Colgate-Palmolive [CL] Conference call transcript for 2023 q2
2023-07-28 10:32:10
Fiscal: 2023 q2
Operator: Good morning. Welcome to today's Colgate-Palmolive 2023 Second Quarter Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I'd like to turn this call over to Chief Investor Relations Officer and Executive Vice President, M&A, John Faucher.
John Faucher: Thank you, Allison. Good morning, and welcome to our second quarter 2023 earnings release conference call. This is John Faucher. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the Q2 2023 earnings press release and related prepared materials and our most recent filings with the SEC, including our 2022 annual report on Form 10-K and subsequent SEC filings, all available on Colgate's website for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in tables 4, 6, 7, 8 and 9 of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the Q2 2023 earnings press release and is available on Colgate's website. Joining me on the call this morning are Noel Wallace, Chairman, President and Chief Executive Officer; and Stan Sutula, Chief Financial Officer. Noel will provide you with some thoughts on our Q2 results and our 2023 outlook, and we will then open it up for Q&A. Noel?
Noel Wallace: Well, thanks, John, and good morning, everyone. So a few quick thoughts this morning on our strong quarter of top and bottom line growth and clearly along with the improved 2023 outlook we provided. On the first quarter call, you'll recall, I highlighted three priorities for the year, driving organic sales growth as we face tougher comparisons, executing on productivity and revenue growth management to fund brand investment, while also delivering on our earnings targets, and improving our cash flow performance. While not without its challenges, in Q2, we made strong progress on all three of these. On organic sales growth, Q2 showed the strength of our global portfolio as we delivered our strongest quarterly growth on a two-year stack basis since Q3 2008, with both organic volume and pricing growth accelerating on a two-year stack basis. We delivered organic sales growth in all six divisions and in each of our categories grew in the mid-single digits or higher. We are laser-focused on returning to balanced organic sales growth and we believe the investments we are making, combined with easier comparisons, give us a path to improved volume growth going forward as we leverage increased brand support and innovation while still delivering profit growth. The strength of our revenue growth management efforts, combined with our progress on funding the growth, drove improvement in our gross margin both sequentially and year-over-year. Our Base Business SG&A was down 30 basis points in the quarter. A strong sales growth, lower logistics costs and the benefits of our 2022 global productivity initiative drove operating leverage even as we increased advertising spending by 20%. Combined with our gross margin expansion, we delivered 60 basis points of operating margin expansion in the quarter. This enabled us to deliver upside versus expectations in the quarter despite continued pressure from below the line items, including the impact of higher interest rates and tax. As you've heard me say, it's just virtuous combination of growth driven leverage, revenue growth management, cost containment and productivity to drive investments in capabilities and brand building which drove the strong quality of this quarter's results. We believe it also lays the groundwork for our performance across the balance of the year and into the future. And finally, our strong cash flow performance continued in the quarter, which is helping us offset some of these below the line headwinds. Free cash flow was up more than 50% in the quarter and is more than up -- up more than 80% year-to-date through net income growth and improved working capital performance and pleasingly, particularly in inventories and payables. So I'm pleased with how we started the year, but I'm also well aware of the challenges and uncertainty ahead of us. Our goal is to deliver consistent, high quality compounded top and bottom line growth to drive shareholder value. And I believe Colgate-Palmolive has the brands, the global footprint and the people to deliver. So with that, I'll turn it over to the Q&A.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And Our first question today will come from Dara Mohsenian of Morgan Stanley. Please go ahead.
Dara Mohsenian: Hey. Good morning, guys.
Noel Wallace: Hi, Dara (ph).
Dara Mohsenian: So another impressive quarter of organic sales growth. And as you mentioned, the CAGR is accelerated on a multiyear basis, but it was driven by pricing more than entirely. And obviously, from here, we're going into a period where we're cycling higher pricing. So can you just talk about, conceptually at a high level, how you think about the balance of organic sales growth going forward, level of visibilities that volume can come back as pricing drops off? And maybe within that question also, if you could just touch on the global Oral Care share and the performance in the quarter and prospects going forward, that would be helpful also. Thanks.
