Q1 2022 Colgate-Palmolive Co Earnings Call

April 29, 2022

Okay.

Good day and welcome to today's Colgate Palmolive Company first quarter 2022 earnings Conference call.

This call is being recorded and is being simulcast 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, Kristina good morning, and welcome to our 2022 first quarter earnings release Conference call. This is John O'shea 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 2021 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 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, five and six of the earnings press release a.

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 Stan <unk> Chief Financial Officer.

No. We will provide you with his thoughts on our Q1 results and our 2022 outlook. We will then open it up for Q&A.

No. Thanks.

Thanks, Sean and good morning to all of you are given the release of the prepared commentary. This morning, I'll keep my remarks fairly short as I'm sure you have a number of questions.

In 2022 is shaping up as a more difficult year than we anticipated with greater than expected increases in raw materials as you've seen from others, particularly fats and oils and logistics. This is offsetting what we think will be a very solid year for organic sales growth now that we are seeing our global supply chain stabilized following COVID-19 related lockdowns.

<unk> and stressed and logistic networks around the world.

Okay got it.

Sales go through the balance of the year first off we knew that Q1 would be the most difficult quarter, given comparisons supply chain issues and pricing negotiations, we exited the quarter with high single digit pricing as we took more pricing in developed markets starting in February and continuing into April .

We believe this is more indicative of the pricing we will see for the balance of the year.

Elasticity, you've seemed to be either in line or better than expectations and this should help limit incremental volume weakness from the higher pricing over the balance of the year incur.

Encouragingly as we said in our prepared remarks volume and organic sales performance improved in February and March versus January and organic sales growth has continued to accelerate in April <unk>.

Importantly, we are beginning to see the benefits of the stabilization in our global supply chain network with the impacts of Covid related factory closures behind us and the opening of the global logistic capacities are.

Our guidance does not assume further COVID-19 related lockdowns and the balance of the year that would impact our ability to manufacture and distribute our products.

Our U S on shelf availability for toothpaste has been below normal for several months as we dealt with the same supply chain challenges you've heard about from other companies.

By tapping into our global supply chain, we were able to restore shipments and our availability is now back to normal levels, which you are seeing reflected in better market share performance in toothpaste.

And with the improved share performance in manual toothbrushes in the U S where our share is up four five points year to date, we feel better about the trajectory of U S oral care.

Combined with increased advertising through the balance of the year significant innovation, particularly around widening in the U S and in Asia and the relaunch of two important core brands, our holiday and Hazel brand in China, and the Hill's prescription diet business, we feel confident in our forecast for an acceleration in organic sales growth for the balance of the year.

This gets us to our new guidance of 4% to 6% organic sales growth.

Temporary and this outlook, obviously is the difficult cost environment, our entire cost factor has risen over the past few months, but the biggest impact has come in the area that we call fats and oils, that's palm oil palm kernel oil soybean oil tallow and others.

This has historically been our second biggest area raw material spend behind only resins, although given the inflation. We're seeing this year our spending in the second half on fats and oils will equal our spending on resins. These ingredients are used in every category. We compete in and we expect a more more than 60% increase across fats and oils. This year.

Year.

And while you know our global supply chain as a strategic advantage the global nature of our supply chain is adding to costs in the current environment.

Rates from Mexico to the U S are up 30% year over year and ocean freight have basically doubled.

We continued to take significant steps to offset these headwinds, we're taking additional pricing and we're launching premium innovation. We have established our 2022 global productivity initiatives to drive further cost savings for this year and next year, while accelerating our funding the growth initiatives, we've reduced our overhead ex logistics spending by 30.

In the quarter versus the first quarter of last year already.

So as we open it up for your questions. We know we need to execute on during the balance of the year and we're very focused against that while we know our guidance is below our previous expectations. We believe that our cost forecast are prudent and that our plans are well thought through and well supported to deliver on our organic sales growth guidance, while leaving us.

Well positioned as we look to return to profitable growth, thanks, and I'll be happy to take your questions now.

Today's question and answer session will be conducted electronically for the telephone audience. If you would like to ask a question you may do so by pressing the star or I'll stress Keith followed by the digit one on your Touchtone telephone. We also ask that if you are listening to the conference on the Internet.

Turn down the volume on your computer speakers when asking a question.

Once again, if you'd like to ask a question press star one.

Okay.

We will take our first question from Dara <unk>.

With Morgan Stanley .

Okay.

Hey, guys. So just two part question on guidance.

When you have this large the.

External change in terms of higher costs clearly it requires a change in the level of guidance that we have today, but it also requires a change in sort of choices around the P&L.

The pricing levels investment productivity et cetera. So.

