Colgate-Palmolive Company (CL) — Q1 2020 Earnings Call Transcript

Thanks, Mary. Good morning, and welcome to our first quarter earnings release conference call. This is John Faucher, 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 2019 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 table six of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website. Please note that starting today in both the press release and the conference call, we are now using the term Base Business to refer to non-GAAP measures that exclude certain items in both the current and year ago periods. Joining me on the call this morning from their homes are; Noel Wallace, Chairman of the Board, President and Chief Executive Officer; and Henning Jakobsen, Chief Financial Officer. Noel will start off with his thoughts on the current operating environment, and how we are adapting to the uncertainty about COVID-19 and the economy. I will then discuss our Q1 performance and provide some context around 2020 before opening it up for Q&A. Given the busy conference calls scheduled today, we request that you limit yourselves to one question so that as many people as possible get to ask the question. If you have further questions, you are welcome to re-enter the queue. Now, I'll turn it over to Noel.

Thanks, John, and good morning, everyone. First, I hope that you and your families are safe and well during these unprecedented times. Obviously, we're operating in a difficult environment, and we expect things to stay difficult for some time. But there's one thing you should know about Colgate-Palmolive and the 34,000 people at the heart of our company, we're at our best when times are difficult. I want to thank all of the Colgate people around the world, many of whom are listening to this call, who have scaled enormous obstacles to keep our business running and to deliver the results that we reported today. We thrive in difficult times because we are at the heart, a local company with global brands and strategies and best-in-class execution. Our locally based operating model, financial discipline, and sound balance sheet helped to position Colgate to emerge from this crisis an even stronger company. We produce and sell products that people rely on every single day to keep themselves and their families, including their pets, safe and healthy. Our responsibility to our employees, our customers, our consumers, and our communities has never been greater. We treat this responsibility with the utmost seriousness and intend to do our best for all of our stakeholders, including our shareholders. That said, and despite strong Q1 results, we have chosen to withdraw our annual guidance for 2020. This was not an easy decision for us. However, given the combined uncertainty surrounding the future impact of COVID-19 and government actions to stem the spread of the virus, we believe this is the correct choice. The second and third order effects of this crisis through economic stress to our supply chain, retail partners, and consumers are difficult to predict at this point, particularly as they're intertwined. As we proceed through the year, we hope to provide you with updated guidance when it proves feasible. In that light, I want to focus on how we are managing through the crisis to give you the context for what we're facing, but also some confidence in how we are meeting this head-on. I'll discuss three topics; how staying true to our values and purpose is helping us navigate this environment, how we're adapting our strategies and executing with agility, and how we are managing through the crisis with an eye towards the future. Staying true to our values and purpose is vital in the current environment as it impacts both our people and our brands. Our number one priority around the world is the health and safety of our Colgate people and their families. In order to deliver on that, we have to implement many policies and procedures to enhance health and safety standards within the company. We have advanced our safety and screening protocols and made adjustments to our work processes to support social distancing. Where possible, we're expanding these policies to our third-party partners. Additionally, we are expanding our health and wellness programs for our people, including counseling, paid time off to care for family members, and flexible schedules to adapt to changing family circumstances. We have talked to you a lot over the past years about brand purpose and consumers' preference for brands to give them something to buy into. The results we have seen in the marketplace show that consumers are responding to this crisis by focusing on trusted brands. Our marketing teams have created new programs and adapted existing ones to lean into our brand purpose. At the beginning of the year, we began to roll out a new equity campaign for Colgate Toothpaste based on the inherent optimism of the brand. The central idea is powerful; using Colgate Toothpaste gives people the confidence to smile regardless of the challenges or questions they face. We've adapted this campaign in digital settings to highlight how important smiles are in a world where we can't be with the people most important to us. So these days, you just smile, whether on Google Hangouts, Zoom, or FaceTime, that lets people know how you feel about them. We know handwashing is a first line of defense against the coronavirus, and we're very proud of our work with the World Health Organization to promote handwashing by distributing 25 million free bars of soap. We initiated this program to support WHO's #SafeHands campaign and are partnering with Save the Children to distribute the product, particularly in emerging markets where the need is most acute. We're also donating $20 million worth of health and hygiene products to help consumers in hard-hit areas. In New York City, our hometown, we've been donating products to healthcare workers and first responders all over the city. The second topic is executing our strategy with even greater agility. The strategy that we have discussed with you over the past two years is working as evidenced by our reacceleration in organic sales growth during that time. But we know that simply executing our existing plans isn't enough. We need to be even more agile in this new world. We are still focused on our core brands, innovation in faster-growth segments, and expansion in high-growth channels and markets. While we will make some shifts in priorities and timings, our key focus areas do not need to change. Delivering on our core brands will be vital over the foreseeable