Colgate-Palmolive Company (NYSE:CL)
Barclays 2013 Back-to-School Consumer Conference
September 3, 2013 11:15 AM ET
Ian Cook - President and CEO
Lauren Lieberman - Barclays Capital
Lauren Lieberman - Barclays Capital
Okay. So we're going to get started with Colgate. So, we think second quarter results clearly demonstrated why Colgate has often been considered a core stapled holding. And by that what we're talking about is the Company's long-standing ability to generate solid organic revenue growth in a challenging macro environment and also its long-standing ability to generate cost savings. From here with an acceleration in restructuring driven savings, we think there should be even greater flexibility to deal with unforeseen headwinds and to continue to reinvest in a more and more challenging competitive environment.
We are grateful to have Ian Cook, the Company’s CEO here with us again this year at Back-to-School and as always look forward to hearing his perspective on global competitive dynamics, as well as how Colgate continue to grow profitably and gain more than its fair share of the global marketplace.
Great, thanks Lauren. Good morning everybody, welcome to the call [ph]. Today, I think those of you that follow us know we are a Company that is very focused, focused on a cool group of categories and a largely emerging market world, but also very much focused on strengthening our fundamentals. And that is what I want to talk about today, because we believe that is what has delivered past performance and augurs well for the future. And if we think about fundamentals, I would like to start with the long history this Company has had of good marketplace results.
If we take the top-line growth of the Company you see here volume and organic growth 2002, 2006 compounded to the far left and then the first two quarters of 2013 to the far right. And if you track through history, the subprime years, the affect of foreign exchange and commodity costs, you can see that we’re beginning to return the Company’s top-line growth into more volume driven growth; and secondly moving that growth into the 6% to 7% range that we talked about for 2013, despite the world conditions we find ourselves in and that’s driven by the emerging markets, our innovation which I will talk about and our execution on the ground. So, healthy top-line growth, still looking for 6% to 7% organic in 2013, a Company that over 20 years has grown to about $17 billion in dollar sales last year compounding at 4.6% over that period.
And a big area of focus for the Company and driver of our investment behind that growth has been the expansion in gross margin. You can see how gross margin has risen overall of the years on the slide, depressed a little bit as everybodys was by commodity and foreign exchange and rebuilding in the recent two years and we have said that for 2013 and this remains our goal, that we expect our gross margin to expand between 30 and 70 basis points this year and operating profit over that 20 year period in dollar terms compounding at over 9%.
And if you distill all that into an after-tax return on capital, you can see for 2013 our after-tax return on capital was depressed a little bit by the devaluation in Venezuela, nonetheless continues to outpace both our proxy peer group and the S&P 500, a fairly common reference measure.
On the cash side of the business, you can see that as we have focused on cash generation, we have moved our $2 billion-$2.5 billion level of cash generation into that $3 billion range, again compounding at 7% over the period on the slide. And as we think about the Company’s use of cash, obviously, rewarding share owners in dividends which we have increased for the last 50 consecutive years, another increase this year on top of a split of the Company’s stock announced earlier in the year.
Secondly, share repurchases absent a promising acquisition candidate, which we expect to be around the $1.5 billion range this year and as I alluded giving us the flexibility for the right acquisition should it appear at the right price and allow us to create the right value. And shareholder value generally over an extended period with the Company is increasing, a fairly standard format for us here which is the S&P 500, the peer group and then Colgate, a 20 year view in terms of stock and dividend appreciation, a 15 year view, 10 years, 5 years through the worst of the subprime, 2012 as some of the S&P companies that had lost through the subprime started to recover, and then year-to-date 2013 generally in line with the peer group, dare I say it a buying opportunity.
And the quality of that performance has been driven by our brands and the market shares those brands build. We show our global toothpaste share at each of these conference is now over 45%, our manual toothbrush share now with third of the marketplace, meaningfully outdistancing our nearest competitor, and mouth-rinse which we have elected to grow organically over the last five to six years building healthily to 22% and this year in the second quarter our entry into the U.S. completing our global footprint and you will find a sample of that rinse product in the gift bag today.
And those results have been guided and driven by a very simple focused strategy, understood and executed by our organization strategic initiatives that have guided the Company for the last eight years, engaging with consumers, customers and those that recommend our products to build our brands, providing the necessary level of innovation to grow ahead of underlying market rates of growth, a very clear longstanding focus on effectiveness and efficiency to provide the funds to fuel that growth and a big area of focus for our Company although we don’t talk about it much at these kinds of meetings focus on the human capital that drives that growth with the leadership we have around the world developed both as leaders and as technical specialists to continue to fuel that growth.