Noel Wallace: Sure. Thanks, Dara. So let me go back to a couple of the comments I made in my opening statement and really talk about how we're trying to work to improve the quality of the P&L, which puts us in the best position to drive compounded long-term balanced growth top and bottom line, which is what we've been talking about for quite some time. As you know, we're coming out of what has been the worst raw material environment in decades. So our plan is with the combination of the revenue wealth management we talked about and the discipline that we're putting across the company in that area, more pricing and productivity, we can restore our gross margins and that's been the key focus. We believe that if we exit this type of environment with a structurally lower gross margin, you're going to be in a hole that's very difficult to dig yourself out of in the future, particularly because you need the gross margin to fund the investment in capabilities and the brand building, which you certainly saw in the quarter. We want to grow margins while still investing behind our brands and sustain a consistent organic sales growth, which we're clearly demonstrating. The key to do is getting pricing in the P&L. We certainly focused our teams on the ground in that area because the depth and duration of this cost inflation that we're experiencing has been an issue and you simply can't do it with one round of pricing. It needs to be consistent and deliberate and purposeful. And now as we look at cost inflation slowing overall, there are still places where we see margin pressure. So we -- of course, we need to take additional pricing, and this has had an impact on the volume. Maybe a couple of examples. China is a good example. We've taken pricing on our Hawley & Hazel joint venture in order to improve profitability long-term to drive the necessary investments in digital, the premium innovation required in that market and a continued shift to e-commerce. And as you know, China is a very difficult market in which to take pricing. And in the short term, that hasn't -- that's had an impact on our volume through lower promotions and wholesaler inventories as we look to set the new pricing in the market. But the long-term implications of not restoring margins are more problematic. I'd go on to North America as well, where we're working to improve the health of our business and our brands through shifting more consistent brand support from above the net revenue line to obviously into margin expansion. This will improve health of our brands and our P&L. We're seeing this play out in our non-promoted share, which is growing, which is a healthy way to grow the business. In the short term, was the volume impact from reduced promotions more than we expected? Yes, it was. But the good news is, we've adjusted the P&L, we've strengthened it and we can adjust moving forward as we see the opportunities provide themselves. So while we're delivering both sales and profit growth along with increases in brand support in the middle of the P&L, it's clearly a healthier way to drive the business. If I look at the Hill's business, we're still seeing high levels of cost inflation, as you've heard us talk about in the first quarter and gross margins are still down year-over-year. So we've taken additional pricing to get the right margin structure for this business for the long-term. Much of the Hill's volume decline in the quarter was in emerging markets as much of the time is due to go-to-market changes or shipments that we had. The good news is the EMEA or our Europe business, and particularly there we were strong, U.S. volumes were only down slightly in the quarter against a very difficult comparison with pricing as you saw up in the teens. But we're focused on getting Hill's back to volume growth the right way. This is a business that responds very well to science driven innovation and strong advertising. We want to make sure that it's well funded and through the gross margin expansion that you've seen. And Hill's saw the biggest advertising increases in brand building in this quarter and will continue to fuel that investment. So I understand the importance of gaining volume growth, as you asked. We know we're all focused on that and as you are. But as I said, we want to do that in a way that sets us up structurally for long-term profitable growth. That means a good visibility towards restoring our gross margin to previous levels through revenue growth management and productivity that we've been talking about, well-funded advertising and the ability to drive operating leverage with the strong innovation that we're bringing to the market and healthier brands. So with a lot of great work by Colgate people, we have gross margin, overheads and logistics trending positively. We just finished the first half where we increased advertising by 17%. We have put additional pricing in place. We have strong innovation across all the divisions and categories. And we have second half volume comps that are easier by about 500 basis points. So we feel we're very well positioned. So with that, let me turn it over to the other questions.
Operator: Our next question will come from Filippo Falorni of Citi. Please go ahead.
Filippo Falorni: Hey. Good morning. Good morning, everyone. Just a follow-up on the prior question, Noel. You mentioned the need to take incremental pricing. Can you give us a little bit more color which category, country combination are you taking more pricing? What has been the response so far, and generally, like the magnitude relative to the prior price increases? Thank you.
Noel Wallace: Sure. Let me just come back to a quick finish on Dara's point. He asked about market shares. Dara, so our market share -- global market shares are up on toothpaste around the world. Strong growth obviously in Europe, a little softness in North America, as you've seen in the scanner data. And we're obviously addressing that as we go into the back half. Latin America shares look good. Asia shares look good. Africa shares look really, really strong. We're up or flat in all the 11 markets where we read shares there. So overall, oral toothpaste shares are pretty good. Filippo, on your question with regarding the pricing, certainly in some of the higher inflationary markets, we will probably still see pricing in the back half of the year. Take Turkey, take Argentina, take Pakistan and some of the other higher inflationary areas around the world. We took pricing in the second quarter in North America. Obviously, that had some impact on volume in the quarter. But we'll see deliberate and very focused pricing where we have margin pressure. On the Hill's business, clearly, we've seen ag prices accelerate through 2022 and into '23. So we're taking pricing commensurate with that as we move into the back half. But it will be more isolated and targeted the bigger price increases are in the P&L. And as you heard us talk about, we took a lot of pricing in 2022. About 58% of the pricing in the P&L this year is flow through from last year. So we still have a little bit to go, but most of it is in the P&L already.
Operator: Our next question will come from Bryan Spillane of Bank of America. Please go ahead.