future. Consumers want to know that the products they are buying are effective and provide good value. This aligns with our portfolio as our core brands are often at base and mainstream price points, which we expect to become bigger focus areas for retailers and consumers as the economic pressures and increased unemployment mount. Our core innovation strategy will bring news to these big segments and is intended to bring added value in a period where price increases may be difficult to take. We will also continue to focus on innovation in faster-growth segments. Our plans for 2020 and 2021 will still include significant premium innovation as it is often innovation that drives store traffic. As part of our efforts to expand our business in faster-growth channels, we have focused even more aggressively on e-commerce and direct-to-consumer. This was the learning that we took from our experiences in China in the first quarter, which helped us to shift resources towards channels that will benefit from disruption in our markets. We saw significant e-commerce share gains in toothpaste in the US in the first quarter behind the launch of Optic White Renewal. And Hill's worked with their brick-and-mortar partners to accelerate their e-commerce offerings in order to offset lost store traffic. Overall, our e-commerce business was up more than 50% in the first quarter. And our North American division e-commerce sales more than doubled in the quarter versus prior year. Our professional teams have learned new ways to engage their customers in a socially distant world. Similar to what we do with Hill's to Home, PCA Skin is helping their spa customers by having them book orders for direct-to-consumer shipments so they can still drive revenue. But agility isn't just executing our strategy the same way we had planned. In this current environment, it requires streamlining our processes and making decisions more quickly so that we can get better respond to our customers and consumers' needs. There's no better example of this than our global supply chain. As the crisis hit, we mobilized our supply chain teams to offset lost production in China by increasing manufacturing elsewhere. We established strict safety procedures in China, which allowed us to reopen our factories in a safe and efficient manner. Now, we are operating at over 100% of our expected capacity in many of our Chinese plants, which is helping to alleviate pressure in countries where COVID is still a developing problem. By taking these procedures around the globe, we helped our Anzio, Italy plant stay open throughout the crisis, delivering 40% more volume in March than initially anticipated. After realizing the scale of the increased demand for many of our health and hygiene products, our marketing and customer development teams worked with our retail partners to develop streamlined product offerings that allow our supply chain to produce fewer SKUs for longer runs, which increased capacity to meet consumer demand. We also identified alternative formulas, materials, packaging designs, and product artwork to give us flexibility as we prepare for further disruption in our networks. We have also become more digitally oriented by transitioning 10,000 people to work outside the office. Thanks to the resilience of our global networks, our quarterly closing process is one of the smoothest in memory despite the fact that all of our shared service centers in Mexico City, Warsaw, and Mumbai are all working 100% remotely. And all of this happened in just nine weeks since I presented to you at the CAGNY conference. This great work has helped us deliver the results that we reported today. This proven capacity for agility will continue as we encounter ongoing impacts from the crisis, economic uncertainty, and foreign exchange headwinds. Our third priority is balancing how we manage to get through the crisis, ensuring that we can win when it's over. We have established and re-established our top-line momentum over the past two years. We need to sustain that momentum and adapt our financial plans to deliver in a very difficult 2020, while leaving ourselves well-positioned for growth when markets normalize. We will continue to support our brands through impactful marketing programs. We know that compelling advertising behind strong brands is crucial to maintaining long-term organic sales growth, which is the key value driver for our company. We also need to further invest in the capabilities that are driving growth: digital, e-commerce, and analytics. We will not fall behind in building the skills needed for when the economy comes back. Productivity is always a priority for us. And in these times, we work even harder to take costs out of the P&L to help offset some of the additional pressure that will come from COVID mitigation, foreign exchange, and the weakening economy. Our Funding the Growth initiatives are ramping up to take out discretionary costs that may be unnecessary given the current business environment. We're using analytics to identify and eliminate promotional programs that are not generating value given the consumer environment we find ourselves in. I will finish up by reminding you of our strategies surrounding cash flow and liquidity, which remain unchanged. We have historically generated significant amounts of free cash flow, a trend that continued in the first quarter. Our priorities for uses of cash include capital investments for productivity and future growth; paying dividends to our shareholders, which we have done consistently for 124 straight years; and acquisitions to accelerate growth. We generally allocate the balance of our cash flow to share repurchase. Consistent with prior comments, we have moderated our share repurchase activity as we focus more of our cash flow on reducing the debt from the Filorga and Hello transactions. Turning to liquidity, we've been issuing commercial paper throughout the crisis. We remain committed to our AA minus debt rating. And as of the end of the first quarter, we have cash and cash equivalents on hand that are more than three times our long-term debt maturities over the next 12 months. We also have access to lines of credit should we need them. So those are our priorities. Although there is a tremendous amount of uncertainty right now, I am confident that we have the right priorities, the right strategies and most of all, the right people, Colgate people to navigate through the crisis and emerge stronger on the other side. And now I'll turn it over to John to discuss our Q1 results and provide some context on our full 2020.