And for the last over three decades, a Company guided by three core values which are in the culture of Colgate caring for the people you work with and the communities you work in, global team work, a phrase coined before that was fashionable and this idea of continuous improvement improving all of the things we do rather than waiting for that homerun one-time gain. And it really is in the spirit of that continuous improvement that I will come back now on top of those consistent results and talk about continuing to strengthen our fundamentals.
And today, I am going to talk about a grouping of these things; first, enhancing innovation for growth; secondly, an area we always focus on, which is continuing to improve our execution on the ground because that’s where you engage with customers and consumers and that’s where you build brands and market share, continuing to use a little of the growing techniques available to us to really understand the consumers we serve in only four core categories and using the data and analytics available to all to enable us to make faster, smarter decisions and convert those decisions into action again on the ground; capitalizing on digital in the broader sense where it is relevant and proven and then back to the global growth and efficiency program that we have spoken about, streamlining our cost structure to further invest in growth in the coming years.
So starting with the innovation. In fact last week, we announced a fairly significant advance in oral care at the FDI Fédération Dentaire Internationale in Turkey last week and that is an advance in anti-cavity protection, a disease that still over 5 billion people in our world suffer from and we introduced at the FDI in Turkey a new Colgate toothpaste, a toothpaste containing fluoride and an acid neutralizing formula which offers superior protection against cavities than exists today.
It is a product combining the sugar acid technology and fluoride and both work in similar ways to stop demineralization of teeth, increase re-mineralization of teeth using pH, but what the acid neutralizing technology brings is it attacks sugar acids in the saliva which is the primary source of cavities. And that reduces early decay by half against a conventional fluoride toothpaste. It accelerates re-mineralization by a multiple of four and in a three year independent published peer reviewed clinical study, it reduces cavities by 20% more than a traditional anti-cavity toothpaste. The reception in Turkey although, frankly this could be anyway but I promise you it’s a slide from Turkey, the reaction from the professionals at the FDI in Turkey was extremely strong because this is a meaningful advance against still the number one oral care condition in the world, particularly in the emerging markets.
In sensitivity, we continue to build on our Pro-Argin technology with a foaming formula that gets between the teeth. We continue to expand our very successful Optic White or Luminous White in Latin America with a version that strengthens the enamel, while it whitens the teeth and another version here in the United States which has a formula enhancement that provides a shine, as well as whitening the teeth, so that smile looks a little bit brighter and just a little bit more confident.
We have in Europe a rollout behind our Total line, Pro Interdental. We continue to expand our mouthwash with a complete line re-launch, 12-hour antibacterial protection even after eating and drinking, going into Brazil, this year as our lead market with a product that you have to shake up to use, a dual phased product. You use it and I am sorry to say this so shortly after breakfast but when you expectorate you can see the bits in the sink, very compelling for people who use a mouthwash. And then, we have introduced a Colgate Plax Altai herbs variant which of course comes from East Asia, the region of Altai in East Asia, Mongolia, and Russia borders which includes some of the local herbs that sell so well in some of our key geographies.
In brushes, in fact just introduced this in the United States, a unique tapered bristle system which gives a better feel in the mouth and Interdental and Gum line; Access, an antibacterial version of the same variant in Asia where charcoal has very positive properties; Hill’s a business where we had been struggling to grow top-line volume, new product that directly goes up against the organic products and Naturals products available in the U.S. with a completely natural formulation, an upgrade of our existing science diet product that leads with a protein ingredient like the Naturals products. And then a prescription diet product which reduces weight while eating in a regular, not a controlled clinical fashion, which is why we term it weight loss in the real world.
In our Personal Care business addressing the male segment, now that men have figured out how to use a shower gel with Protex for men in Latin America and parts of Africa, in Europe, an extension to our strong Palmolive business, Underarm new variants, this one not interfering with your fragrance under the Speed Stick name in Latin America; a lady Speed Stick offering which offers five benefits in-one, a bio-response line in Europe under the acquired and strong Sanex name which fights odor causing bacteria while respecting the natural flora on the skin, and in our Fabric Softener business, a Soupline Perfect Glide new product which provides easier fresher products and ease of ironing, less time spent to get the job done. And finally on our Homecare business, our leading Ajax line in Europe a purifying line under the oxygen name.
