Q3 2021 Colgate-Palmolive Co Earnings Call

Please standby were about to begin.

Good day and welcome to today's Colgate Palmolive Company third quarter 2021 earnings conference call. This call is being recorded and is being semi class live at Www Dot Colgate Palmolive Dot com now for opening remarks, I would like to turn the call over to Chief Investor Relations Officer.

John Boucher. Please go ahead John.

Thanks, Jennifer good morning, and welcome to our 2020, one third quarter earnings release Conference call. This is John <unk>, 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 fab.

Or is that could cause actual results to differ materially from these statements.

This conference call will also include a discussion of non-GAAP financial measures, including those identified in tables, eight and nine of the earnings press release.

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 stands the Tula Chief Financial Officer.

I will provide commentary on our Q3 performance as well as our latest thoughts on 2020, one guidance before turning it over to Noel to provide his thoughts on how we will continue to deliver on our growth trajectory.

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.

Our focus on innovation premium innovation pricing and productivity allowed us to deliver solid Q3 and year to date results. Despite a very difficult operating environment.

We continue to deliver against our targets because we are executing consistently on our strategy nor laid out at cagny back in 2019.

We are focused on delivering consistent sustainable profitable growth, both volume and pricing growth growth in all of our categories growth in all of our divisions emerging and developed markets.

And this has enabled us to deliver 11 straight quarters with organic sales growth in line with or above our long term target of 3% to 5%.

This is despite very difficult comparisons and a challenging operating environment.

The current operating environment is challenging in many different ways.

<unk> mobility is limited in many markets, particularly in Asia due to government restrictions to stop the spread of COVID-19, which is having a negative impact on category growth.

These restrictions have also led to temporary closure of manufacturing facilities across many industries as you've heard in the news and from other companies.

We are not immune to these restrictions, although given the essential nature of our categories. We produce products that people in their path to use on a daily basis can lead healthier lives, we have been able to resume production throughout our network, although sometimes at a lower than normal level.

This did have a slight impact on sales in the third quarter and we expect a modest impact in the fourth quarter as we ramp production back up.

We are fortunate to have a flexible and resilient global supply chain. It has helped us to offset some of the effects of the supply chain challenges, albeit sometimes with additional logistics costs.

Speaking of logistics the stress on global logistics networks is creating shortages of raw materials, lengthening shipment times, increasing costs and adding additional uncertainty.

All of this is on top of the significant increases in raw material costs and continued movement in foreign exchange.

These challenges will continue into next year.

We will continue to meet them head on.

Our net sales grew six 5% in the quarter driven by four 5% organic sales growth and a 2% benefit from foreign exchange.

Our organic sales growth in the third quarter was led by oral care, where we were up mid single digits and pet nutrition, where we were up double digits.

We delivered organic sales growth in home care, despite a difficult comparison, which puts our homecare business at double digit growth on a two year stack.

As expected organic sales in personal care declined mid single digits as we lap the COVID-19 related growth in liquid hand soap in the year ago period.

But sales remain above 2019 levels.

We grew volume one 5% in the quarter.

Pricing grew 3% in the quarter up sequentially from Q2, despite a more difficult for 5% comparison.

As we continued to layer in new pricing to try to offset accelerating raw materials costs.

<unk> was up in every category and every division.

Raw materials continued to increase in Q3, putting further pressure on our gross margins, despite additional pricing and productivity efforts.

Our gross margin was down 180 basis points in the quarter.

Pricing was a 110 basis point benefit to gross margin.

Raw materials were a 510 basis point headwind.

Despite a slight benefit from transactional foreign exchange.

Productivity was favorable by 220 basis points.

On a GAAP and base business basis, our SG&A was up 50 basis points on a percent of sales.

Driven by significant increase in logistics costs as advertising was up on a dollar basis, but flat on a percent of sales basis.

Excluding logistics and advertising, our overheads were down slightly on a dollar basis and down nicely on a percentage of sales basis.

We continue to increase our investments in capabilities like digital e-commerce, and data and analytics, but this was more than offset by sales leverage and tight expense controls.

For the third quarter on a GAAP basis, our operating profit was down 5% year over year, while it was down 3% on a base business basis.

Our EPS was down 7% on a GAAP basis, and up 3% on a base business basis.

A few comments on our divisional performance.

Net sales in North America grew 1% in the third quarter with organic sales growth of <unk>, 5% and 50 basis points of favorable foreign exchange.

Volumes were flat in the quarter. Despite a negative nearly 400 basis point impact from lower liquid hand soap volumes.

While pricing was slightly favorable.

We made significant progress on our North American business in the quarter with solid oral care growth driven by mid single digit growth in toothpaste, which led to improved toothpaste market share performance through the quarter.

Personal care and home care were both down as we lapped COVID-19 benefits in the year ago period, Although LTE M D and PCA skin delivered strong growth in the quarter.

North America operating margins were negatively impacted by raw materials and higher logistics costs.

The impact of plant closures on our global supply chain required us to incur additional airfreight charges to fulfill customer orders in the quarter.

We also incurred some additional manufacturing costs in the quarter that should help improve the long term profitability of the division.

Latin America net sales were up 11%.

With 8% organic sales growth and a 300 basis point benefit from foreign exchange.

All three categories delivered organic sales growth in the quarter.

With oral care organic sales growth in the high single digits.

Volume was plus two 5% in the quarter, while pricing was up five 5%.

Brazil, and Mexico led the growth in the quarter, while Colombia delivered double digit growth following last quarter's political unrest.

The natural segment continues to be a key driver of growth for us across Latin America.

Particularly colgate natural extracts charcoal.

And we recently launched Colgate zero toothpaste in Brazil.

Our strong Latin American pricing growth highlights the success of our revenue growth management program with a combination of list price increases premium innovation and trade promo adjustments.

Europe net sales grew 1% in the quarter with organic sales minus 1% and foreign exchange, adding 2%.

Volume was down 1% and pricing was flat.