Thanks, Noel. We delivered strong operating profit, earnings per share and cash flow in Q1 2020 as we responded aggressively to the COVID-19 pandemic around the globe. We delivered a combination of volume and pricing growth, with organic sales growth across all four categories and in every division except for Asia Pacific, where China and India were negatively impacted by the pandemic. While pantry loading due to COVID-19 obviously provided the benefit to the quarter, our sales and profit trends were strong through January and February. As Noel mentioned, our underlying growth strategies are working, and we believe they will continue to benefit us going forward even as we adapt to a new reality. On a GAAP basis, our gross profit margin was 60.2%, up 130 basis points year-over-year. On a base business basis, our gross profit margin for the quarter was 60.3%, which was up 110 basis points. Our gross profit margin was up in every division in the quarter. For the first quarter, pricing was 70 basis points favorable to gross margin, while raw materials were a 130 basis point headwind, including the transactional impact from foreign exchange. Productivity added 150 basis points. Mix was a 20 basis point benefit in the quarter. On a GAAP basis, our SG&A ratio was up 90 basis points as a percent of sales. On a base business basis, our SG&A ratio was up 100 basis points in the quarter driven by an increase in advertising to sales as our advertising spending was up 13% year-over-year. Excluding advertising, our SG&A was up slightly year-over-year driven by an increase in logistics costs as we work to meet heightened demand. On a GAAP basis, our operating profit was up 8% year-over-year, while it was up 6% on a base business basis. Our EPS was up 28% on a GAAP basis and up 12% on a base business basis. As Noel mentioned, we delivered strong cash flow growth in the quarter, up 28% year-over-year due to net income growth, favorable working capital performance, lower tax payments, and the lapping of a voluntary pension contribution in the year ago period. North America delivered strong growth in the quarter, aided by increased consumer demand across all categories, particularly liquid hand soap and dish soap and household cleaners. As Noel mentioned, we're particularly pleased with the performance of Colgate Optic White Renewal toothpaste, which is driving share gains for the Optic White franchise, both online and in brick-and-mortar. Latin America net sales were flat in the quarter as strong volume and pricing growth were offset by significant foreign exchange headwinds. All three categories delivered strong organic sales growth in the first quarter, led by Oral Care. Both Mexico and Brazil delivered a good mix of volume and pricing growth. Colgate Total delivered strong growth in the quarter, helping to drive our premium portfolio. Our digital marketing campaign that Noel mentioned has reached over 135 million users across multiple platforms with engagement and view-through rates well above CPG norms. Europe's double-digit net sales growth in the quarter was driven by 8% organic volume growth, the inclusion of Filorga, minus 1.5% pricing and negative foreign exchange. Europe's high single-digit organic volume growth was driven across all categories and every hub. Palmolive liquid hand soap and Ajax cleaning products drove strong sales growth across the division, while Sanex Body Wash reached peak market shares. In the U.K., our premium Toothpaste business behind Colgate Total and Colgate Max White Ultimate drove organic sales growth and market share gains for the Colgate brand. The first quarter was a difficult one for the Asia Pacific division. We saw a significant impact on China from the COVID-19 pandemic throughout the quarter, while India was impacted by a country-wide shutdown that began in late March. In China, we have begun to see the country open back up. And trends are improving in Q2, but we caution that the country still is not back to pre-crisis levels. We continue to focus on innovation, particularly at premium price points in the e-commerce channel. Our Colgate Miracle Repair toothpaste with concentrated amino acid is the biggest driver of growth for Colgate's e-commerce business and has helped drive a more than 20% increase in average selling price for our e-commerce business in China. In India, we are still experiencing disruptions to both our supply chain and our retail network, consistent with what you have heard from other companies. Trends have started to improve, and our plants are beginning to ramp back up. But we still expect an impact from the crisis in the second quarter. In Africa Eurasia, our strong net sales and organic sales growth was driven by volume growth across every hub. Our focus on faster-growth channels continues to pay dividends, particularly in terms of discounters in Russia and Turkey. We saw continued improvement in our South African business. Our Protex brand, which delivers anti-bacterial and anti-derm benefits, is uniquely positioned for the current environment and drove significant growth in Q1 in South Africa and many other markets around the world. And I'll finish off with Hill, which continues to deliver excellent results. Those remain an example of how execution of a consistent strategy around brand purpose, core innovation, and a focus on faster-growth channels can deliver growth in any markets. Sales growth was led by North America, where continued double-digit growth before the pandemic was augmented by consumer pantry loading late in the quarter. The e-commerce business was up by more than 50% as we drove strong growth across all platforms. In Europe, Hill's delivered its fastest net sales growth and organic sales growth in many years, with growth in advance of the impact of the crisis. Prescription diet drove the growth in the quarter, and we are beginning to see the benefit from the Science Plan relaunch. While we are not providing guidance, we want to provide some context around certain factors that you should consider as you work on your models for 2020. Our organic sales momentum continued into April, although foreign exchange continued to worsen as we benefited from the rebuilding of retail inventories and increased demand in certain categories, offset by weakness in some emerging markets. As we mentioned in the press release, based on current spot rates, we expect foreign exchange to have a mid-single-digit negative impact on net sales for the full year. We now expect our tax rate to be in the range of 21% to 22% on a GAAP basis, while on a base business basis, we now expect our tax rate to be in the range of 23.5% to 24.5%. Also, as Noel mentioned, we continue to plan for less benefit from share repurchase in the year as we focus more of our cash flow on reducing the debt from the Filorga and Hello transactions. And with that, Mary, can you open it up for questions?

