nevertheless, it was a low watermark for segment margins and a very long time. So it's been a lot of discussion on pricing, but I wanted to at a more granular level talk about what percentage of your portfolio.
In North America, specifically and the U S. Really do you think that you can cover through pricing what has already been announced to retailers and the environment here certainly seems a lot more amenable currently than it had been even just a few months ago for obvious reasons here in terms of retailer receptivity and then just sort of rounding it out what should the <unk>.
Market expect in terms of margin recovery here and this segment for the balance of the year. So thanks for that.
Sure.
So we kind of experienced the perfect storm and the U S and the first quarter, obviously the category expectations that we had declined more than we anticipated faster and deeper quite frankly on top of that we obviously saw a significant increase in raw materials more than expected.
Third and this was the biggest piece versus our expectation it was logistics.
Two issues, there, obviously the capacity and cost of logistics broadly across the U S have gone up.
Quite significantly and that was exacerbated by a specific event that we had and a warehouse that we were opening up.
And had some transition issues associated with that that compound and our cost so with that.
And the warehouse issues are quickly moving behind us.
Service levels are quickly returning to where they were but it has certainly had a short term impact both from a sales standpoint and market share standpoint, and importantly from an operating margin standpoint that being said and if I characterize a little bit about what's going on and U S. I mean, the categories. We're quite concerning obviously moving through through the March peer.
<unk>, where we saw significant declines more than we anticipated.
But the silver lining here I think on North America, as we've seen categories and the last two weeks come back nicely and fact, particularly around the toothpaste category, which is rebounding up double digits and the last two weeks, particularly as we see store traffic and foot traffic return to stores, we've got a good innovation pipeline planned and.
And you saw we've maintained our support which we think is extremely important to continue to obviously drive volume and share and the back half and we're laser focused on logistics and raw material costs relative to pricing again revenue growth management, we're not going to <unk>.
Talk to our plans on price increases at the side, but it's a market where everyone is certainly looking at that aspect very very closely and I anticipate that you will see more price increases across the sector given the headwinds that everyone has faced in this space, but again.
We are focused on this I think the team has got a good handle of what's going on and get the service issue behind us, which it has and will move forward Q2 will continue to be a very difficult comp for the U S. As you saw last year, we had significant growth in Q2, as well and so that will be a difficult comp, but it'll be dependent highly and where the categories and up as we move forward.
All right and we'll take the next question from Steve powers with Deutsche Bank.
Hey, thanks.
And we've talked a lot about pricing and you just mentioned again there are no I guess.
I'm thinking about the context of your and your underlying strategy.
The mix shift towards premium innovation.
And in light of the uncertainties that you called out on emerging markets and some of the volatility we've seen in developed market category trends and just.
Just the notion that there is inflationary pressure building on the consumer shopping basket.
The only and your categories, but but more broadly does that does that impact at all and what you anticipate in terms of consumer appetite for that premium innovation that you're bringing to market, especially if the prices associated with it are going higher.
Just curious.
How youre thinking about that whether those considerations vary at all by region or across categories and whether it's impacted at all how youre choosing to prioritize investments over the balance of the year.
Yeah.
Yeah. Thanks, Steve No no. It is not distracted us from our strategy premium innovation continues to be a very important element, we've talked a lot with with you regarding our refocused orientation on innovation and between <unk> and H three.
Very much focused on the aspects of H, one and H, two which are premium brands and if you look at the growth of oral care and the first quarter, particularly toothpaste a good percentage of that came from our premium position strategy and I'll give you a good example.
Good shares and Brazil, holding share is despite a pretty competitive environment, our premium business and Brazil alone was 28, 7% of our business roughly I think and 2018, it's up to 30% of our business year to date, and it's up 120 basis points.
Versus last year, so a good indication that.
Mark showed that the Colgate tar to control some of the natural extracts bundles the launch of <unk> and the market. There those are important initiatives to continue to close our index and we still have a ways to go to close the index that we've talked about so premium <unk> and will continue to play and I don't think quite frankly, even though some of these markets will be under pressure.
Economically the fact that we have innovation across all of our price points and historically, we play very aggressively both in the opening as well as the mid price. We think we have the ability to leverage our portfolio effectively as we see the economic circumstances change, but again premium position will continue to be a focus you saw.