Oral care organic sales grew high single digits, while personal care organic sales were down sharply driven by difficult liquid hand soap comparisons due to COVID-19 related consumption in the year ago period.

And a decline in Florida duty free sales.

Colgate Elixir toothpaste continued to drive growth in the quarter, along with strong contributions from Amex and marathon.

Asia Pacific net sales grew 1%.

Organic sales declined <unk>, 5% in the quarter with volume down slightly and pricing and foreign exchange both slightly positive.

Oral care saw low single digit organic sales growth in the quarter.

While personal care and home care were down due to difficult COVID-19 comparisons.

We did see a government imposed mobility restrictions negatively impacting category volumes in several markets, including many in southeast Asia.

India and the Colgate, China business, both delivered strong volume growth behind robust innovation and they argue that segment in India and in E Commerce in China.

Our holiday and Haynesville JV saw significantly improved performance in Q3 versus Q2 with trends also improved sequentially through the quarter.

Africa Eurasia net sales grew 1% in the quarter with organic with an organic sales decline of 1% lapping.

Lapping double digit organic growth in the year ago period.

More than offset by a 2% positive impact from foreign exchange.

Volumes were minus four 5%, while pricing was plus three 5%.

The organic sales growth decline in the quarter was driven by personal care as we lapped double digit growth in the year ago period, due to COVID-19 related demand and pricing.

Oral care organic sales in the quarter were flat as disruptions in the global supply chain had a negative impact on product availability.

Hill's strong growth continued in the third quarter with 20% net sales growth and 19% organic sales growth with.

With strong growth in both emerging and developed markets.

Organic sales growth was driven by double digit volume growth and high single digit pricing.

Through list price increases and our premium innovation strategies.

Our focus on the microbiome, which Pat British <unk> talked about during our Cagny presentation. This year continues to pay dividends.

With the active biome plus technology.

Including in Hill's prescription diet, gastrointestinal biome, and Hill's science diet perfect digestion.

Both of which are driving sales growth and share in this important segment.

And now for guidance.

We still expect organic sales growth for the year to be within our 3% to 5% long term target range.

As I mentioned previously we have seen an impact from government actions to stem the spread of COVID-19, including reduced consumer mobility and supply chain interruptions.

We are managing through these issues, but we would expect modest headwinds from this to continue in the fourth quarter.

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 July.

Please note that at current spot rates foreign exchange would have a negative impact on Q4.

All in we still expect net sales to be up 4% to 7%.

Given the continued pressures from raw materials, we are projecting a greater decline in gross margin than when we last gave guidance in July.

Fourth quarter gross margin is expected to be roughly in line with the third quarter, although the raw material situation remains very difficult.

We continue to take additional steps to mitigate the impact of these cost headwinds, including additional pricing optum.

Optimizing trade spending.

Accelerating FTE were available and many others.

We are focused on recouping the gross margin we have loss due to cost inflation over time and are planning to take the actions necessary to do so.

Advertising is still expected to be up on a dollar basis, but flat on a percentage of sales basis.

Given the issues surrounding logistics networks on a global basis, our logistics costs will continue to be a headwind, particularly in the U S and Africa Eurasia.

Our tax rate is now expected to be between 22% and 23% for the year on both a GAAP and base business basis.

On a GAAP basis, we still expect earnings per share growth in the low to mid single digits and as we said on the second quarter call towards the lower end of that range.

On a base business basis, we continue to expect earnings per share growth in the mid to high single digits again, we would expect to land at the lower end of that range.

And with that.

I'll turn it over to norm.

Well, thanks, John and good morning, everyone. So what I take away from our performance both in the third quarter and on a year to date basis is that we continue to make good progress on our strict strategic and operational journey. Despite the significant volatility we aren't counting across our entire business.

At the heart of this is our strategy to deliver broad based sustainable profitable growth every division every category, both volume and pricing, that's our aspiration and over the past few years, we have changed our mindset about how we drive growth we're more proactive in attacking the opportunities for growth I think core premium.

She's faster alternative channels and markets and of course, we've talked a lot about building capabilities I think digital data E. Commerce innovation. All of these are helping US mind these important areas of growth.

While lapping our most difficult comparisons in over a decade, we've delivered organic sales growth at the high end of our long term target range of 3% to 5% and on a two year basis, both pricing and volume growth increased sequentially in the quarter.

Importantly, this growth is being driven by our two most important categories oral care and pet nutrition.

All care organic sales were up mid single digits in Q3 against the mid single digit comparison and a high single digit year to date, we're driving this growth through more impactful innovation.

Our growth in faster growth channels like e-commerce, and pharmacies and hire more efficient marketing spending.

Our premiums Asian strategy is paying off with our focus on breakthrough and transformational innovation changing how we interact with the people who use our products.

A great example of this is how we've changed our approach to widening in U S. You are familiar with optic white renewal, which has done incredibly well outside the U S. The story needs to be more about just hydrogen peroxide levels in China, it's about enzyme based whiting and other markets, we have whitening products targeted towards consumers, who love T.

Coffee or consumers, who love wine or tobacco.

We're targeting a widening opportunity much more broadly with new technologies formulations and delivery systems, expanding our growth potential.

Pet nutrition organic sales growth was up 19% in the quarter against an 11% comparison and is now up 14% year to date through quarter three.

This growth is driven by Hill's science based equity messaging behind our core it's driven by meaningful premium innovation and the continued expertise of our digital and e-commerce teams the.

The launch of prescription diet derm complete those breakthrough therapeutic nutrition for both food and environmental sensitivities has led to share gains in the category and has been rolled out internationally over the next few quarters Hills.

His goal of ending pet obesity, where studies show with 50% of pets are overweight as the emphasis for our Hill's Master brand campaign. This campaign has been rolled out globally and has driven growth in both our therapeutic and wellness anti obesity products.

And this type of environment, we couldnt delivered the results without this year without the amazing work done by Colgate people every day our.

Our customer development organization is reacting quickly to the changing cost environment. So we can take pricing as part of the revenue growth management initiatives.