Just short term with the new guidance, you quantified very well in the prepared remarks, the cost changes obviously, the org sales change, but can you just be a bit more specific on maybe some of the other drivers in terms of incremental price you're expecting with the new guidance.

For 2022, how you think about incremental productivity will it change your AD spend at all I'm just.

And part of the reason I ask it as you've got $650 million and higher costs. So that's a high teens earnings impact that sort of double the earnings revision in the guidance. So I'm just trying to better understand the offsets to some of the cost pressures and then B just wanted to really extend that same question more strategically longer term you've obviously.

Success re accelerating organic sales growth.

To some extent with the changes under your leadership do these sort of P&L decisions. This year, how might if at all that impacts the strategies, you put in place or or sort of the long term topline growth trajectory as you look beyond this year. Thanks.

Sure. Thanks, Dara, let me start a little bit about the pricing comment because I think it's obviously core to how we're thinking about the balance of the year.

As you know, we took pricing and at least the developed markets a little late in the quarter as we had talked about in the fourth quarter. We plan to take pricing in February March and April and Thats exactly what happened. So we didn't get the benefits of the pricing in the first quarter P&L largely in North America as well as Europe , while we are.

We're able to get significant pricing across the developing part of the world. It was North America, and Europe , which lagged a little bit in the quarter as we exited the quarter, we saw high single digit pricing.

<unk> executed, particularly in the March month, and obviously that is continue to transpire as we look at the strong sales that we're seeing in April we have likewise continued to accelerate pricing and the developing part of the world in the year to go so a combination of what we're doing in the developed world and the execution of those prices.

Which was lagged a little bit, particularly in Europe , as we were going through some longer negotiations than we anticipated as we entered the quarter and we've consequently taken more pricing than the rest of the world. We feel very good about where we are for pricing in March being more indicative of the type of pricing that you will see in the balance of the year. So so far so good.

Good, particularly around elasticity as volumes are more or less in line with where we thought but it's early days on elasticity and we will see how that folds in the balance of the year.

But we obviously have we believe a very strong innovation plan very strong promotional plan as well so on pricing, which I think is core to our guidance, we feel pretty good based on what we've seen in March.

As I said, where we see it in April and more importantly in the plans that we've put in place for the balance of the year strategically in terms of choices no big changes there I mean, we have a really strong growth plan as we've talked about going into the year on premium innovation as well as core innovation you heard a little bit of that in my comments too.

Two significant launches on core innovation, that's our holiday and Haynesville business, which is the number one brand in China that is a complete portfolio of change across the entire business that was obviously some of the softness we saw in volume in the first quarter was driven by the fact that we were transitioning into an entirely new bundle across the entire portfolio.

Folio and likewise on our prescription diet business, which you know we've had great success on the science diet. We're now taking a lot of those learnings into improved nutrition improved packaging and conceptual execution on the prescription diet business, which is at a premium price.

I would also say on some of our other core businesses around the world, particularly given the pricing environment that we're faced with we are now in a much better place to execute relaunches, given we have more a better line of sight on our supply chain issues that were faced with that was obviously, taking time away from putting new products in the market. So.

<unk> when we start thinking about how that lays out for this year and next we will get back to a lot of those core relaunches, which will allow us to take pricing.

<unk> bolster volume and value at the same time, so that's kind of where we are strategically making the right choices, we think about getting pricing in the market, making sure we execute against our very strong innovation plan and protect the core businesses, which will be very very important as we move into a potential recessionary environment.

Well go to our next question from Peter Grom with UBS.

Yes.

Hey, good morning, everyone. I Hope you were hope you're doing well so I just.

Just wanted to ask about the organic revenue outlook I know you mentioned that the sequential improvement in February and March and into April can you, maybe unpack that a little bit how much stronger was the growth versus what you saw in January and then just for the high single digit pricing that we should expect through the balance of the year is the volume assumption in the <unk>.

4% to 6% organic revenue outlook predicated on historical elasticities are or what you are seeing in the market today. Thanks.

Sure. So let me deconstruct a little bit of Q1 January was a little softer than we anticipated as I mentioned, we obviously saw a little softness in Europe .

Given some of the delayed pricing negotiations, we saw a little softness in our holiday and Hazel business as we mentioned Thats really transitory as removing from the old bundle to a new bundle, we saw a little softness in our French business and we saw a little softness in the rural areas in India. So that led to a somewhat soft.

<unk> January sequentially, we saw all of that in Peru in February March both volumes improved February March versus January and as I mentioned, we had strong pricing starting to get executed.

Early March and towards the end of the month and into April . So we feel quite good about where we ended the quarter and as I mentioned, we've seen that translate into a strong April as well. So that's kind of how we've set up the guidance for the year. So 4% in the first quarter. We believe will be the low end of organic for the year and that will sequentially.