Bryan Spillane: Hey. Thanks, operator. Good morning, everyone. Hey, Noel. Maybe just kind of tying it back to -- maybe this ties back to Dara's question. But in the prepared remarks, you talked about -- on a percentage of sales basis, SG&A would be up in North America, Europe and Hill's to support volume acceleration. And I guess, as we look through the results, it looks like it's been pretty good in Europe, like, you've gained share. So maybe if you can, for some context, in terms of that investment, how much of it is – like, where has each of those geographies progressed relative to the investment? Is it right to read that you're having an impact in Europe and you still have some catch-up to do in North America? Just want to get some color on that.
Noel Wallace: Absolutely. Thanks, Bryan. Yeah. I'll start with Europe. Obviously, we've increased investment there and we're seeing terrific response to particularly the elmex and meridol brands where we've elevated our investment there, but likewise, on the Colgate brand. So a lot of the efforts that we've had on premium whitening have played out to drive incremental share in Europe. So that investment across that business is certainly playing out. But importantly, the investment in Europe is broader based than just Oral Care. We have a wonderful relaunch on Sanex, that's underway across Europe. We're putting investment behind that. We relaunched our Soupline business in France, which is a big business for us. And we've launched the Suavitel -- the Soupline Hearts, which we're putting investment behind that. So I think what's important is with operating margins back to growth, it's giving us a lot more flexibility to support a wide array of brands, particularly in Europe. And that would be the case likewise in Latin America, where we've obviously seen a little pickup in exchange. So on a local currency basis, we're getting more advertising. And I'd also point to the fact that we're getting more efficient and targeted with our advertising with some of our digital skills that we're implementing across the world. North America, it's taking a little bit more time. You certainly have seen the promoted share fall off. But as I mentioned in my comments to Dara, the important thing is our non-promoted volume share is growing. And that's a clear reflection of the fact that we've increased support on the brand and building the health of the brand. And if you look at the attributes of the Colgate brand, particularly in North America, we're seeing good movements in terms of how we measure the health of the equity. So good news there. Asia, likewise, good response. We've obviously seen a fall-off on our biggest business, which is Darlie due to the price increase. But the Colgate business overall, where we've added more support similarly is responding very, very well. And we couldn't be more happy with the progress we're seeing in Africa on the Oral Care business with the elevated increase that we're seeing. Advertising doesn't respond immediately. It takes quarters after quarters of consistent growth. And what’s important, back to the quality of the P&L, is that with the quality of the P&L where it is, it allows us to sustain that advertising. In this quarter, you obviously saw us increase it. And that’s clearly the strategy because over the long term, consistent levels of advertising play out for brands the best.
Operator: Our next question comes from Andrea Teixeira of JPMorgan. Please go ahead.
Andrea Teixeira: Thank you. Good morning. Noel, you mentioned the balanced volume and pricing, obviously, impressive to see some of the green shoots in Africa and Eurasia. Can you talk also about the brand support above the line you mentioned in North America and elaborate more on that? And obviously, that has been a main drag to global volumes. And I understand it takes time, of course, to see volume share rebound. But do you see in terms of like when should we see some improvement there as you talk to your customers? And then sorry to get a second part of the question, but I want to understand also your impressive rebound in margins in the quarter came through. Even looking at your prepared remarks, you mentioned raw material and packaging, you still ahead of 540 basis points negative impact. So I'm thinking about the cadence of this inflation, if you can comment and then how we can expect that from here? I know you reiterated margins up, but I just want to see to the P&L, what would be the puts and takes there? Thank you.
Noel Wallace: Sure. Thanks, Andrea and good morning. So on above the line expenses, obviously, when you're in an environment of inflation and recovering cost and taking pricing either through list prices or revenue growth management, it involves a reallocation of your promotional dollars for two reasons. One, you want to ensure that when you're taking list price increases, you see that pricing in the market and you get consistency of implementation around the retail environment. So that was an important part of the second quarter pricing we took in North America. To do that, you need to pull back on some of your promotional volumes. That was done, one, because some of those promotional volumes are unprofitable. So as I mentioned earlier, we are very focused in North America on building brand health and getting back to consistent delivery of share growth with advertising and innovation through simply -- and simply taking some of the reliance on promotions away. Did we pull back a little bit too much perhaps? But we're going to be very thoughtful moving forward on how we put grocery net back into the North America business to ensure that we continue to grow margins and obviously grow share at the same time. But we will ensure that, that happens in the back half. But I can tell you that we're going to be very thoughtful on how we approach all the categories relative to promotions to ensure we maintain the margins in the P&L. And around the world, I think we were quite consistent with the above the line where we had list price increases. We were managing promotions. We'll have a little bit easier comps as we've talked about on pricing -- harder comps on pricing in the back half, but easier on volume. So I think we'll see a better balance between our organic growth as we move through the back half of the year, but we'll still see a little bit of pricing moving through, as I mentioned, upfront. On the margin line, clearly, very pleased with the progress that we're making both at the gross profit level and the operating margin level. And I remind everyone that our gross profit does not include logistics and cost of goods. So if you take logistics, obviously, we had a very strong quarter relative to gross profit acceleration. And our SG&A was down despite the fact that we took a 20% -- we implemented a 20% increase in advertising. Let me turn it over to Stan. He can give you a little bit of color on how we're thinking about raw materials phasing out through the balance of the second half.