So, a very wide and broad array of innovation which has driven our growth in the past, is driving it today and will drive it in the future. A relentless area of focus then second, improving execution on the ground and this really is I think where share growth is won or lost. In a country like India, it’s all about reaching the Mom and Pop stores with small vans. So it’s distribution model where we have vans that literally go to the next level of distribution, sell the product, the product is then delivered by the distributor and our sales people directly at those very small stores, agree with the storeowner how our products will look at those stores. So we have much more direct control over those, what we call down trade distribution outlets and of course in India there are several million of them.
It has -- that focus has built market share in India. Those of you who follow us in India may know our share is just over 54 nationally. So our rural shares are even higher and these are people that are coming in to the middleclass. And in toothbrushes our national share is about 36%. So again in the rural areas with this kind of deep penetration, we are elevating our shares in the rural areas and of course those consumers ultimately become the urban purchases.
And we have similar programs like this, believe it or not in places as far away from India as Cameroon where we use little tricycles to get to the stores because frankly the infrastructure in Cameroon is even worse than India. So the technique is deployable in different ways in all of the emerging markets in which we do business. And then as we think about executing on the ground, I thought I'd pull out a couple of personal care examples as we tend to spend most of our time talking about oral care.
So one here from a developed country is Palmolive, the hand wash segment in the Australian marketplace and for that array of innovation we have built a complete go-to-market program in Australia, particular displays connecting with the consumers digitally and through traditional advertising, romancing the consumer in the store and at the shelf and frankly hitting them in the face with off-shelf displays in retail environments where we can do that.
And you can see here with that kind of focus on this particular business, we are continuing to build in a very developed marketplace our market share, taking us almost to the 40%, which was a goal we had set ourselves and you can rest assured of course that the next goal will be 50%.
Increasing our knowledge of consumers. Let me use an example again on a personal care business this time, Brazil is the country and the brand is Protex, an antibacterial body cleansing line that we have in much of the emerging markets of the world. And the strategy here over years has been to keep the base strong and expand into new potential user groups. Now the base started as kids and moms keeping their kids healthy by keeping them bacteria-free as they wash their hands when they came in from whatever it was they were doing outside. But the sharp insight we now have on the consumers is allowing us to target teenagers as a completely discrete segment and men as a discrete segment for Protex users. So the traditional Protex advertising is to keep the family healthy and protected, particularly the kids as I mentioned and so we have skin-friendly antibacterial protection as a re-launch for the base to keep it strong, but the advertising is the same advertising those consumers have seen on Protex for many years.
And then we get to the new consumers. For the teens, we have a line that helps eliminate bacteria removing the dirt and oil that can cause pimples, which obviously is an area of concern for those teenagers. And we have advertising that goes directly to the teenager, but also advertising that goes to the mom to get her endorsement and support for that variant of now an expanded Protex line.
I mentioned men a little bit earlier. I showed the South African example. This is the Brazilian example of the same idea and the emphasis here, to keep it within the family is to shift to a man who is also a dad, with advertising that I think is fairly self-evident. And what that has done over several years is allow us to continue to build our Protex market share in Brazil to now take leadership of body cleansing in that country and that same growth from an overall body cleansing point of view has allowed us to take and expand leadership with that brand, largely driven by the emerging markets.
Analytics as I said, faster, smarter decisions, allowing us to execute better on the ground. I have shown the next two slides before, but it is something that we believe is going to be discriminating for successful companies. In the medium-term we intend to make it a competency in our Company and we hope and believe that if we do this correctly driven off our SAP backbone, it can be a competitive advantage for our Company.
So, what I call fundamental and basic analytics, which you can see on this slide, speeding up the automation and reporting the kind of traditional brand health assessments that old packaged goods companies do and tracking our new products in any number of ways, but obviously including the all important trial and repeat measures.
And then there are the more advanced analytics, which are around marketing mix modeling, what you can do today in the area of pricing, pricing sensitivity and the elasticity, what you can do in terms of the assortment at shelf, how you organize the shelf to engage the shopper in more powerful ways, and then the kind of virtual information that if you have the right technology platform you can get literally on a daily basis from retailers the so called point-of-sale information which most sophisticated retailers have today.