Hey, guys. Good morning. Hope you’re all well. So you mentioned a potential negative impact on forward category growth in this new environment. Noel, I was just hoping you could be a bit more specific on your expectations in some of the key emerging markets countries. Are we looking at a potential magnitude that's significant in your minds or more modest, and perhaps you can compare and contrast the situation we saw in the last recession a little more than a decade ago. And then also from a revenue perspective, one of the unique aspects of Colgate is the professional recommendations, whether it’d be dentists, veterinarians, or dermatologists now. So, can you just help us understand how much of an impact the lack of office visits you think could have going forward on market share and ultimately, revenue? Thanks.

Good morning, Dara. Let me start with taking a step back on, as you referenced, 2008, 2009 and reaffirm some of the strengths that allowed us to emerge through that crisis stronger. The portfolio of our business is very strong in recessions, as you well know. We have price points across the full continuum, particularly our core businesses. Playing on your comment around the professional endorsements that historically played very well for us and will continue to play very well for us during this crisis, particularly given the scientific nature of our products, and the efficacy of our products, and I wouldn't expect given that some people will not be visiting the profession, the strength of the brand will be altered in any way during that period. The brand continues to be very, very strong, and our endorsements from the professionals all over the world continue to be strong. So I don't anticipate that we'll have any issues. Certainly, some of our business moving through the profession will be impacted in the short-term, but long-term the brand strength will continue to prevail in this period of time. Moving on to the category, listen, we've seen a lot of volatility in the categories. Hence, one of the reasons that we pulled guidance. There's a lot of uncertainties as things jump up and down. But rest assured people are still brushing their teeth. And as you've seen, people are still taking a lot of showers and washing their hands. In some categories, we expect the behavior change to be quite consistent over the next couple of months. Liquid hand soap, bar soap, bar cleaners, we've seen a real acceleration in consumption in those categories. And our anticipation is those will continue. Oral Care has been negative as some of the pipeline comes out from February, March, and April. But we expect that category will come back, particularly as economies start to loosen up and you get more and more traffic coming back in the stores. As you've seen, we've had tremendous growth in e-commerce. That was what we discussed at the CAGNY, it's a big, big focus area for us over the last nine months. We put a lot of resources into that space. We're really learning. Obviously, the Hill's business is best-in-class. We're transferring those learnings around the world. So we're getting consumption in the categories that you're seeing quite weak in brick-and-mortar coming through in e-commerce now. And certainly, that will play well for us longer-term. So overall, categories will come back, a lot of volatility right now in emerging markets. I was on the phone this morning with our Asia team, and they're seeing things come back quite nicely. We're about 75% of where they were pre-crisis, but that has stepped up meaningfully over the last six weeks or so. And so overall, we'll see categories come back, but it's about getting store traffic back and getting some of the economy solutions. But overall, looking okay.

Thank you. Good morning, and hope all is well. So you sounded very positive to Dara's question on consumption trend, especially soap. So Noel, I was hoping if you can comment a little bit of consumption and what's happening in April. Are you still working on replenishing the shelves? Or did you benefit from stockpiling, primarily, I would say, probably in North America and Western Europe? Or are you seeing trends reaccelerate as you go? And how much production capacity are you being able to keep up to your comments about Asia and other parts of the world? Thank you.

Sure. Thanks, Andrea. So let's take North America first. Obviously, significant spikes in March relative to consumption, a lot of the panic buying, but more importantly, some of the trends I articulated earlier around how we're seeing consumption increase in certain categories like bar soap, like liquid hand soap, like floor cleaners. And that has continued through April, as John said. We've seen strong category growth in those specific areas. Obviously, some of the momentum that we're seeing in April is replenishing inventories that were at very low levels coming out of March, particularly in those high-demand categories. Conversely, in categories where we saw pantry loading like Oral Care, we've seen the categories come down in consumption as you would expect, given the pantry load that was in March and no specific reason why consumers would be brushing their teeth more. So it would be what you expect. Categories where consumers are using them more, good consumption, and categories that were driven by some of the panic buying has slowed down, and in fact, are negative in April. And that would be consistent for both Europe and the U.S.

Hi. Just one housekeeping issue. On Hill's, can you remind us what percentage of that business is e-comm? And I know you said the whole business, the whole company on e-comm was up 50% for the quarter, but can you tell us a sense of how much Hills' e-comm business was up. But then my real question is more structurally, actually on China, where I know you've had some market share challenges over the last couple of years. I'm just curious, because I know that's a very fragmented market. There's so many local brands in the Oral Care category. Do you think you've done anything structural in that category so that you're going to emerge from the COVID crisis with a stronger market share position? I'm just wondering if the crisis has sort of helped wash out maybe some of that local competition. Thanks.