Marketing and R&D are working together to accelerate the launch of premium innovation to drive mix and profitability in.

And most importantly, our global supply chain team has delivered these results despite freight and logistics disruptions plant closures congested ports and supplier outages.

Importantly, all of the efforts we have put into building capabilities over the past few years is not just about driving growth. It's also about creating an organization that can respond more rapidly to all of these challenges we face around the world. For example, our focus on data and analytics is helping our revenue growth management program pinpoint the best opera.

Two needs for incremental pricing as costs continue to rise we're getting this pricing out in the market more quickly and the data that drives that process gives our people on the ground more confidence in their decisions.

Our investment in E Commerce, and digital marketing continues to pay off in our six largest e-commerce markets for oral care. We finished the third quarter with year to date net sales already ahead of 22 net sales 2020, net sales and toothpaste share growth in five of the six markets.

We've implemented new media buying strategy to drive efficiencies, both online and offline and launched a four tier training program to enable 14th.

Our employees to help drive our digital strategy.

But as I've said the key to all of this is that we recognize that the strategy is working and while we address the pressing issues of raw materials logistics and supply chain, we can't lose sight of our long term areas of focus.

Our innovation calendar for 2022 will show an increase in the percentage of innovation that has breakthrough and transformational we've announced our new sustainability and social impact strategy. This year, which includes 11, new targeted actions in areas like zero waste climate change using less plastic as well as bright smiles bright futures and our <unk>.

<unk> equity and inclusion efforts and we will continue to build our people and capabilities through new ways of working that are truly changing how colgate people do their jobs.

2021 has been very challenging year for us and many of these challenges will continue in 2022, but I am confident that out of the changes that Colgate people put in place over the past several years, which will allow us to continue to deliver our goal of sustainable profitable growth and now I'll open open it up for questions.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for quest.

Jens.

And we'll go first to Dara <unk> with Morgan Stanley.

Yes.

Hey, guys.

Hey, there. So no can you review your real care market share performance globally, maybe compare and contrast, some of the regions that are performing better versus laggards and if you take a step back looking at the strategies you laid out at Cagny, a few years ago, which strategies have sort of taken hold in <unk>.

Oral care are working maybe what are some of the areas, where you might need some more work.

I can just slip in a related second part can you also update us on the competitive in the pricing environment in oral care in light of the higher <unk>.

Cost environment here. Thanks.

Sure. Thanks Dara.

Overall, we're pleased with the progress that we're making on oral care, particularly in toothpaste and manual toothbrushes. If you take our shares on a constant currency basis, they're relatively flat, which is better than where we had been.

When you start to go around the world, particularly as you look at new channels. We are very pleased with the progress we're making in e-commerce and pharmacy. So, let's just bounce around the world a bit North America still has been a little bit soft, but we've seen the shares bounce back nicely in the last 13 weeks.

And where our shares are actually flat now and in all outlet basis. If you take e-commerce and all the untracked channels, our estimation as our shares are black back to flat in the U S slightly up which is good progress, particularly as we've seen the acceleration of some of the premium skus that we've launched in the market, particularly widening over the last 13 weeks and likewise our E <unk>.

Common shares continue to be good not as good strong as our general market, but progressing in North America.

Europe the shares have been strong our <unk>, our strategy behind <unk> and <unk> has been very successful in pushing those businesses across all of our core markets. Our shares continue to be up across that region and we continue to see the shift toward our premium bundles, which was again part of the strategy change that we outlined back at Cagny that we were going to focus on.

Under share of channels like pharmacy with some of our premium therapeutic equities like Merit all in <unk> Latin America. The shares continue to be very strong.

That in the quarter slightly down as a result of some of the promotional volume that we have given up in Mexico, which has been quite significant but Brazil shares continue to be pretty good and trending nicely, particularly behind strong revenue growth management initiatives that are key.

Characterize the Brazilian subsidiary for so long, but overall pretty good Africa pretty good good shares in South Africa better shares in Russia, as we move to a premium innovation strategy. There. So we are we're pleased with that aspect.

As well China has been a terrific performance in the quarter for Sara we've seen our e-commerce shares across both the Holly in Haynesville joint venture as well as the Colgate franchise be the fastest growing skus in the market. We are the fastest growing manufacturer in the market our shares on the Colgate business in China now are up after.

Many years of declines when you combined both brick and mortar as well as ecommerce. So overall very pleased and again I think Thats a testament to the strategy and the strategic changes we made with our portfolio remember that a big focus in China was getting the premium position part of the portfolio of fixed the.

The growth in E Commerce has all been premium Skus, which.

Priced at about 300 index to the general market. So again I think good innovation that's into the market is helping to drive drive our business and you heard in the upfront comments, obviously e-commerce across the world. Once again is driving nice shares for us, particularly in oral care, where we've had had a lot of focus.

Coming back to the question around the strategy on oral care again, the focus was premium innovation and new channels and if you take our pharmacy growth across the world in toothpaste very strong, particularly in key markets, where we really focused which have been in Africa, Europe, and Latin America, particularly Brazil, you see our farmers.

Sure is continuing to grow and we've got a good pipeline of innovation coming in 2022, that's going to be specifically tailored towards pharmacy growth and likewise e-commerce being the other fast growth channel and obviously you just articulated the success, we're having there therapeutic was the other big focus that we had in Cagny in terms of where.

We're going to push the oral care business, particularly toothpaste, we've expanded merit all in al mix strategically into core markets, where we see big pharmacy classes of trade and where we see the therapeutic segment growing and our success has been quite notable particularly in those markets, where do you look at Brazil, specifically, whether you look at the middle East, where we've been quite successful.

As well so again I think that strategy seems to be taking hold naturals has quite frankly been a little bit soft and I think thats coming out of the COVID-19.

Period, where consumers traded more therapeutic efficacious brand so to speak in the natural segment was.

It was softer than we would've expected. So hello here in North America shares are stable, but not growing as much as we anticipated.