<unk> as we move more pricing into the into the P&L as well as continue to innovate and provide some volume.

<unk> as we move through the balance of it.

The year I will say that again getting the supply chain constraints behind us from a bottom line, yes, it cost us money relative to doing some of the things that we did to get more toothpaste on the shelf to get more toothbrushes in the market, we have seen that translate into more volume in the business as a result, as well and Thats a good thing because we're seeing that translate into <unk>.

<unk> and category growth for our retailers so from an organic standpoint, youll see it sequentially grow through the quarters, particularly as we execute more pricing in the second quarter and as I mentioned, we've now look to take more pricing in the back half as we will see the peak in raw materials come through later in the year.

Relative to.

Two the pricing aspect I think not much more to add there.

We've taken we took strong pricing in developed developing part of the world.

You see our two year stack on pricing at roughly 10% and there is more pricing to come and you will see pricing as a percentage of our organic growth likely accelerate certainly in the second and third quarters.

And we will see where we end up in what situation. We are in in the fourth quarter, but pricing will accelerate that's a combination of a couple of things obviously the revenue management initiatives that we've been taken we're.

We're getting more premium innovation and I won't get into some of the success, we're having behind the optic White Pro series, which is our most premium priced whitening bundle thats doing quite well out of the box, where obviously as I mentioned earlier importantly, using our supply chain now to get core Relaunches executed quick.

<unk>, which will give us a pricing opportunity as well so those would be the three key initiatives relative to getting pricing up in the back half.

We will go to our next question from Andrea Teixeira with JP Morgan.

Thank you good morning.

I just wanted to perhaps focus on North America and talk about home care.

It was obviously a headwind as you called out.

I know you just pointed out that some of them the new franchises and premium innovation efforts have been bearing fruit. So I was wondering how we should be thinking in the balance of the year and.

And just as a prior prior question regarding.

Hello. This is how we should be thinking it looks as if there's a satellite you have this back 10%.

Pricing I am assuming that is the U S.

So how can we be thinking as you roll over more pricing and just a final point that is that pricing coming in at the end of the summer into the fall or actually earlier than that Andy last thank you.

Sure. Thanks, Andrea and good morning, let me talk a little bit about homecare.

So again, a little bit of the constraints that we have with contractors and the implications of certainly the COVID-19 related issues that have challenged a lot of the contract manufacturer in the U S. That's certainly plagued us a bit on some of our home care, particularly our dish liquid business.

And we have specifically address that and starting to see the improvements of that as we move through the balance of the first quarter and as we moved into April as well. So we see home care from a volume standpoint, starting to come back nicely. We've taken we're taking pricing on some of that home care business in the second quarter as well and so that will obviously translate into.

Improved performance overall, the cleaner business is solid.

The fabric softener business is quite solid.

From a from a share standpoint, a little softness in dish liquid and we have plans on particularly the palmolive and <unk> business in the U S from a combination of both pricing and some some new product initiatives to hopefully bolster that business as we move through the back half on elasticities again, it's really early days here and I.

I think you have seen it consistently across.

Most of the.

The sector, everyone is assuming that elasticity will be better than historical numbers wise because everyone is consistently taking up pricing. So therefore, everything is going to be up in where everyday products that consumers use every day and so as a result of that aspect I think youll see a little bit less elasticity than we've seen in the past.

And that's what we've seen so far but again theres a couple of factors to take into consideration there will be significant inflation across the entire consumer segment and well, we'll be watching that very closely but if you go back historically our franchise in our portfolio positioning plays well in inflationary environment, because we have big core biz.

This is widespread distribution and we compete across multiple price points.

But we know that we can continue to grow the premium segment of the market, which is where we under index High index is in the core business, but we're going to take ambitious plans on our core business to bring value to the category into a retailer. So we feel pretty good about worthy elasticities will ultimately end up here just because we.

Experienced it before we've got good innovation going into the market and as I said kind of all ships are rising in this case of the categories are all taking our pricing across the board.

Go next to Wendy Nicholson with Citi.

Okay.

Your line is open please check your mute button.

Yes.

Can you hear me.

We can wendy okay, sorry about that so just a follow on on that line of questioning about the elasticities.

If I look back at my model the one business that really suffered during the great recession for you was the health business.

I honestly can't remember whether that was something specific to the health business, whether it's an innovation or a competitive thing or whether that was an area where consumers really did trade down so I guess number one.

You don't need to recreate history for me, but just in terms of your confidence that the health business. This time around is going to remain strong your volume growth has been amazing just your confidence that if we do go into recession consumers are kind of trade down and looking for cheaper pet foods.

