This paragraph introduces the Colgate-Palmolive 2023 Second Quarter Earnings Conference Call and its participants. John Faucher, Chief Investor Relations Officer and Executive Vice President, M&A, provides a warning that actual results could differ from forward-looking statements and that non-GAAP financial measures will be discussed. Noel Wallace, Chairman, President and Chief Executive Officer, and Stan Sutula, Chief Financial Officer, will provide thoughts on Q2 results and the 2023 outlook before opening the call up for questions.

In the second quarter, the company saw strong organic sales growth in all six divisions, with organic volume and pricing growth accelerating on a two-year stack basis. Revenue growth management efforts, combined with progress on funding growth, drove a stronger gross margin both sequentially and year-over-year. Additionally, SG&A was down 30 basis points and advertising spending increased by 20%, resulting in 60 basis points of operating margin expansion. Despite pressure from below the line items, the company was still able to deliver upside versus expectations.

Noel Wallace discussed the strong quality of the quarter's results, which were driven by a combination of growth, revenue growth management, cost containment and productivity. This also laid the groundwork for future performance, and cash flow was up more than 50% in the quarter. Wallace noted that Colgate-Palmolive has the brands, global footprint and people to deliver consistent, high quality compounded top and bottom line growth. Dara Mohsenian asked about the balance of organic sales growth going forward, and whether volume could come back as pricing drops off.

Noel Wallace is discussing the company's efforts to improve their quality and restore their gross margins. He is emphasizing the need for consistent and deliberate pricing in order to combat the cost inflation that the company has experienced. He is also noting the impact that pricing has had on volume, citing China as an example.

The Hawley & Hazel joint venture has taken pricing in order to increase profitability and shift to e-commerce. This has had a short-term impact on volume due to lower promotions and wholesaler inventories. However, the long-term implications of not restoring margins are more problematic. Hill's business is still seeing high levels of cost inflation and gross margins are still down year-over-year, so additional pricing has been taken to get the right margin structure for the long-term. The volume decline in the quarter was primarily in emerging markets due to go-to-market changes and shipments, but Europe was strong.

Noel mentioned the need to take incremental pricing, and gave more detail as to which categories and countries this pertains to. He also gave information about the response to the pricing increases and the magnitude in comparison to previous increases.

Noel Wallace explains that global market shares for toothpaste are up, with strong growth in Europe and softness in North America. He also notes that pricing will likely increase in higher inflationary markets like Turkey, Argentina, and Pakistan, and that Hill's business has seen ag prices accelerate through 2022 and into 2023. He concludes that most of the pricing in the P&L this year is flow through from last year, but there is still some left to go.

Noel Wallace explains that the investment in Europe has been successful, with the elmex and meridol brands seeing an increase in share, as well as Colgate's premium whitening efforts. The investment is not limited to Oral Care, with a relaunch of Sanex, Soupline and Suavitel underway. In Latin America, there has been a pickup in exchange, allowing for more advertising. North America is taking a bit more time, with promoted share falling off, but non-promoted volume share increasing.

Noel mentioned that the Colgate brand in North America is seeing good improvement in terms of equity. Asia has seen a fall-off in the biggest business, Darlie, due to price increase, but the Colgate business overall is responding well. Africa has seen an elevated increase. Advertising takes quarters of consistent growth and the quality of the P&L allows them to sustain the advertising, which they increased in this quarter. Andrea asked about the brand support above the line in North America, and when to expect an improvement in volume share. Noel also mentioned that the impressive margin rebound came from raw material and packaging, and was still ahead of the 540 basis points negative impact.

Noel Wallace discussed the need to reallocate promotional dollars in an environment of inflation and recovering costs. He mentioned that they pulled back on promotional volumes due to some of them being unprofitable, and will be thoughtful in how they approach categories and promotions in order to maintain margins in the P&L. They will also have easier comps on pricing in the back half.

Noel mentioned that the gross profit does not include logistics and cost of goods, but they had a strong quarter relative to gross profit acceleration. Stan Sutula then discussed how raw materials are still a headwind but they are driving funding and growth savings. He also mentioned that the teams have done a good job driving productivity and that FX is bouncing around in certain areas. Overall, margins are expected to improve in the second half of the year.

Noel Wallace discussed the company's plans for the second half of the year with regards to volume creation in the U.S. He stated that they will be focused on the structure of the P&L and not chasing unprofitable volume, but that there will be a slightly heightened promotional environment. He also noted that other markets have not seen an elevated promotional environment yet, but that they will be targeted where there is a competitive need.

Hill's is taking aggressive pricing to combat inflationary prices and to recover costs. There is no specific target for profitability, but the company is taking a thoughtful approach to pricing and is looking to increase gross profit and operating margins by leveraging opportunities such as the new Tonganoxie plant, wet capacity building, and the removal of private label business.

Noel Wallace discussed how the company's digital transformation and focus on digital advertising is yielding a higher ROI and better copy effectiveness. He also mentioned that spending more money on generating first-party data allows them to get more targeted and personalized media that is more effective, resulting in an increase in non-promoted volume share in the U.S. of 100 basis points.

In the U.S., Colgate pulled back on promotions and established new pricing, leading to a fall-off in their promoted share. This has caused a migration of customers to competitors who have not pulled back on promotions as much. Colgate has seen a more healthy balance of advertising across their categories, which they hope will lead to more sustainable growth.

Noel Wallace discusses the U.S. P&L and how the company is working towards digital transformation and best-in-class capabilities. He then addresses Lauren Lieberman's question about the Latin American market, discussing the strategy of premium innovation and how the company is managing affordability and premiumization in the face of inflation.

Latin America had strong organic sales growth and volume improved after five quarters of double-digit pricing. Mexico and Brazil delivered volume growth in the quarter. The consumer is responding to the innovation and pricing. The Hill's business is seeing weaker volumes globally, likely due to pricing and a pause after the last couple of years of strong growth and adoption.

In the most recent quarter, Hill's saw double-digit organic sales growth despite lapping 18% growth in the year ago period. The quarter a year ago was mid-single digit volume, making it a good quarter overall. Categories softened towards the end of the quarter due to pricing, but Europe and the U.S. remain strong. Emerging markets are seen as a growth opportunity, particularly in Latin America and Southeast Asia.

Logistics is playing out as expected with an improvement from the previous quarter, and this trend is expected to continue in the second half. Noel Wallace is then expected to answer a question about North America, where there may be some volume pressure due to strategy adjustments, but this should smooth out by the end of the year.

Noel Wallace discussed the North America HPC business and its objective to improve brand health by funding advertising and being careful not to pull back too much on promotions. Wallace also noted that the business has diversity in different regions around the world which can be used to fund opportunities in North America or Asia. He concluded by noting that North America has a plan for the back half to deliberately focus on recovering some of the share loss in the quarter. Peter Grom then asked about the moving pieces that would put organic revenue growth at the higher or lower end of the range.

Noel Wallace states that it is difficult to determine exactly how the balance of the year will end up, but they are expecting a 500 basis point tailwind from a volume standpoint. North America will be watched closely, and Hill's recipes are continuing to respond well with share growth. Wallace is comfortable with the guidance they have provided, and they will take any upside if it comes.

Noel Wallace concluded the Q&A portion of the call by thanking everyone for their interest in the company and expressing his appreciation for the Colgate people who have worked hard to ensure the success of the company's strategies and plans. He expects the two-year stack to moderate in the back half of the year, but believes that the company will see a return to volume growth and the benefit of pricing taken this year. He is confident that these strategies and plans will lead to increased shareholder value.

This summary was generated with AI and may contain some inaccuracies.