Did indicate that we're rolling that out selectively into some core markets around the world and that will unfold.

In the balance of this quarter and into the first quarter of next year. So overall I think the strategy that we outlined there working certainly as you've seen from the results. There are mid single digits in the quarter and high single on the year for oral care.

She has been absolutely terrific and consistent and that is on top of a marketplace that quite frankly is growing considerably below that right. Now. So again, we think we're driving share globally. All on when you look at it on all outlet basis, particularly given the organic growth sequential improvements that we're seeing.

We will go next to Peter Graham with UBS.

Hey, good morning, everyone, I hope youre doing well so.

I was hoping to get your perspective on kind of what youre seeing in the current environment and how that informs your view on the growth trajectory as we look ahead to 'twenty two right. So the top line momentum is strong and as you mentioned inflation and FX headwinds are expected to continue and I don't expect guidance, but I would just love to get your perspective on how <unk>.

We should think about margin progression looking out beyond Q4.

Well listen Peter you've heard it I think throughout the earnings season, so far that obviously cost inflation is significant for all of the fast moving consumer goods and we're certainly not immune to that and but what we are very good at is pricing and you've seen that consistently over time and time over the years, whether it's foreign.

Change inflation of raw and packing material inflation, we have found ways over time to recover that in our margin line and that is certainly the focus right now in the business.

The good news is when you have a inflationary environment.

Indexed around raw materials, you tend to have everyone looking to take pricing in the market and that makes it more conducive certainly from a category standpoint, and making sure that as everyone takes pricing that the volume continues to go along with that so we're pleased that we've seen pricing in the marketplace, we've been leading that across the board.

Quite frankly, particularly in the emerging markets, where we've taken pricing quite aggressively throughout the first half and very much into the third quarter and we've laid out pricing for the fourth quarter and into early 2022. So we'll see the margins begin to recover now the environment you've heard around raw materials.

Logistics continues to be extremely volatile and we anticipate that we'll continue to see some headwinds in that space. The team understands that and it's putting the strategies into place in order to recover margins as we move forward.

We will also be heightened heightening our focus around revenue growth management and that discipline is going to be really embedded much more so given the fact that we've now put some analytical processes in place to help the teams as I outlined which we think is terrific. It will give the teams a lot more confidence on the pricing that we're taking to ensure that we're working with our trade.

Partners to grow category at the same time as we take pricing to recover costs. So we're pleased with that likewise had a lot of discussions over the last couple of months on our grids are new product grids relative to premium innovation and making sure that we continue to focus on that area of the business, where as you know historically, we have under indexed and we've seen good.

Progress against that particularly as you look at some of the premium businesses that we have around the world whether it be L mix merit, all or some of the prices we've taken on our therapeutic bundles within the Colgate portfolio. So overall.

Tough raw material environment, we will continue to be very choppy, but we're very focused in terms of taking pricing and ensuring that we push our premium innovation moving forward.

We'll go next to Andrea Tcs with J P. Morgan.

Thank you. Good morning, So could you talk about your supply chain and I know you mentioned the issues in China.

But I think two parts to this question I E. Like what is happening globally do you see.

Mostly.

Things sequentially, improving always two very tough to service clients and customers.

Billy and N. B I think you said there was an impact in the third quarter and that's going to linger in China in the fourth I'm, assuming this is not material, but just.

Wondering if you can quantify thank you Andre.

You've come to know Colgate and the fact that we consider our supply chain a competitive advantage for us and that is the fact that we operate globally with some of the most efficient facilities around the world.

And the benefit of that is obviously translated into the strong gross margin progression that we've seen over the years that being said when you operated global supply chain youre not immune to decisions taken locally that will impact that and obviously in Asia, where we have seen a government is taking actions to stop the spread of Covid.

Whether it would be that are obviously impacting some of our suppliers and our third party contractors, we've seen disruption in the supply chain and as a result of that we have the contingencies in place to move that production elsewhere, which the team has done just a tremendous job in servicing the sales need of the business and <unk> seen that obviously in the acceleration.

Or is it continues good topline growth that we've had and that's a function of our supply chain, ensuring that we meet the demand of our products and our retailers and we moved production around the world to do that that comes with a cost that certainly we incurred in the quarter. Some of the disruption specifically related to what we referred to in our commentary.

Aerie, we're moving through those very quickly.

Move behind one that was quite significant and we're back to where we needed to be in terms of of output and we're back to pretty close on some of the other ones. We expect that to be fully back in capacity by the end of the quarter this quarter, but that being said that.

The environment is very unpredictable and we will continue to try to anticipate some of these things moving forward as we've done but one can never be for sure. When the government decides to come in and shut down a province or an area based on their needs. Likewise. This has a big impact obviously on the rest of the supply chain, whether it be raw material sourcing.

It would be our contractors.

Herd and John's commentary, we did take some decisions, particularly in North America around some of the contractors that we use in order to clean that up and move into into our supply chain strategy that allows us to exit some of those and get more efficiencies moving forward. So we're taking all the right decisions moving through the issues that we had in the third quarter.

<unk>, but we're not immune to the unpredictability of the supply chain environment that everyone's faced with today.

We will go next to Nik Modi with RBC capital markets.

Yeah.

Yeah, good morning, everyone.

And so I was hoping you can talk about Hey, I was hoping you can talk about <unk>, it's been a remarkable turnaround over the last few years, obviously improvements in market share, but also category growth. So just wanted to see if you can unpack some of all the drivers that you see for the business and how long do you think that higher pet adoption phenomenon that we've seen during COVID-19 will.

It would be an incremental tailwind.

Sure listen the pet the pet business has been terrific. Obviously I think a lot of the change in strategies that we deployed a couple of years ago, which again are based off foundation Leon exactly all the stuff, we're trying to deploy across the world really working on the core of our business looking at premium innovation in <unk>.