Yes, if you go back to I believe Youre, probably looking at <unk> and that was at least the beginning of the naturals boom as you remember and as we have openly stated we made in our view some strategic errors in how we chase the naturals rather than staying.

True to the core business. So I think that was the biggest driver and certainly at that point in time when do the Hill's business was nowhere near as salient and had nowhere close to the momentum that it has today and were certainly on our front foot and continue to think about that business in terms of investment you heard today.

Day that we closed we closed a new <unk> facility the contract manufacturing facility that we bought in Italy that is going to unlock more wet capacity for us which is one of the fastest growing segments, particularly in Europe , which is exciting we're relaunching the prescription diet business going into into the back half of this year, which is obviously above.

Half of our business, which we think is going to be an exciting innovation for particularly our veterinarian professionals. So the business is in a much different place today than it was back in <unk> nine obviously much more rns on front, we're going to maintain the investment spend there, which we think is critically important again. This is a business that has low penetration and low share so a lot of.

Outside of North America, and capacity constrained today, hence the reason why the purchase of new <unk>. So again, we think we're in a much different place than we were a node <unk>. The brand itself is significantly stronger than it has been in the past.

And we will go to our next question from.

Olivia Tong with Raymond James.

Great.

Good morning, Thank you for taking my question.

I was hoping to get a little bit more granularity around your full year.

Yes expectations and how much of the EPS revision is due to input costs versus.

FX rates as your handicap.

10 point swing on EPS expectations from London, pendulum, together and realizing obviously, there's no shortage of uncertainty, but can you talk about what the most meaningful changes arent there and mathematically how do you get from where you work it mid singles.

And then specifically for international markets can you talk about what your peers are doing not just the multinationals with the local players with respect to pricing is the expectation that their pricing or the realization of what youre seeing so far that they are pricing at a commensurate level to what youre doing thank you so much.

Yes, Thanks, Louise great Great to hear from you. Let me let me just talk conceptually on the EPS and then I'll have Stan jump in and give you a little bit more of a.

The bridge in terms of how we're thinking about it but fundamentally listen this comes down to the extraordinary acceleration that we saw in our raw materials post the January guidance, which as you've heard is around half a billion dollars. So just to add on its own is driving obviously the significant change in EPS combined with.

The fact that our logistics have continued to accelerate part of that we will work out of as we move through potentially the back half of the year with improved manufacturing and supply chain, which is obviously important for us to get that product on the shelf as I mentioned, which is we're doing it at a higher cost, but we anticipate logistics will.

Stay high Ocean rates, we are we're keeping ocean rates at where they are today for the balance of the year and obviously some of the transit rates that we're seeing particularly out of Mexico, which are up about 30% versus the year ago period, we're assuming that will maintain itself as well so raw raw materials, largely driven by fast and <unk>.

<unk> I'll get stand why don't I have stand open that up a little bit for you and then I'll come back and we will talk about the international markets and pricing.

Sure. Thanks, Alex So as we entered the year, we knew that commodity costs were going to be up year on year and we planned for that.

In January we entered the year, we saw in the market, we expected that material cost would moderate as we went through the year at that time in January we anticipated roughly $750 million or 13% year to year increase but as we stated in January if the commodity cost don't moderate that would represent a headwind so.

What's happened since January as you heard in our prepared remarks, we've seen significant movement in those commodity costs and now we see an incremental $500 million of costs for the year. What that means is that material costs will be up over 20% for the full year on year on year basis. So we put some context, a little bit underneath what's happening in those.

Commodities natural gas is up over 60% now natural gas is used to power many of our plants and importantly, many of our suppliers plants, which puts pressure on their cost and timing soybean and corn are up by over a third pumps up 25% and increasing.

So as we said earlier, what that means for the year fats and oils, including palm will be up over 60% year to year and doubled since 2020 residents are up over 20% in these two categories combined fats and oils and resins make up a significant portion of the material spend now on a combined basis are up nearly 40%.

<unk>.

Take glycerin, another important material and thats more than doubled year to year. So as we've looked at logistics, we saw similar cost inflation.

And since we've seen that increase over $150 million since our expectations in January that translates to logistics being up nearly 20% for the full year.

And some of those increases because we prioritize meeting clients' needs. We talked briefly about this our decision to prioritize toothbrush shipments given client demand and market opportunity and particularly in North America. We grew that category of double digits and gained over 450 points of share.

And I think importantly know talked about this would represent over 20% increase to our costs over 1 billion too, but what are we doing to tackle that and mitigate some of that significant escalation.

Materials were leveraging alternate materials, where viable re formulating where that makes sense, taking price to reflect the cost increase we've talked about price significantly here and then things like leveraging analytics to enhance our procurement process and driving our robust funding the growth program to help mitigate that profit and.