Sure. Thanks, Wendy. Let me take Hill's. Obviously, as John mentioned, the Hill's success, once again, in the quarter was extraordinary. And I think it really points to the underlying strength of that business: one, great core innovation; two, great efficacious scientific brands that play really well in the marketplace; and three, an incredibly adept organization around winning digitally and winning online. Specifically online, to your question, their business was up in excess of the company growth, which was around 54%, 55% for total Colgate. Hill's was up 57% in the quarter and saw good progress across particularly some of the key initiatives they implemented with some of the brick-and-mortar retailers, which was unusual, given some of the struggles that that retail environment had. But overall, great growth on Hill's. It's a high-teens percentage of sales. It continues to grow, obviously, and the success we've had with some of the Science Diet relaunch, particularly in some of the pure-play retailers has been quite notable. Moving on to China, all the strategies, Wendy, that we put in place that we've talked about over the last 18 months or so, repositioning the portfolio, moving significant structural changes relative to moving from brick-and-mortar to online, both in resource and capabilities, all of that is playing out really well for us. We've stepped up our innovation, particularly in the online space. You heard John talk about Miracle Repair. I did get some good news this morning that the Darlie franchise has returned to the number one share of market brand in the country. We had lost share market to Yunnan Baiyao, the local player. We have returned to leadership in March, which is terrific. Shares are up for both Colgate and Darlie in March. We're seeing good progression there, particularly in the online space. More work to do on Colgate. However, the significant repositioning of the portfolio will happen in the back half of this year. But structurally, we've made all the changes that we think are necessary to win. And as I mentioned earlier, I think big brands are going to win in this environment, whether it's in Asia or anywhere around the world, the proven efficacy positioning, the scientific knowledge that we have, and how we communicate that in our brand purpose, particularly around our core businesses, will bode well moving forward.

Great. Thanks. Noel, maybe just to build on that. You've spoken about what you're seeing today on the ground generally in emerging markets. But can we get a little more insight into how you're thinking about the go forward? Just comparing what you just said there about China to what you expect over time in India versus Eastern Europe versus Brazil and Latin America. And I guess, whether in terms of the shape of consumer demand, the competition, and market share outlook. And specific to Latin America, your confidence in your ability to realize pricing where those FX transaction cost pressures are probably going to be most acute over the next couple of quarters? Thanks.

Historically, we manage crises effectively in emerging markets due to our pricing power. Our current strategy will be slightly adjusted as we encounter recessionary pressures. We see significant opportunities in the premium segment, which we've discussed for the last 18 months, particularly around premium innovation. This focus will continue, but we will also increase our core innovation, especially considering the price points and size of our businesses in emerging markets. These core innovations often represent the starting price points in major markets like Mexico, Brazil, and India. We're rapidly adapting to shifts in consumer behavior, especially regarding health and hygiene, and how it affects our products. Recently, our focus on relaunching Total, particularly with its antibacterial benefits, has been very successful in the past several weeks. We've seen strong performance in markets like Brazil, Mexico, and the U.K. as our premium innovation for Total gains traction. Moving forward, we will emphasize core products while also pursuing premium options, and we’re confident in our positioning within emerging markets. However, we can't predict the extent of unemployment or potential lockdowns from COVID in these areas. Nevertheless, our portfolio is well-aligned to adapt to emerging trends. The same strategy will be consistently implemented globally, with local adaptations as needed, although China may require a different approach due to specific portfolio strategies for that market. Regarding Latin America, the recent currency devaluation has been significant, and we’re taking steps to address this. We've already implemented price increases in the first quarter and plan to continue doing so, though this will become more challenging in the current environment. We're carefully managing promotional spending as store traffic decreases and focusing on revenue growth management and price pack architecture while navigating a recessionary environment. We anticipate that these efforts, alongside a stabilizing material pricing environment, will help us maintain the integrity of our Latin America P&L and continue necessary investments to emerge stronger from this situation.

Hi, thank you. Good morning. I would like to discuss changes in your perspective on innovation rollout, especially considering the stock performance and the upcoming recession. Additionally, marketing has been particularly strong this quarter, indicating considerable support. As you reflect on the remainder of the year and the state of consumer pantries, how do you envision innovation and marketing moving forward? Thank you.