And the example I’m going to show is obviously pretty plain vanilla, not wanting to give away anything too detailed here, but a couple of examples from the U.S. in terms of marketing mix modeling, it uses two, three years of data. It breaks down and isolates the drivers of what build brand volume from the variables here. These are the main variables. There are other variables as well. So you can plot what the drivers are and use reworked plans on a test basis to see if the learning converts into real gains in the marketplace.
And for each of the activities that we run we now have a very clear return on investment and for those of you that have been in presentations where we have talked about Colgate business planning and the return on investment that gives us obviously ROI is something that you end up wanting to improve upon year-on-year. So you’re constantly revisiting your promotional mix, your store assortment to try and elevate return on investment while you grow the brands.
We have expanded this broadly now across our U.S. Company in all of our principal categories this year and the two simple examples I will give, and forgive me but when you show these things everybody’s reaction is, yes, well that’s obvious. But like most of these things it’s always obvious when you discover it. But the fact of the matter is by promoting together, a Colgate toothpaste and a Colgate toothbrush and that means in everything, the off-shelf display, on the shelf, the feature that the retailer puts out, the coupon that the consumer uses, you actually get a 20% volume lift which drives the category and obviously drives Colgate.
Or the other example which was partnering with a customer actually in terms of a promotional technique where we had more than two options I’m going to show, a variety of options but to simplify it, one of them required you to buy one Colgate purchase and the other required you to buy two to get a free product sample and maybe counter intuitively here the best option was the one that saw the consumer buying two, actually more interesting to the consumer and saw an 80% to 100% volume lift, both very strong, both being deployed across broader categories.
And digital, sometimes we talk about it very much from a 60,000 foot point of view; we are into digital in many-many different ways. The example I show today is in a very social media responsive country, China. We ran a promotion for Colgate’s healthiest mouth. We used what’s increasingly becoming these ubiquitous reality TV shows and competitions, an endorsement in China as celebrities are very powerful and we try to build excitement using all of the techniques available to us around the idea.
This was how we broadcasted. There were voting. There were webisodes. You can see the impressions here and how many people engaged in the promotion and we actually leveraged the mobile aspects of digital in China and there was a vote and there was a winner, and the winner was truly excited when they won on that reality TV show. But more importantly as a component of how we go to the marketplace in China, it’s one way we continue to build our market share in China, which is now over 35% and outpacing both of our multinational competitors in that country.
And then finally, the program we announced in the fourth quarter of last year, our global growth and efficiency program, a four year program, which ends at the end of 2016 and sees us doing three things that we have been doing for quite some time, just taking it to the next level, expanding our use of commercial hubs and I will show an example, expanding our use of Colgate business service centers, so we can do transactional non-strategic and non-on the ground work in centers leading our subsidiaries to focus on building brands and market share. The savings range, we have been very public about, and the program is very much on-track.
So commercial hubs, the benefits we have seen and we have examples of commercial hubs that go back 15 years now, is that enables smarter and faster decision making closer to the ground. It allows us at the centers to provide better support for the business because you can have better quality talent in one if you will mother [ph] location in the center servicing the satellite locations and obviously it improves the cost structure overall.
The action plan is laid out here. We are clearly moving to more hubs around the world. As I said we will be strengthening the consumer research, the analytic, the digital support that our marketers and commercial people on the ground have and we will in harmony with the shared service centers have this done by 2016.
So, the Southern Cone of Latin America is a good example. We used to operate the Southern Cone of Latin America as four discrete subsidiaries, Paraguay, Uruguay, Argentina and Chile. We now operate those four geographies as one group based out of Buenos Aires and Uruguay and Paraguay get far more fire power, resource and capability then they would have been able to afford as smaller standalone operations. Or take Europe which is announced underway where we are grouping this array of countries and creating a central European group, same principal as Southern Cone, same as we’ve been using in Central America for the last 15 years. Something we know how to do, something we know how to pace, something that we know brings advantage.
The business service centers, the Colgate service centers, again multi-functional business services are provided from these centers. We take the general principal of trying to be as global as we can be, all enabled by SAP, but we will stay as local as is necessary to be sure we are successful in the number one job, which is building our brands, our market share and our top-line growth. We intend to maximize the work globally or in regional centers and for each of these things there is much pre-work, there is much validation and indeed these are the benefits we have seen ourselves deliver in our first shared business service center in Europe.