<unk> to really dial up our focus on high growth channels and Thats exactly what what's unfolded over the last couple of years and that strategy's, continuing obviously to get sharper and sharper as we execute it more broadly across the hills network around the world a lot of that growth has come out of North America, which has been terrific in the double digit growth compounding each other.

The U S had another outstanding quarter in the third quarter again, we're benefiting from a quite buoyant category, but the important part that you called out as we're growing share quite consistently not only across our wellness products for our core products, but also all of our therapeutic products and prescription diet <unk>.

Seeing obviously veterinarians open back up but that is certainly improving the consumption of our prescription diet. We've talked at length about the innovation process, we had behind hills, which I think is second to none in the category right now, bringing real science and real therapeutic benefits too.

Pet owners, and we're seeing that translate into obviously more penetration and growing share. We continue to talk about the low awareness of hills, both in North America and around the world that affords us significant opportunities. We continue to build that brand consistently all over the world and we'll continue to invest behind that business.

Spike the fact that raw materials are a headwind, we're not going to jeopardize the health of the brand by cutting back on our investment we will continue to invest to grow awareness and that ultimately is growing penetration in the category. So we feel very good about where we are obviously the comparisons continue to get tough.

But those have been tough and we continue to see good progress on our strategy, our ability to take pricing and our ability to bring in new consumers to the franchise.

We'll go next to Chris Carey with Wells Fargo Securities.

Hi, good morning.

Morning.

Hi.

I wanted to get a bit more context.

In North America.

She said that you had incurred some.

Extra manufacturing cost in the quarter I think you just noted there was some efficiencies with.

Contract manufacturers, but.

The comment was in the <unk>.

Fair remarks, I believe to improve the long term profitability of that business and I was wondering if you could just expand on that.

Do you think like a lack of scale or efficiency or something else in the manufacturing base has been.

Cause of the margin compression in that business.

And that you have opportunities to offset that am I reading that wrong I guess just oh.

Overall in the context of the.

The pressure on margins and the commentary around some of the actions you are taking a.

A bit more perspective, so thanks, so much sure yes.

Yes, let me jump into that in a little bit more a little bit more detail, obviously with somewhat of a perfect storm in the third quarter for us.

As we looked at the business in North America significant inflation in raw materials, obviously that came through in the quarter logistics was probably the most significant headwind we had in the last couple of months versus where we were previously obviously youre not.

You're clearly aware of the logistics industry and with what's going on tighter capacity tighter labor hire higher costs, obviously, which have obviously fueled significant increases in rates internally within within North America not to mention the fact that there's a lot of congestion going on and a lot of delays in getting product.

Two and from where it needs to be so as a result, we've been very focused on working with our retailers to ensure that we can continue to improve upon that the other areas. I mentioned earlier, we have this incredibly efficient global supply chain, but we do source product from different parts of the world and you've seen obviously ocean freight increases increased.

Mattikalli over the last three months or four months, we have not been immune to that North America quite frankly brings quite a bit of its product from overseas. While we have very substantial manufacturing presence in North America, we do bring product from overseas, which has obviously been a victim of those price increases we've seen in ocean freight.

The other one is we have seen increased demand, particularly in some of our oral care products and we want to continue to service that as we always have consistently and reliably to our trade partners and as a result of that we made decisions to air freight product and to ensure that we have sufficient supply for our retailers that airfreight did not come.

Without significant cost we will move through that clearly as we move through through this year and into next year and so we will see those costs come out and as you alluded to in your question. We did take some important strategic decisions on how we look at our network and our supply chain, both from a contractor standpoint, as well as what we source it.

Currently within our facilities and made some decisions in the quarter.

That will allow us to rework some of those contracts and hopefully drive more profitability in the long term. So overall, we're pleased good oral care growth, which is obviously, where we wanted to see that business continue to grow that business is looking at obviously, our pricing environment is becoming more conducive to take pricing historically, which has not been the case and theyre very <unk>.

<unk> on their new product grids around premium innovation, which has a strong plan for 2022 and a resurgence of focus around revenue growth management, given how important it is that we offset some of that that compression we're seeing at the margin line.

So overall a.

A difficult quarter for North America, but they've got the plans in place and we think some of the things that we're working through in the quarter will be behind us as we move forward into 'twenty two.

Yeah.

And we will go next to Wendy Nicholson with Citi.

Hi, good morning.

You guys have such huge market shares in some of your categories in emerging markets I Wonder if you could take a step back and just comment on what you're seeing I mean.

We don't really have a sense for has consumer behavior changed in some of those markets is there a lag effect from COVID-19, either did consumer stockpile or house their price sensitivity changed just in some of your bigger markets I figured you guys aren't good good company to ask about what Youre seeing on the ground you had three 5% growth in emerge.

King markets on the volume side, which is good but not great and I'm. Just wondering if there is if there was something other than just tough comps if theres a change in the way consumers shop or how much they have to spend kind of from a high level Big picture perspective. Thanks.

Sure.

Let me just address the three 5% quickly when they obviously that was drawn down by some of the.

The shutdowns, we saw across Asia, and the lack of mobility Southeast Asia in fact, very little mobility, we saw categories fall off quite dramatically across southeast Asia and that certainly had an impact on volume in the quarter and as you heard John mentioned, if you really wanted to Dimensionalize a lot of the volume softness in the quarter it was liquid.

Handsew.

Which was a.

A headwind of 400 basis points in the North America business alone, but let me let me step back to your broader question on what's going on around the world coming out of Covid and what we're seeing in terms of category behaviors.

All care was not a COVID-19 beneficiary and obviously it was not in the same cap as we saw from some of our personal care businesses, which saw a significant acceleration in consumption and a more systemic behavior change across the world. So oral care as mobility comes back into the market.

We continue to see the oral care categories growing and Thats. Good for us long term, obviously getting more and more consumers back into stores will allow more consumption and more category driven initiatives to take place and so we think over the longer term, we're going to see oral care continued to accelerate personal care and home care obviously.