Sure. Thanks, Olivia. So as I just mentioned, we've been doubling down on innovation for the better part of 18 months now. And it's interesting as a management team, as we've gone into this, we've obviously been looking specifically at what innovation is right for the current environment. We will be moving some things around as necessary. We're dialing up some areas. We've orchestrated a series of teams internally to work specifically around some of the common truths that we're seeing, particularly in the health and hygiene spaces: one, how we adopt our portfolio; and two, how we accelerate innovation moving into this. What's interesting is we have just a long history of great clinical studies and claims and science behind our products that we think we can pull out of the jaws and use in this current environment, great formulations with great science and claims that will play into health and hygiene. So we think it's very appropriate for us to look at our innovation and modify it as necessary moving forward. And the key focus for us here is agility and doing this really, really quickly. So you'll start to see some of that innovation come to the market in the back half of this year already that wasn't necessarily there before. Some of the bigger premium innovations, as I mentioned, will stay. We will alter those based on some of the spacing, whether it's moving out later in the third quarter, so to speak, versus earlier to allow some normalization, particularly in some of our key markets where we see store traffic down quite considerably right now. So that will happen. Continuing to support the business, we've always done that during tough times, and we've come out stronger as a result. The brands have emerged stronger. We see competition spending quite a bit, at least on the media side, a lot more movement for us in the digital and e-commerce space, which we're putting a lot more money in. And I think you can see the results that we generated in the first quarter. Certainly, that shift of resources and spending in e-commerce has paid out for. So marketing spending will be prudent and thoughtful moving forward to be sure. But we'll continue to support our brands, which we believe is in the best interest of generating the long-term growth that we want to deliver.

Thanks. Good morning, everyone. And I hope you are doing well. Noel, question on consumption trends and specifically, those increases in consumption that are more transitory in the current environment versus those that you see as more lasting, given changes in consumer behavior. So we're already seeing a move towards greater working from home. I think there's every expectation that's going to persist, heightened emphasis on health and wellness, accelerated shift to e-commerce, just to name a few. But as you think about your portfolio across Oral Care, Home Care, Personal Care, and Pet, can you discuss whether you see a change in consumption trends longer term that are more lasting? If so, do you see this as a net positive for your portfolio? Thank you.

Sure, Kevin. And the obvious is we have a very large soap business globally, one of our bigger categories. We obviously have a large liquid hand soap business, particularly in Europe and the U.S. We don't talk a lot about our Home Care business, but we have a very strong Home Care business in Latin America as well as in Europe and growing really quickly in North America. All those businesses, we're seeing behavior changes that we think will stick moving forward. I mean, consumers will wash their hands more, people staying at home will be cleaning their floors more. Obviously, people are washing their clothing more. So our fabric softener business will benefit from that. So categories where we see behavior change, we compete in quite a few of them. Obviously, people aren't going to stop brushing their teeth. And that will continue to be obviously a growth opportunity moving forward for us, but we don't see any sizable changes there. We'll see more volatility in the Oral Care space, I think, because you probably see more pantry loading in terms of how people are buying products coming in and out of the category less frequently. So obviously, as we think about innovation, we'll have to time that innovation quite carefully and be quite prudent on that. So overall, our categories are positioned quite well. Obviously, skin health is an area where we've seen quite a bit of disruption in, whether it be travel retail or some of our pharmacy business in Europe as well as our derm business here in the U.S. And we're working very closely with those teams, particularly in the area of telehealth, working on opportunities to continue to engage those communities so they can serve their customers with product online. We talked about the Hill's to Home model that we've been driving over the last year, which has done very, very well for Hill's. We're expanding that into our skin health business in order to stimulate demand at both institutions and spas as well as derms. So, overall, we'll see that category go through a bumpy road, we think, over the next couple of months, six months or so. But if you go back to 2008 and 2009, you know, it took more or less nine months to 12 months for that category to come back. The basic fundamentals for skin health long term are still really, really good. It's a highly profitable category. So long-term, we're very comfortable with where we are, but we'll make the necessary changes in the short term in skin health.

Thanks. Good morning. And again, hope you and your family are well.

Thanks Bill.

Just a kind of question on the supply chain. I mean, certainly remarkable, as I'm sure you're aware, that you and your peers can kind of have manufacturing plants running at 80%, 90% capacity on a regular basis, all of a sudden, takes the surge of the business and really have pretty limited out of stocks. And so I'm just trying to understand what near term, is that margin-accretive business as you're going even faster? Or do you have to have incremental costs that will ease as you go forward? And then longer term, what does that tell you about your supply chain that you can handle that much more capacity when you thought they were already at 80% to 90% utilization?