This was the first one in Warsaw. We accomplished what we wanted to accomplish but we found a couple of interesting things. Number one, we found that when we took the 27 countries, we take accounts payable into this service center, we were quite prideful of thinking that we had a standard accounts payable process in all of our subsidiaries, what we did sort of, the Brits did it a little bit differently than the Germans and the French did it a little bit differently than everybody else.
So when we brought them together, we were able to take another step of moving to a best practice for all 27 now 34 subsidiaries. Number two, we found out things like we have 16,000 vendor providers in Europe. I wasn’t unaware we bought 16,000 things. So Europe now are working on bringing that number down to 6,000. And when you do that, you can then say to those vendor partners, we don't want any paper transactions anymore, we're going to go fully electronic and take the advantage of no human intervention. The point simply is when you put these things in place, you find room for further improvement overtime. So we are adding to the Warsaw, Poland Center, one in Mumbai which is where interestingly we have one of our three IT centers and the second in the same offices that we have for the Colgate business in Mexico City.
And finally a journey we have been on for over 20 years, continuing to optimize our global supply chain. We are down today to 54 facilities, servicing our global business and we will be down a further 10% by 2016, makes us more efficient and interestingly it actually increases our speed-to-market. We have announced some of the key facility changes which are built into the global growth and efficiency program.
You can see the European announcements in the first point. We recently announced the relocation of an underarm facility that we have in Morristown, New Jersey to the Southeast of the United States, and all of the factory closures we expect to be completed by the end of 2015.
And as we think about the funds that the global growth and efficiency program will generate, our reinvestment priorities for those funds, enabling technology and analytics, digital engagement, anything to do with accelerating growth in the emerging markets and increased investment behind innovation and brand building which we know are so powerful and important to continue to drive top-line growth. And the global growth and efficiency program on top of everything else will help keep us winning on the ground out into the future.
So for a Company that focuses, this is what we focus on day-in, day-out, country-by-country and I guess you distill down again into strengthening the fundamentals of the business that we manage on a global basis and we hope and believe that the focus on those fundamentals will keep Colgate investor faces smiling into the future.
So, those are my prepared remarks. And now I would be happy to take any questions in the time remaining.
Lauren Lieberman - Barclays Capital
Thank you. Could we just start talking about the anti-cavity product that you discussed? So, I guess this is probably the biggest news out of the long-term innovation group. And just a little bit more color on the price tier that this will be in, is it an emerging markets product, developed markets product and anything you can share about rollout plan?
It is a slight premium price. The disease condition is most prevalent and most concerning to health ministries in the emerging markets. And so our rollout begins in those emerging markets. It does not preclude the developed world, where frankly the disease is still important, even though people have kind of moved on. And a very important part of the program we are putting behind this and we’ve already invested quite of bit energy in doing it, Turkey would be a good example, I could give you others but I won’t; we have spent considerable time working with the health ministries. So, it’s not just a manufacturer advertising an advance in oral hygiene. It is working with the health ministries around our Bright Smiles, Bright Futures program to make a public health program, part of what drives this product around the world. More than it starts with emerging markets on expansion, I would prefer not to say for obvious reasons.
You have done a tremendous job expanding gross margins over the years. How do you think about gross margin say five years from now? Can you continue the trend or is there a ceiling to that number?
You’re right. We have a very sharp focus on gross margin. We think it gives you the most leverage in an income statement. And it’s interesting. Everybody always asked us, well there must be an end, you can’t keep growing gross margin. I would say a discriminating change in our ability to feel confident about continuing to grow gross margin was the introduction of SAP, which started in the mid-90s was completed in the early 2000s and on top of which we are now adding incredible analytic capability. So, if you can analyze it, I can tell you, you can find opportunities that maybe 10 years ago would have taken a room full of accountants and even then you wouldn’t have been sure.
So, we are confident that we can continue to expand our gross margin in the next three to five years. We have an internal goal of 60% for the Company. I can tell you we have several products in our Company today that are meaningfully beyond that and of course things like mix, things like the Colgate business planning and the efficiency we get in trade spending, things like premiumizing our portfolio without abdicating the entry price point tier of our portfolio, we have a fairly broad array of initiatives clustered that we see this year, I mean 30 to 70 basis points, even with Venezuela we feel is good progress in 2013. So, when we get to 60, ask the question again.
Lauren Lieberman - Barclays Capital
Stop there and take everything else into the breakout, but please join me in thanking Ian for being here today.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!