The 19 levels, but certainly not anywhere close to where they were in 2020 hygiene products that we're very focused on in our home care business, whether it be dish liquids or floor cleaners. I think we'll continue to see nice growth in those categories. You heard John mentioned, the homecare growth that we've seen as more and more consumers stay home obviously you there.

More dishes being cleaned and more floor has been being cleaned and that has allowed that category to continue to be quite quite robust, but as consumers move back in mobility comes back into markets or people returned to work you may see a little bit softness in those longer term, but overall, because we think we're positioned well, particularly in the oral care space. If you go to pet food.

<unk>, obviously, the significant adoption that we've seen over the last two years during during Covid and the fact that we are now executing.

Much much better against our strategy, we feel very good about where the.

Where things are moving there and there has been a behavior change unquestionably in that category, where consumers have returned to science and nutrition and very focused on that space, which we are obviously very.

Very driven by right now.

Okay.

We'll go next to Ian Grundy with Jefferies.

Great. Thanks, good morning, everyone.

A question I wanted to come back to the pricing strategy and implications on gross margin over the next 12 months. So specifically with all the pricing that's going into place you guys have done a fantastic job with funding the growth for decades.

My question is the intention as you sit here today with all the volatility in the environment that you can fully offset the input cost pressure and everything youre dealing with the supply chain perspective with pricing and productivity.

Is that a realistic.

Fishing is that a realistic goal as youre sitting here from a risk management perspective is that something you think you can do or is the cost inflation and supply chain.

Two great at this point I'm, just trying to get a better understanding of how you guys are thinking about it how you're pricing and how youre thinking about productivity.

And then if I could just sneak in one related question a lot of interest around demand elasticity, which has been relatively low I think across many categories.

Which understandably is going to vary by category by geography by channel just some broader observations there are no with what youre seeing so far with the pricing in place for your business would be helpful. So thank you for all that sure.

Sure.

Sure Kevin.

Obviously watch this closely and price you know has always been a key driver of our organic growth given how we look at the markets around the world and we've consistently look for quick ways to get pricing in the market and not only to drive category growth, but obviously to protect the margin, which ultimately allows us to protect the advertising.

It's worth mentioning that obviously on a two year stack that this was the highest pricing number we've seen in many years for us. So again I think it reflects a consistent disciplined we have across the board of taking pricing quickly in the markets. You heard me talk a little bit about how we're using data and revenue growth management now to get that information on the ground quickly to the team.

So they can do what they need to do to analyze to take pricing across the board, but it's not just going to be pricing. We will look at obviously premium innovation and getting our mix improved not only within our portfolios, but channel mix as well I talked a little bit about the importance of driving pharmacy growth around the world, which is a growth opportunity for the company, particularly in oral care.

Sure that typically trades at a much better margin for the company given the therapeutic profile of those bundles, where obviously you're going to continue to embed a significant revenue growth management initiatives all over the world not just in some of the key inflationary markets and as we talked about earlier, where we're deploying some pretty nice strategies around around the <unk>.

Emerging markets right now to ensure that we get pricing up beyond just list prices.

Piece of this is productivity historically, you've seen us do a really good job around funding the growth. This quarter was no exception, adding 220 basis points to the margin line, but we're really dialing that up not just simply from a cost standpoint, but really looking at efficiencies across the organization.

And going into 2022 looking at how how we look to find optimized ways to run our business more efficiently and we will continue to do that as we historically have done and find ways to pull cost out of the out of the system. John mentioned it in his commentary our overheads were actually down very nicely in the quarter on a percent to sales and again I think thats <unk>.

Of the cost.

Focus that we have and looking at our business and making sure that we're finding ways to optimize so it's going to be a multitude of different things and we'll continue to see that all evolve it will take some time to be sure. These things don't.

Move in a straight line were taking pricing, where we can as quickly as we can we're obviously watching the competitiveness of the market, but as I mentioned earlier. This is an environment that everyone is facing right now which tends to allow everyone to find ways to take pricing up in the category. So we don't feel we will be in an anti competitive position, but we will be very key.

Los to watch that and markets to ensure that we continue to.

We remain competitive the other piece of this.

We haven't really mentioned is the advertising and we continue to focus on being building, our brands and being competitive in the marketplace and that is a key driver of the consistent top line growth Youre seeing in the company right now and we will continue to do everything we can to protect that advertising line and obviously working through the middle of the P&L will be critical in that regard.

We will go next to Jason English with Goldman Sachs.

Hey, folks good morning.

Yeah.

I guess I wanted to pick up on Mr. Graham's question around margin progression, but assuming in a bit more just in North America.

If we step back I know, it's a tough year with cost and logistics et cetera, if we step back and just look over the last five years or Youre on track to have lost 13500 basis points.

Profit margins in North America.

And I think Youre also on track to actually have market share is lower than you were five years ago over that duration.

So.

Can you just give us some context around what's happening with your investment plans in North America with talking to the strategy there.

Do you think you've got the right investment posture through innovation.

Plants.

To compete effectively in the market.

Is this is this a low point on margins can we bounce back from here is a slick during point just any context, you can give us around the profitability and the performance in that market. Thank you.

Sure.

Jason So we talked about all care, obviously, a big focus for us in the North America business that was strong again in the quarter up mid single digits.

<unk>.

I won't repeat what I talked about in terms of share growth, particularly last 13 weeks, we are more competitive in the U S market, we were not competitive in the first half we have dialed up our competitiveness and we're seeing the benefits of that translate into into better share progression, particularly across some of our premium bundles. We continue to support the business quite.

Well, we think we're in a good place, where we need to be but obviously as any marketer lets say it more support as always better we're looking for increased efficiencies in that business as we move forward in order to accelerate gross margin as I mentioned earlier, North America was disproportionately hit with raw material inflation and logistics and we took decisions very deliberately in the quarter to address.

Demand.

Obviously, you had a an effect in that quarter. So we anticipate that we will start to come out as we move through the fourth quarter and certainly as we move into the first half of 2022 that being said the raw material environment continues to be very volatile and unpredictable and we will take the decisions that we need to take to remain competitive we are very <unk>.