Packed on logistics, we're taking a number of actions as our supply chain stabilizes from things like Covid impacts some material shortages, we're going to streamline our logistics use less expedited transport.

Now temporarily we're carrying more finished goods inventory due to erratic and longer transit times, we're also making things like investments in automating our warehouses. So these remain volatile we are being aggressive to tackle those so from a P&L point of view as you translate that down to EPS those are going to be a headwind for us for the year.

<unk>, we're taking aggressive pricing aggressive funding the growth and productivity actions.

We are still expecting margin will contract for the year and we're going to maintain investment in advertising. We believe that that's an important component of our long term model and Thats. Why we are taking that are organic growth up to the 4% to 6% range.

I'll take that down we will continue to drive.

Improvements in overhead.

And stripping logistics out overhead improved on a year on year basis, and the team's done a very good job of managing that prudently, but that's what yields us down to a EPS when you take into the effects.

Multiple interest rate hikes, a headwind on tax that drives the EPS here down on a year on year basis mid single digits.

So let me let me come back to what we're seeing on local brands and certainly private label to a certain extent as an extension of that.

I would just return for some travel around Asia, We're certainly seeing some of the local branch take pricing there and likewise I think we're going to see private label, followed very quickly. Obviously these increases impact them and their cost of goods are obviously materially higher than.

Than ours. So we will watch that carefully we don't have a lot of categories that index highly with private label, obviously oral care very low single digits. The two categories that we need to watch carefully our liquid hand soap and toothbrushes, but.

But so far we have not seen.

And a significant erosion of our migration to private label and so we'll weigh as we see the environment unfold over the next.

A few months.

And we'll go to our next question from Steve powers with Deutsche Bank.

Yes, hey, thanks, everybody and good morning.

I guess I'm curious I am curious as to how you think about the supply chain impacts in terms of quantification of it in the quarter.

Whether in terms of volume or market share, particularly in North America, but.

Public throughout your remarks or supply chain issues.

Europe , and Latin America, holding you back so just curious as to how you think about.

How much you were held back and how that how much of that.

Versus the releases or the balance of the year number one and number two just maybe just some further details on China.

It was down overall I think in your release, you said that.

You called out Colgate China.

Itself as a point of strength, so obviously some timing there.

Hollywood Haynesville, but just.

Maybe some more color on what happened in China, and how you think about that market.

Going forward, which is obviously.

Dynamic context, thank you.

Sure. Thanks, Thanks, Steve listen the supply chain as we talked about throughout 2021 has been really choppy.

With a lot of second and third derivative impacts of all the all of the implications related to Covid.

But if you take specifically the impacts to us.

Where you really feel it is on shelf availability and we have historically been best in class in that regard across our categories and some of the setbacks. We saw from Covid Lockdowns in China, where we source some of the challenges we've seen in logistics coming out of Mexico raw material supply.

<unk> as well, having shortfalls that caused a lot of choppiness in our supply chain throughout 2021 and certainly.

Accelerated a bit as we went into the first first out of the fourth quarter and into the first quarter. The good news is as we finished off in the back half of February and into March we saw a lot of those issues structurally get much much better for us as a company are onshore and shelf availability, which had dipped way.

Below norms was now back right at top of class and you see that directly in our point of sale data in some of those customers, where we actually now are measuring detailed on shelf availability at the daily and weekly basis that allows us to react very very quickly we have taken decisions through 2021 and in the first quarter.

To ensure that we have sufficient inventory to compensate some of those the shortfalls that we were seeing in the uncertainty that we had from various contractors or raw material suppliers that has cost us some money.

But we feel in the end is now given given the trade obviously far more clear line of sight in terms of our ability to source and increasing demand, particularly behind our tooth patient and toothbrush business here in the first quarter. So on shelf ability significantly improved as we exited the quarter and has maintained itself as we went into April that is <unk>.

Slated into better market share performance take the U S. In the last five weeks, we were up or flat in 711 categories, which is a marked improvement versus where we had been in the past some of the issues likewise translated into the European business.

Where we saw some shortfalls in terms of service levels there.

That now has been addressed through some decisions that we have taken and we are seeing likewise as we exited the quarter a little bit better volume. So all in all across the board most of those issues now are behind us, particularly the lockdown issues that really had a significant impact on part of our business and I give credit to the supply chain for.

<unk> a tremendous amount of agility work that I think is only going to set us up for stronger resilience moving forward as we see some of the uncertainty continue to unfold in certain parts of the world.

China is.

It's actually a really good story from the sense of our CP, China business was up high single digits in the quarter, our <unk>, China business combined with Holly and Hazel was up 650 basis points in market share in the online business, which is obviously the fastest growing part.

The China retail the retail sector.