Yes. Thanks, Bill. So again, as I mentioned in my prepared commentary, it's been inspiring to watch our supply chain around the world deal with this. And we have discussions internally how important some of the crisis management meetings that we have throughout the year to deal with contingency planning and risk mitigation. And all of that really prevailed during these difficult times. It's the global supply chain and the standardization that we have and how we operate it, while globally is still very local, we're able to shift resources very quickly. So as I mentioned, right out of the gate, when China started to struggle, we shifted resources into Europe immediately. And we're able to supply everywhere that China was supplying out of Europe. Likewise, as Europe started to be challenged or Latin America or U.S. started to be challenged, we were able to shift back to Asia. So there's a lot of flexibility in our supply chain and credit to the team. A lot of work goes into that, to be sure. Some of the incremental volumes that we've seen, obviously, we pushed to contractors, that comes out of the lower margin. But moving forward, as we work on some of these standardization opportunities that I mentioned, for instance, working with some of our key trade partners to simplify our portfolios, that will allow us to reduce the SKUs that we're producing and bring some of that production back in-house, where we can elevate capacity based on the simplification efforts that come through that. Obviously, strategically, we're also looking at investing in some of these categories to expand capacity as required moving forward to ensure that we can meet the demand that we see ongoing. So, short-term, we anticipate that there's some margin implications with the costs associated with COVID, whether it's logistics or some of the contract that we have longer term or we'll bring that back in-house and find ways to continue to deliver the margin that's accretive to the business.

Hi, good morning, Noel and John.

Hey, Steve.

Question on the incentive structure back to 2019 when, Noel, when you took over as CEO, it seems like there's a greater index waiting to organic sales emphasis and market share performance. So within that, how do we think about there is visible pockets of opportunity over the next two, three years? And specifically, how can Colgate use the volatility in the current marketplace and kind of lean in with investments to emerge stronger during this period of time. And John, quick clarification for the FX implication to sales, how should we think about the multiplier factors, what that could be to EBIT dollars or EPS? Thank you.

So, Steve, as I mentioned, we've been around for a very long time. Colgate has faced numerous crises, economic downturns, and even pandemics. This situation is certainly unusual and filled with unpredictability, as you've likely observed in recent news. However, we are committed to focusing on the fundamentals we've been developing over the past two years to enhance our business. This includes building brands with purpose, which is why we will continue investing in our brands. We've learned that our capacity to innovate and invest during challenging times allows us to emerge with robust brands and positive income statements. We will persist in this approach. We've increased our productivity measures, as I've often mentioned. We're leveraging digital tools in a new way throughout the company. The collaboration tools we implemented, particularly those from Google's suite, have proven to be remarkably effective, enabling 10,000 people to work virtually from day one, showcasing our IT team's capabilities. Additionally, we're using technology to enhance productivity in our operational processes, and we will continue to ramp this up. Regarding our incentive structure, we will maintain our focus on organic sales and bottom-line profitability. This remains a priority for the company. You’ve seen our business reaccelerate over the last six quarters. Even with some pantry loading, we saw an increase in our organic sales this quarter, both for Hill's and Colgate. We believe the underlying fundamentals of our business are quite strong. Continued investment and capability building, especially in digital, e-commerce, and analytics, will position us very well as we move forward.

Great. Thanks. Good morning.

Hey Lauren.

I wanted to discuss further what we've covered regarding Latin America. We've been considering how some of the strategies you've outlined in the longer-term plan related to premium innovation and exploring new channels might impact category growth in the region. It seems that household penetration and daily usage trends may have plateaued to some extent. If a significant recession were to hit those areas, would the market growth slow down, rendering your acceleration efforts less effective in the near to intermediate term? Or is there a possibility that more opportunities for household penetration or usage could sustain healthier market growth rates?

Yes. Thanks, Lauren. It really depends on the category. I mean, obviously, some of the ones I mentioned earlier like liquid hand soap and bar soap, we will expect in emerging markets, for instance, liquid hand soap penetration to grow. Those are fundamentally bar soap markets. But the efficiency and hygiene nature of liquid hand soap may lend itself to increase brand penetration. Products like spray cleaners and wipes, we'll see more penetration grow, and we're expanding those as well. So there are certain categories where we see certainly the opportunity to grow penetration, particularly ones that provide an efficiency or an added value, and that will be our focus. Consumption in those categories, likewise, will probably offset some of the pricing pressures that you'll see in some of those markets. We typically found not significant trade down in recessions, but you do get some for sure. And we've been able to deal with that with revenue growth management, obviously, a focus on innovating behind the core, which is, as I mentioned earlier, usually at opening price points. And that allows us to take pricing in those categories. Price pack architecture and recessions has always worked quite effectively for us. So it really depends on the category and the market. Overall, we'll probably see a little slowness or a reduction in terms of value growth. Volumes, as I mentioned, people don't stop brushing their teeth. And in categories which we mentioned, we in fact, think we'll see an increase in consumption moving through this.

Yes, thanks, and good morning everybody.

Hi, Mark.

A quick follow-up. So one, just on Latin America in terms of how are you thinking about pricing in a market, especially some of the bigger countries where inflation is actually below recent historical levels. I mean, I recall more pricing to inflation as opposed to FX, so maybe just some thoughts there. And then secondly, just a reminder on input costs and the ties to oil kind of directionally, and how we should think about that potentially being offset by some of the higher costs that you mentioned before on manufacturing, other things you're doing around COVID?