<unk> on growing the North America business. It is a priority for the company.

We are ensuring that we give them what they need in order to address the challenges and the competitiveness of that marketplace and we expect that we'll continue to see good gross margin expansion over time I do think this is a low for us but.

But I say that in the context of an environment thats quite unpredictable, but given what we saw go through in the third quarter, we anticipate that things will get better as we move forward.

We will go next to call me, Oh, Gosh, <unk> with credit Suisse.

Alright, Thank you and good morning, everybody I'll follow up a little bit on the second question on.

Price elasticity.

Let me just linked to price elasticity. If you can also just maybe comment on the the consumer condition.

Various areas around <unk> around the world.

Sure listen we've historically led pricing in so many of our markets and in the emerging markets you tend to see a little bit more elasticity early on but we are focused on ensuring that our innovation processes across multiple price tiers and so when you combine pricing with innovation.

At the same time, we find that we can rebuild consumption quite quickly so elasticity tends to dissipate over time, certainly as we get the new innovation in the market and communicate that so we're quite confident in where we are in emerging markets.

Developed markets tend to be a little bit more difficult you know historically, taking pricing in Europe, and North America has been a challenge.

We've certainly shifted a lot of our focus to now re launching brands, we launched the core bringing more premium innovation in the market in order to drive pricing and typically then as you bring value added consumer oriented benefits to the category you can take pricing and therefore, the elasticity isn't as dramatic so we will see it over time.

I think there is everyone is raising pricing is fundamentally in the categories that we compete in that tends to reduce the elasticity as well.

One might ask whereas private label in this environment private label shares were down in every single category in which we compete.

It's fundamentally so the news is big brands are winning and I think as long as you bring good quality innovation you continue to support that innovation with good content is personalized and targeted we think we can offset some of the elasticity, but that being said the raw material environment is significant and pricing will be significant over the next <unk>.

Two quarters in order to offset that moving forward, but we wanted to do that to make sure we protect our advertising line.

We will go next to Steve powers with Deutsche Bank.

Hey, Thanks, and good morning, No I guess, maybe to summarize a lot of what we've talked about so far.

Cut through the some of the noise around manufacturing closings and mobility restrictions in bulk supply chain bottlenecks et cetera, I guess I'm trying to get a better sense for how you're seeing colgate's momentum trending, particularly on the on the oral home and personal care businesses.

As I look at it I think I think I'd see directional improvements they are evident this quarter.

Sequentially, but at the same time in most regions I think overall performance came in lighter than many of US had hoped on the outside.

So again can you maybe just summarize the sequential momentum as you see it on a global basis, maybe how you expect things to progress in the fourth quarter ex hills and what the what the early setup is heading into the new fiscal year in terms of building that momentum further thanks.

Yes.

Very pleased with the momentum I mentioned in my comments up sequentially, our two year stack on volume and pricing in this environment. We think is a terrific result, driven by our core focus areas, which is oral care and pet nutrition. So oral care continues to drive good sequential growth quarter to quarter, we talked about it mid singles.

In the quarter high singles on the year, obviously, the pet nutrition business double digits Comping double digits. So again I think some terrific progress their personal care significantly impacted by Covid driven categories and liquid hand soap which is a very big business for us in North America and around the World. Obviously, we saw a significant falloff in the cat.

The category was down 28%.

To give you some context on that and as John mentioned that was a 400 basis point headwind. So some of the Covid categories was certainly stabilize as we move forward and we lap those moving into 2022, but the.

The essence of your question is where are we with the momentum on oral care and we feel good about it we feel good about our 'twenty two plans we feel good about the pricing we're taking we feel good about the segments. We're competing in we feel good about the channel strategy that we've had where we're growing share in the fastest growth channels, which are typically e-commerce discounters and.

In pharmacy, and the strategies that we've put in place in the portfolio execution of that is delivering against it. So we feel overall, we're pleased with the underlying momentum on oral care personal care as we lap some of the Covid will improve moving forward. We paid had some good discussions, particularly in North America and Europe around some of the <unk>.

<unk> that we need to continue to drive it our market share interesting just as a data point on market share on liquid hand soap in the U S was actually up two points in the quarter given the fact that it was still down 400 basis points versus.

Where it was last year on a volume standpoint. So again, we think we're taking the right decisions on portfolio and innovation in order to drive share and continued to recover some of the softness that we saw that was temporarily driven by the COVID-19 expansion last year.

We will go next to Lauren Lieberman with Barclays.

Hello, and I think you're on mute.

At this time Theres No response, we'll move to Bryan Spillane with Bank of America.

Hey, good morning, and thank you for taking the question.

Brian.

I wanted to ask just a question around free cash flow and.

And want to understand if.

With the inflation and just all of the noise I guess in supply chain, if it's having an effect at all on free cash conversion and I ask because.

Last year, you over delivered relative to the 90% conversion target looks like this year at least year to date running a little bit below that and so.

Really just wanted to understand if there is if the effect that it's having on the P&L is also having an effect on free cash flow and if that's something we should consider as we're looking into 'twenty two.

Yeah I'll throw this one to stand, but let me just provide a couple of top line comments overall, if you go back historically, where we are it compares quite consistently with our historical numbers that there were some.

Benefits that we certainly had last year on a comp basis around working capital, but let me turn it over to Stan who can give you a little bit more color on that yes.

So look we continue to cycle favorable working capital performance versus last year and there is really an anomaly. When you look at 2021st of all 2020 cash flow driven by the unique environment was up significantly while we're down year to year I think if you look back and compare to 18 and 19 youll see that its more and more in line.

Higher raw materials pricing, certainly put upward pressure on our inventories, but I think important to note as you mentioned free cash flow as Youll see the investment we're making in the business and Capex. So capex up roughly $120 million, that's really an investment as <unk> talked about earlier and the long term health of our business.