And Hazel business was migrating as I mentioned, Steve to an entirely new portfolio and a repositioning of the brand, including a brand name change that we'll incur.

That was rolling out in the first quarter as a result of the significant distribution scale of China, we were moving down inventories of old product distributors. We're obviously, taking their inventories down in preparation for the excitement behind the relaunch we've started to see a lot of that unfold in the back end of March and now into <unk>.

April and we will see it ultimately it will take a couple more months before we see full distribution of that new product across the China market. So overall, the China business looks quite strong for us for the first time in many many years, our overall China market shares in toothpaste, that's combined Holly and Hazel and coal.

<unk> are up so it's been a long time since you've heard me say that but I think thats a testament to some big strategic changes that we made in China now going back 253 years, both in terms of portfolio strategy as well as go to market that we would say is definitely paying dividends and we will watch obviously, the holiday and hazer relaunch carefully but quite.

Excited about that thus far in terms of how we're seeing it hit the market.

Okay.

Well go to our next question from Jason English with Goldman Sachs.

Hey, guys.

I guess a couple of questions.

Kind of building off your last comments around the online or the exit of the Darlie brand.

Yes.

When did that begin exactly like in the execution and I am.

And Youre planning assumption is that youre not going to repaying all of the sales as you as you migrate away from the brand.

When do you think that pressure will be behind us how many quarters, we have to live with it.

What's likely going to be a drag from from the rebranding.

Sure.

Listen I mean, we expect obviously that we will not only hold but ultimately build share with this relaunch Jason that's the intent I mean, we have significant investment planned behind this relaunch. It is the number one brand in China has incredible saliency, we're putting an improved technology as well we have an innovation stream thats coming behind this.

Now Theres no question Theres always risk when you change a brand name, but all of the work that we've done thus far and what we've seen early days that transition really started at the tail end of January early February the bulk of it starting to happen in March and as I mentioned will unfold more than likely over the next the next couple of two years.

Three months, we will know by the by the end of the second quarter third quarter, where we are we will get a good sense, particularly on the in the online world as I mentioned the vast majority the fastest growing channel is online in China, and we will get a read pretty quickly and how we're doing relative to our online business with darlie in that market, but <unk>.

<unk>. This is a widely distributed product very very strong obviously gets into C. D. E cities. So it's widely distributed it will take time to work through the.

The old product, but we're starting to see some of the new product already on shelf in the modern trade and so far so good but I would say give us another quarter the balance of this quarter to really assess how we're doing and come back to you with it with a point of view as we as we move into the third quarter.

Okay.

Yes.

Well go to our next question from Lauren Lieberman with Barclays.

Great. Thanks, good morning.

I wanted to follow up on the supply chain question, because I do know that.

In fourth quarter, and even third quarter results, you had talked about supply chain dynamics impacting North America, but at least.

To my recollection. This is the first we've heard about supply chain bottlenecks and headwinds from Latin America and Europe .

And given it impacted sales in the quarter I would think that you would have had a sense of that by the time you reported for Q.

Same goes honestly for the sort of softer start to the year in January So I guess I wanted to ask specifically about the supply chain dynamics in Latin America, and Europe , and then a broader question just on visibility.

Because.

Yes.

Just feels like I know, it's a volatile environment, but.

There seems to be an intra quarter moving target.

And I just level of confidence frankly, as we look forward for the balance of the year. Thanks.

Sure Lauren let me just clarify we have not had supply chain issues in Latin America, the supply chain issues and the.

The volatility that we've seen is principally being driven by the.

North America complexities that we've incurred as well as some shortfalls from some of our raw material suppliers in the middle of the quarter.

In Europe , which created obviously some constraints there so specifically it's been North America driven.

<unk> bye bye, some slight down issues in China as well as some of the Covid related issues. We had in some of our facilities here in North America. So we as I mentioned, we feel very good about where we have now in March structurally things have gotten much better.

Efficiencies in the plant asset utilization capacity output all are moving in the right direction, which are good indications that we're moving we're moving to where we want to be and as I mentioned.

Some of the service level challenges that we've had I think everyone is move through but we were somewhat exacerbated by those in terms of our ability to get what we need it into some of our key customers are now back to historical high level. So good news there no issue Latin America on Europe , specifically had to do.

Dealt with a some raw material shortages. It came from some of our suppliers mid quarter. So that was after we discuss it.

We've set guidance in January that particularly hit us in Europe and that has now moved behind us and things are back to a much more normalized level, we see that quite frankly, all around the world I mean, if you look at a number of issues that we dealt with in 2021 and moving into the quarter this year with raw material supply.

<unk> our contractors those seemed to have subsided, let's watch it carefully because.

Anything can happen in the current world given the uncertainty that everyone is faced with but we have put a lot more resilience into the system now to deal with some of the unforeseen circumstances that we are seeing listen in terms of visibility lowering we were.