And Asia.
Particularly where we're launching and leading with premium innovation and our online business and in Asia. Our online business continues to grow I think it was up over 200 basis points a year to day. So again supporting the fact that the premium position and strategy is working and we will.
<unk> be agile relative to how we see the market evolve and need be we will play more in the mid and openings should that be necessary I think what's importantly, as we get more and more consumers back into stores. Historically that is where we are we have performed so well and our ability to generate more volume and pricing.
Opportunities as consumers track back into and to the shopping environment bodes well, but that being said I'll also share our ecommerce business continues to perform exceptionally well that was a big growth driver for our business coffee and a difficult number last year. We continued to show strong growth and our share is a pretty consistently up across the board and the online environment.
And we will take our next question from Bill Chappell with <unk> Securities.
Thanks, Good morning.
Good morning.
Does that does that.
And around kind of capital allocation and any thoughts there now for years and company had a pretty steady share repurchase program, that's kind of faded over the past two three years M&A activity seems to be really picking up within the industry as everybody's kind of.
Looking for a new home as we get into 'twenty, 'twenty, one and any kind of changes to the thought process over the next year.
No actually no I mean, our strategy continues to be very consistent with what we've articulated and the passion and reinvesting in the business with our high ROIC that we have we continue to see real opportunities to invest and capacity and cost saving projects around the world and that is indeed exactly what.
We're doing so.
And so that will continue to be our priority. Obviously is M&A comes available and we've been conservative and in that regard, we'll be selective about which is we see some strategic gaps in our portfolio and we may look to bring and bring those in but right. Now we're very focused on what we have and the current portfolio. We think we've got significant.
And he is still to expand and and really build our skin health business out the way we want to we've got the Halo acquisition coming in and obviously some of the challenges that the natural segment experienced particularly in North America, and getting those behind us and moving forward with the expansion of that brand around the world. So we're focused on what we have and then obviously.
We'll continue to pay the dividend and we've increased share buybacks. This year as we had outlined.
And our guidance.
Coming out of 2020, when we were paying down the debt. So that comes back to historical numbers. So no real change there we continue to be very flexible as we see opportunities and maintaining a strong balance sheet.
<unk> to be of Paramount importance to us.
And the next question is from Mark Astrachan with Stifel.
Yes, thanks, and good morning, everyone.
Hmm.
And I wanted to ask about.
AD spend and and.
And market share. So AD spend has grown ahead of sales since at least 2018, how long does that continue and.
And where does it normalize as a percentage of sales and I guess related to that.
Does <unk>.
Market share factoring into that thinking, especially given and the numbers that you disclose and the releases around what has been sustained share loss and oral care.
And especially now that FX is favorable as well as the commentary earlier on the call about the importance of the categories and gross margin so and maybe if you could tie that in together and would be helpful.
Yeah, we don't have a specific target in mind for advertising. There's so many inputs that go into thinking about how and where we spend money we are being more strategic on where we spend our money.
That is underscored by the innovation strategy that we've outlined relative to particularly premium position, which and our view requires the right level of advertising to seed it and.
So as a result of that there's not a specific number we're looking at I think the most important aspect for US is continued sustainable profitable growth and you've seen that now quite consistently over the previous couple of years and that's the barometer. We're holding ourselves to is to continue to drive that top line. We obviously now have the ability as we should.
More and more money into digital to really assess the performance of that spend and that makes the economics and efficiency of our advertising that much better as we think about how we want to spend and where we want to spend and so we as we see the opportunities unfold as we see the plethora of brands and innovation that we have.
To support will continue to put money and advertisers, we're seeing a return on that investment and I think you've seen that it's all kind of obviously linked we've got premium innovation driving gross margin that puts more dollar dollar margin into the P&L and then ultimately transfers into better advertising more advertising support more capabilities and more EPS and so.
It's a balance across all of it there's not one specific goal were looking to achieve and I think we're getting better and putting our advertising, where we see the right returns and being selective both from a category and geography standpoint, and how we do that hills is a great example of that you know, we've obviously deliberately and strategically put more money and.
To that business and you've seen the payback on that quite clearly.
All right and your next question is from come Oh, Gosh, a wallet with credit Suisse.
And.