And what we're looking to grow so that investment has an impact on free cash flow, but we think is incredibly important for the long term. So you step back and look at cash flow, where we are today, we're not concerned about the positioning we think we're confident in our ability to generate that cash we're confident in our ability to invest in the future of the company through.

Capex, so we're comfortable with the current positioning on free cash flow.

Yes, I would only add that particularly around capex, which has been quite consistent for us over the years.

We see ourselves with some real opportunities to invest in growth areas of the business.

And that's certainly what has elevated the capex in the quarter, which is we think only good news for the long term.

We will go next to Javier Escalante with Evercore.

Hi, good morning, everyone and another question on pricing.

So basically we heard from Bose your.

Competitors Proctor and Unilever, taking pricing either in Q3, we're announcing price increases.

But if you could talk about the the big local players there.

In China, and India is there is dumped into their supply chain.

That is different that they can drag on pricing is difficult CERN and this is something that contributed to the weakness in Q3, both in China, and India that would be very helpful. Thank you.

Sure Javier Thanks.

I think the answer is everyone is no one is immune to the inflation that we're seeing across the market both from a raw materials standpoint or from a logistics standpoint, obviously they may have had different constituents that look at their business differently than public companies are big multinational companies, but in any case no one is immune to it.

And <unk> had discussions and been able to get out and travel a bit and talk to retailers I mean retailers are recognizing even on their own private label brands are going to have to take pricing to offset the significant inflation that's being.

Absorbed in the market rate right now so I expect that Youll see all boats rise so to speak in this in this environment that pricing will go up there will be certainly some delay with local players as they tend to try to serve.

Search out a bit more volume as the big players take pricing, but again I think if you can combine the pricing with the right innovation, which we're very focused on delivering and adding value to the consumer.

The local brands have to react to that in some form or fashion, either with their own innovation with their own price increases in order to stay competitive from a support standpoint. So I don't anticipate it's going to be a significant issue Javier you know our business really well you know that we innovate across all price points and we have significant focus that's very deliberate.

In markets and looking at shares.

And our innovation process across each of the key price segments that we compete in and that will certainly be the case as we move forward.

We'll go next to Mark Astrachan with Stifel.

Yes, thanks, and good morning, everybody.

Wanted to ask specifically.

On the AD spend are you guys getting the right returns on an absolute dollars that you're spending if you take a look at that that.

That category of that column.

The increase is somewhere north of 200 basis points over the last few.

A few years as a percentage of sales obviously there are a lot of discussions on the call talking about market share challenges oral care household.

Here are two of the pandemic, just maybe holistically kind of talk about how you think about that does that number need to move higher from here or can it stay the same but can you kind of work in a different way and then how does that all kind of tie into.

Market share and profitable growth for the business going forward. Thank you.

Sure.

Well listen, let's step back and look at what's happened over the last two years and I think it's very clear that we have reaccelerate. The top line of the company and that has been a core focus for everyone. In the organization is just growth mindset that talks about elevating our core our adjacencies in faster growth channels and doing.

That across all categories, and all geographies and if you take.

A basis two years ago, that's exactly what we are delivering against right now so the investment. We believe is fueling that growth obviously, the strategies and execution are a big part of it but we feel very strongly that the acceleration that we've had in investment both on the oral care side as well as the pet nutrition side have clearly delivered.

Topline growth now we would like to see it reflected in some of the Nielsen based share readings, but the market is very complex now the go to market strategy and the path to purchase for consumers is much more complex than it ever was in the past and consumers moving between channels and obviously the emergence of online which is quite significant and in some.

Markets like China has become a very significant part of the category and we're seeing very strong server growth. There. So overall, we feel the top lines moving in the right direction. The investment is supporting that that being said, we are very focused on making sure that we deliver ROI against every dollar in the P&L.

And we have brought in resources from the outside and amplified our capacity around the world working with WPC, our partner to get much more granular and much more analytical about how we're investing particularly our digital spend to make sure. It's targeted and we're getting ROI for that spend and we're getting much much better at that so as we look.

Our advertising will continue to be competitive in terms of what's needed in the marketplace continue to ensure the health of our brands are protected but we're very focused from a productivity and efficiency standpoint, looking at that bucket of spend and making it work harder for us and that's exactly what we will expect to see in 2022 as well.

Our last question comes from Lauren Lieberman with Barclays.

Hey, Lauren.

Can you hear me.

Thanks.

I can we can hear you just fine okay cool, so I don't know what happened.

Just curious about Mexico.

Just it was kind of called out in the context of Latin America, and she has been a little softer. So just wanted a little bit of detail on that thanks. So much I know this has gone on for a long time.

No Mexico again high single digit performance in the quarter, and obviously a difficult environment, particularly given the aggressive pricing that we have been taken in the marketplace and that pricing certainly had a little bit of impact on volume shares in the quarter.

Nothing that's terribly concerning to us at what we consider not real profitable volume given that we're losing to the lower end of the market. Some of our competitors have been highly aggressive with their promotional.

The promotional levels and we've decided to protect the margin in the P&L and continue to invest in building the brands.

Interesting if you look at some of our equity measures in that marketplace, particularly given that we focus now on really supporting the equity as well as innovation.

Attended their budget review, just recently and they look terrific. So again I think we feel like we've got a very strong position in that market, we sacrifice a little bit of a promotional share but that is not unusual when we take pricing and lead the market and we will continue to ramp up innovation and ensure that we remain competitive but nothing to be concerned of Brazil. Likewise.

Which you didn't ask about but I'll mention that shares are flat there.

And doing very very well, particularly as we see great growth in the pharmacy channel. So the balance of our portfolio has gotten much more therapeutic which is obviously more profitable for us in the long term. So we're pleased with some of our two big markets and you heard John mentioned, Colombia is back on track given the political disruptions we saw.

Last quarter and driving some nice growth for us across Latin America, good not concerned about Mexico at this point.

Okay.

And at this time there are no further questions and this does conclude today's conference. We thank you for your participation you may now disconnect.

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