We came out of out of last year understanding that we were faced with $750 million of incremental cost and we had the pricing in place to deal with that and the gross margins came in more or less in line or actually just slightly below where we expected a little bit above guidance to the street in the first quarter and then we got hit with the cigar.

Difficult incremental increases to the tune of $5 billion.

Post the January call, which came in mid fab and in tomorrow. So that's been the single biggest issue in terms of visibility for US we did not anticipate those we had cost becoming more benign in the back half initially when we set guidance obviously with the war all of that change so the visibility for us became dramatically different.

As we exited the quarter and hence the change in our guidance that we've communicated today.

Lauren if I could just add one thing going back to your Latin America comment.

There was some impact in Latin America really over the last couple of quarters relative to the supply chain issues, we thought with plant lockdowns in in Asia. So that was what we were referring to in the prepared commentary.

But no nothing relative to Latam.

To further themselves they have been able to obviously continue to do what they need to do but as you know we source quite a bit of product out of Latin America, the cost have gone up.

But we don't have anything that we would consider significant there.

Well go to our next question from Javier Escalante with.

Hi.

Hi, everyone.

I think the two things that it would be helpful. Because.

And it's still unknown lowering.

Laurie.

<unk>.

We feel that your supply chain is very global.

Can you speak about Colgate, you talk about toothpaste and toothbrushes and then the problem in Latin America seems to be that you have problems sourcing toothbrushes our Asia.

Toothpaste in the U S is that our Mexico. So I think that there is a little bit of a disconnect between.

Our understanding of the supply chain.

Your conversation so if you could clarify.

In the U S.

What are the supply chain issues is that Mexico is not delivering into the U S. And then in Latin America is it debt.

Toothbrushes, Indonesia, now coming through into Latin America, and finally in Latin America. As you basically said that you had no supply chain issues that volumes dropped.

So why the drop because if you think about <unk> and Unilever are they grew organic sales in Latin America, 16%. So the consumer seems to be fine. So why is that why is it that Latin America is lagging your competitors. Thank you.

Sure Okay, let me address the supply chain.

First.

Toothbrushes first and foremost as a global supply chain we source.

Predominantly out of out of Asia, as well as some sourcing out of out of Latin America, obviously, given the Lockdowns that we saw in Asia in 2021, and subsequently having an impact in the first quarter that impacted most of our global.

Our global toothbrush business around the world more acutely here in the U S, where we have taken decisions in the fourth quarter and in the first quarter to ensure that we accelerated migration of those toothbrushes when supply came back back online back into refill inventories and improve on shelf ability. So we had issues there, particularly.

North America, where we're having to bring product in expediently in order to fulfill demand that impacted some of our sourcing some of our toothbrush business Likewise in Latin America Likewise in Europe .

But it was more acutely faced by by the North America business and we addressed that our toothpaste business. Historically has been a balance of our global supply chain that works very very efficiently given some of the challenges that we had in North America, we were bringing more product out of Mexico. They will fulfilling increased demand for our product it came into additional cost.

Obviously, as we talked about earlier that freight rates out of Mexico increased we did have some delays getting product across the border at times.

But that was not a function of our problem was a function of what was happening systemically across the marketplace. So our toothpaste supply chain is global it has been a competitive advantage for us for years and years, we're able to now transfer transfer products from one market to another quite consistently and quite efficiently, but as you have delays in one market or <unk>.

Fire.

Implications in one market. It obviously creates a little bit of a bottleneck for you. We've taken decisions to ensure that we are having locations that are efficiently sourcing local markets, where needed and I think today, we're in a much better position than we have been in the past related to dealing with the uncertainty of.

The supply chain network that exists in the world that we live in today. So overall, we think we're in a good place on volumes for Latin America listen.

The only real shortfall in volumes for Us in Latin America was Brazil, we took a high double digit pricing of 15% pricing in that market. We saw volumes come off a little bit, which historically has been consistent with what we've seen we've taken significant pricing Mexico had positive pricing positive volumes across the board. So I would really attribute it.

It to some of the softness we saw in Brazil, because of the rest of the business is okay, and we will see how Brazil unfolds, but this is quite consistent with what we've seen in the past when we've taken significant pricing.

Okay.

Our next question from Mark Astrachan with Stifel.

Thanks, and good morning, everyone.

I guess I wanted to go back and try to understand the pricing strategy for 'twenty two so.

You talked obviously about.

$750 million or so on a cost headwind in January .

Which has obviously gotten bigger but it was still a big number back back then it seems others were a bit more proactive at least it seems to me more proactive and got stronger pricing earlier in the year.