Hey, everybody. Good morning, I know you just mentioned and a lot of inputs that go into one where you spend your money as you did you kind of thinking about coming out of COVID-19 and you think about your.
The various divisions and the various pieces and your portfolio and has anything changed in terms of.
Where do you want to deploy capital and and maybe specifically to talk about are you thinking about the cleaning side any differently, maybe there's other parts of the business you might be thinking about differently.
Doubling down on Hill's for example can you maybe just talk about what has evolved a little bit now that we're on the other side of this and likely on the other side of this.
Yeah, and without getting into too much detail.
We've spent a significant amount of time looking at our 2025 strategic plan and.
And in that strategic plan I think what's very notable and a different forces making tough choices.
And we're going to invest our money and rather than being somewhat democratic and that process, we're being much more strategic and not only where we spend our money in terms of geographies, but the categories that we spend our money against and.
And as a result of that coming out of COVID-19, we're going to continue to be laser focused on executing against our strategy and that involves us taking money and putting it where we think we're going to get the best return through the P&L on that.
And it's building businesses and geographies that we believe will deliver long term sustainable profitable growth. It's building businesses that have the right demographics and category of opportunity in terms of growth potential for them.
And obviously, making sure that the mix of our spending and and the mix of our innovation and continues to be premium eyes, which requires an investment and you couple that with obviously the need to continue to support a lot of that organic stuff that we do on the market. We talked about per capita consumption programs.
As a result of.
Our focus on education and doing things of that nature. So all of these aspects are critically important to driving the investment strategy. So to speak. So again, it's just built on a I think a well thought through strategic plan, it's anchored against making good choices.
Where we want to spend and certainly as we see the categories unfold and the back half of the year, we'll continue to allocate accordingly based on where we see the best growth opportunity.
Once again, and if you would like to ask a question or if you have already asked one and I would like to ask another please press star one to enter the queue. The next question is from Rob and Stein with Evercore.
Great. Thank you. Thank you very much just first just to kind of a detailed question I'm sorry, I missed it your corporate expenses.
We're a good bit higher.
And then I think most people modeled.
Was that did that has to do with the warehousing.
Issues that you referenced.
And and if so how much of it was related to that or what other sorts of investments or are you doing there and then second you mentioned that in general Youre, gaining share and e-commerce.
Can you just kind of give us a little bit more detail in terms of the percentage of the business, that's and e-commerce, maybe detail and the growth rates and the U S China Europe.
Just a little bit more granularity would be terrific. Thank you.
Sure. Thanks, Rob.
And the corporate side actually when you look at the SG&A line that was driven by <unk>.
Logistics and advertising. So if you strip out just our corporate fixed costs, our corporate fixed cost pleasingly, we're actually down in that equation. So I think a lot of the productivity initiatives.
We're focused on across the P&L and managing cost actually delivered.
Our fixed cost reduction and the quarter, which was terrific to shape moving onto specifically E. Commerce I mean, obviously the growth numbers are terrific across the board relative to our focus there and as you look at market share increases we've seen those and North America, we've seen those and Hill's we're seeing knows and Asia quite nicely.
We're seeing those and Latin America and in fact I got some.
And some India numbers that look outstanding so again, where we're focusing time and effort and certainly putting the investment there we're seeing and a good return on that and I think that bodes well as we continue to see the growth of E. Commerce, we exited the year at double digit on e-commerce and that number.
<unk> has accelerated in the first quarter. So I think the focus and strategies we have in place.
<unk> continued to be.
And to be well received and the marketplace I'll give you one data point.
We're up 260 basis points versus the first quarter last year on a percentage of sales on our E. Commerce business. So again I think it is growing quite nicely and.
And importantly, driving our market share and new users into the franchise.
Thank you Mr. Wallace. It appears there are no further questions at this time.
Okay, well, thanks, everyone and so that's obviously concludes our call and again, we're really pleased and how we started the year and we've got a lot to do and we're excited about what's ahead of us, but there's no question a lot of volatility and challenges, but we've got an incredible culture at Colgate and our entire team of three or 4000 people are.
Deeply focused on delivering strong results and while ensuring that we continue to adapt to a rapidly changing environment and when and the futures I just want to thank everyone for their continued support on our business and look forward to talking to everyone very soon thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
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