Sure. On the pricing front, we are being cautious in some emerging markets. Historically, we've been aggressive with pricing, especially in the first quarter, which will continue throughout the year. We plan to approach pricing creatively by managing our gross to net more effectively, especially with reduced store traffic. We'll also focus on different channels and innovate at various price points. Our strategy will consider competitor actions, but since we hold strong positions in most emerging markets, our aim is to take the lead on pricing while being mindful of the current environment's sensitivity. Regarding costs, we expect them to be less of a challenge compared to the previous year. Resin prices have decreased, although agricultural prices have increased. Overall, we anticipate fewer headwinds than in the latter half of last year, and we will monitor the situation closely. There's usually a six to nine-month lag between falling oil prices and their effects on our financials, but we expect a more favorable environment in the last half of the year. Some COVID-related costs should lessen as we bring more production in-house and as panic buying stabilizes, allowing for better capacity planning. Additionally, we are striving to maintain customer service despite the anticipated rise in logistics costs compared to last year.

Thank you very much, everyone. Noel, John, I want to point out that the press release seems quite conservative. You're withdrawing guidance, but everything I'm hearing on this call sounds very positive. April was strong, you're increasing advertising by 13%, and you're enhancing your marketing efforts. Your e-commerce performance is impressive, and conditions in China are improving. You're seeing significant ongoing increases in cleaning and sanitary products, and good volume and pricing in Mexico and Brazil. Your cost outlook for the second half of the year looks very encouraging. So I'm a bit puzzled about the caution expressed in the press release and the withdrawal of guidance, especially given the overall positive commentary so far. It’s a tough environment, but the outlook appears strong, which leaves me confused.

So listen, it's straight to what we said in the commentary. The unpredictability of what we're seeing across the world is at a level that we've never seen before. Obviously, India, we didn't anticipate would shut down like it shut down. We had plants and distribution channels shut down for almost two weeks. They're obviously coming back online as we speak, but that had a significant impact at the back end of the quarter and has had a significant impact in April. And we can't predict exactly where it's going to happen. Obviously, we've seen things creep up in terms of the number of incidences in Brazil. So, what happens there going forward. So again, it's the unpredictability of what we're seeing all around the world. And you combine that with the continued strengthening of the dollar around the world and the foreign exchange headwinds that gives us pause. And we've seen, obviously, a lot of volatility, likewise, in some of the consumption numbers that we've been talking about throughout the call. They're jumping all over the place right now. And so it's very difficult to get a line of sight on how things are going to ultimately unfold. Yes, the fundamentals of our categories are good long-term, but the uncertainty with government regulations and disruptions moving forward, we think it's the prudent thing to hold our guidance at this stage. And we'll come back to you as soon as we can when we have a little bit more confidence on where things are headed.

Hey. Good morning, folks. Thank you for signing me in. Hope everyone is well and congrats to you and your firm for navigating the situation as well as you have so far. I want to come back to the last question because I thought it was a great question. I mean you responded to the part about why pull the guidance, I get it. But I think Rob and I had the same reaction to the press release and the same conflicting interpretation of this call so far. I want to zoom in on one line in the press release that maybe I read too much into. But in there, you say you expect government actions, consumer behavior related to COVID-19 and economic uncertainty to reduce category growth in many markets. I read that, and I interpret that as unequivocal deceleration on the forward. Maybe you were just simply referring to the exceptional growth in the first quarter. But when I listened to you walk through your expectations of each category and market, I hear lots of puts and takes. Skin care, a little softer, maybe a little bit of trade down in Oral Care, but all this is going to be offset by personal and home sanitization and cleaning. Is that the right interpretation? It's going to be choppy and slower in the first quarter, but as you think about underlying growth rates, while there's a lot of uncertainty, you don't really have a reason to think that your category is going to be materially slower going forward.

Yes, Jason, if you examine the weekly and monthly trends across various categories worldwide, there is significant variability, particularly in Oral Care. In contrast, categories like liquid hand soap, bar soap, and cleaners have shown more consistency. The largest uncertainty, in our perspective, is the extent of the global recession we may encounter. Combined with the challenges posed by foreign exchange fluctuations and the difficulties in implementing price increases—although we have been successful in this regard—this situation is quite unique. The unpredictability and disruptions we are experiencing are noteworthy. For instance, if major markets impose more lockdowns, it will be a considerable challenge for us and the category as a whole. A potential rise in unemployment of 10% to 15% in certain markets is unprecedented for us, and such a scenario will affect the value orientation of our categories as well. Overall, there’s a lot of uncertainty ahead. We are striving to position ourselves effectively, leveraging our experience, but as I mentioned, there’s considerable unpredictability given the factors I’ve outlined.

Well, thanks, everyone. Obviously, unusual and unprecedented times, I want to once again thank all the Colgate people. It's inspiring to work with such an incredibly talented organization. We're greatly benefited by having a management team that has dealt with this level of uncertainty, but obviously, working hard to continue to deliver the results. And we look forward to having more discussions with everyone moving forward. Thanks, everyone. Be safe.