I get your comment the gross margin for you all with better than guided but it was still down a lot. So I guess I'm curious was there a volume calculus in your decision to seemingly lag from peers on pricing and now that you are taking more price how how should we be thinking about volumes relative to pricing for 2002.

In other words kind of what is what has changed or how do we think about the change in your assumptions. There. So if you could talk about the decision kind of first of all whether that's right or not and then how we think about the volume change as a result, thank you.

Yes, what happened in the first quarter, obviously, we saw a little bit of delays in our pricing execution in Europe , which I mentioned earlier in the prepared remarks, given some of the.

The annual negotiations and ultimately how those unfold at the good news is those are behind us as we exited the quarter and we will see that pricing fully reflected as we move into into the second quarter.

We were a little late in the U S. Arguably I think in terms of how we saw things, but we did lead pricing in our core business.

Ahead of competition.

We have seen competition ultimately follow but we did lead.

In the U S. So we felt like we got out ahead of it pretty quickly, but obviously the costs moved a little bit beyond what we expected so coming back to gross margin, we were kind of more in line with what we thought.

We thought we would see most of the pricing come through in the back half of the quarter, which would obviously deliver accelerated sequential gross margin through the balance of the year.

That was the initial assumption, but obviously all things changed when the February and March mid February March cost increases came through we have now subsequently taken more pricing, we will be taking more pricing and developing part of the world as we move through the balance of the year and we're also looking at obviously accelerated pricing, particularly through re.

Launches in the developed part of the World as we move through through the back half.

Go to our next question from.

With Jefferies.

Great. Thanks, good morning, everyone.

No I think we covered a lot of this I wanted to kind of pick up on Lauren's question and some others.

The degree of the downward revision of your outlook versus peers, and even more broadly staples. So everyone can appreciate how challenging the environment is.

Loss in any one for a moment.

But it is difficult for everyone right at the same time, so without being redundant you spent a lot of time on the cost headwinds and supply chain issues.

Do you feel like it was materially different about your business product categories commodity basket, the speed or scope with which you can move on pricing.

Hi chain scope of productivity savings controls around SG&A and your stance on conservatism in guidance as you look at that relative to the peers, which I know you guys are following closely what do you think is very unique about your business is causing a sharp downward revision that we've seen elsewhere. Thanks for that.

Sure. Thanks, Kevin listen, we I think we stated it upfront what is uniquely different for US right. Now is obviously the significant move we've seen in fats and oils and that is a significant part of our cost structure of our business. In addition to things that have moved up quite significantly that historically had been quite quite benign relative.

Two our cost cost of goods things like glycerin, which have doubled in pricing. So fats and oils are the big driver here, we're assuming that those costs will stay at the current levels and slightly increase through the balance of the year I don't know how others are assumed.

That as a result, we have seen we've taken oil more or less at current levels with a slight increase through the balance of the year that may be a different assumption that others have taken and we obviously have the logistics on cost given our short term implications of our global supply chain, which we ultimately think as we move into 2023 will move.

Behind us so that's predominantly the biggest difference we have.

<unk> very strong brands that allow us to take pricing you have seen that consistently year in year out our ability to take pricing, particularly in the developing part of the world and we will continue to execute against that but we will watch the consumer environment.

Carefully we are maintaining our investments in the business.

That's a very important for us to continue to accelerate the topline growth. That's hence why we feel good about the 4% to 6% organic given that we will be maintaining our investments in that piece. So it's really that our logistics our overhead structure just to talk to that we have the the global productivity initiatives as you know that we've launched we're accelerating the savings in that.

Through the back half of this year, our operating costs are just our direct overheads were actually down in the quarter, which again.

We'll get the leverage from that as we move and accelerate sales through the back half of the year, but the biggest difference is we're assuming a continued very very costly inflationary environment through the balance of the year, we don't see that changing at this point I am not sure the assumptions that others have made or whether they've made any assumptions at this stage, but we feel.

It's prudent for the business to create the visibility that you need that we're assuming those costs will continue to be at current levels or slightly above.

Okay.

Our last question from Andrea Teixeira with Jpmorgan.

Thank you for taking my follow up I just.

On the Brazil comment.

Understand like you mentioned, though that the pricing and there was some price elasticity I was just hoping.

If you can touch it was it more on the <unk>.

Personal care side auto care, what are your plans to kind of.

Perhaps more competitive given that the currencies.

I went to your favor I think thats. The good news there is that any ways of trying to defend the share of the volume share given that you probably took pricing more in dollar terms than you would depreciate at that point.

Sure listen it's early days, we obviously took pricing very very quickly as I mentioned, we saw volumes come off a little bit.

In the business and it was quite frankly are more.

Q1 2022 Colgate-Palmolive Co Earnings Call

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