Stan Sutula: Thanks, Noel. So raw materials, as we look towards the second half, we will see these moderate. But there are pockets that actually are going up, and predominantly, they're impacting Hill's. So around ag and proteins, those continue to escalate. So while on a year-on-year basis, these will moderate slightly coming off of the first half, they still will be a headwind in the second half of the year. Now we continue to drive funding the growth savings. The teams have done a really nice job on driving that productivity and we will carry that through the back half of the year as well. So we do expect margin to improve in the second half and continue that momentum. And then obviously, just as we look at FX, it's going to bounce around here a bit. And in particular, we've seen pressure in Africa, Eurasia countries as well as Asia-Pacific. So overall, we do expect margins to improve in the back half of the year.
Operator: Our next question is from Olivia Tong of Raymond James. Please go ahead.
Olivia Tong: Great. Thank you. First, can you just elaborate a little bit on what the impact of logistics is just so we can kind of compare you to your peers? And then specifically on the U.S., could you just talk about the path forward? I mean, we talked about the -- what's driven some of the challenges so far in terms of volume. But could you talk about the actions that you're planning to take for the second half, whether it's some relaxation in terms of the pullback and reinstating perhaps some of the promotion or other actions that you're planning to take with respect to the U.S. Thank you.
Noel Wallace: Sure. Thanks, Olivia and good morning. I'd ask you to reference the Q on details on logistics. There's a lot more detail in there. And if you're not finding what you need, obviously follow up with John and Stan afterwards. On the volume cadence, certainly, as you look at the back half, as I mentioned, the comps get much easier. But despite that, we're going to be very deliberate in how we think about volume creation in the back half. We’re going to be thoughtful, as I mentioned, continuing to focus on the structure of the P&L, which we believe is absolutely imperative for the long-term sustainability of the company. We think that we can keep the gross margin accelerating, we’ll keep the advertising in the P&L and not simply chasing unprofitable volume. So we’re going to be very focused on that. That being said, we do expect a slightly heightened promotional environment in the back half. As cost tend to level out, we’ll see probably a little bit more promotions. I will say that around the world today, we have not seen an elevated promotional environment. We are recently starting to see more volume being sold on promotions but not the frequency of promotions there or the depth of promotions in the market. So that’s an important aspect. But we’re going to be very deliberate in how we think about the promotional cadence in the back half, probably a little bit more in the U.S. But the rest of the world will be very targeted where we see competitive needs to put more money there. But so far, it’s been quite constructive. And we continue to believe pushing our brands through innovation and top – and advertising is the healthiest way to grow the business longer term.
Operator: Our next question will come from Jason English of Goldman Sachs. Please go ahead.
Jason English: Hey. Good morning, folks. Thanks for swapping me in. Stan mentioned earlier the elevated degree of inflation that's continuing to impact, but also the new price increases. How should we expect them to translate into margins? I mean, it's good to see the moderation in gross margin expansion this quarter. But we're still down a lot from where we were. What is the right level of profitability for that business on a normalized basis and what is the pathway to getting there?
Noel Wallace: Yeah. Thanks, Jason. So again, we are taking aggressive pricing across the Hill's business, as you've seen through the recent quarters and we continue to see some inflationary prices on ag prices. Now do we think that's going to continue into '24? Unlikely, but we want to assure we continue to take pricing this year to recover that. Is there a number that we're targeting? No. We want to continue to do this in a very thoughtful way. We see real opportunities to continue to grow both gross profit and operating margin at Hill's in a healthy way quarter-to-quarter moving out, particularly given the pricing that we'll see flow through the back half of the P&L and hopefully a more benign cost environment. We also have mixed opportunities that we're very focused on as we get the new Tonganoxie up and running and the wet -- and we get wet capacity building that will allow a little bit of margin accretion on mix. So we're pleased with that. We're getting the productivity through the plants operating more efficiently. So we'll see that. And obviously, as the private label business comes off, that will be a natural organic accretion to both gross profit and operating profit at the end. So good aspects to – as we see the business projecting over time. We’re going to ensure that we’re competitive relative to pricing in the market. We’re going to continue to ensure that we keep the high levels of advertising there on the Hill’s business, which you saw in the quarter. So overall, we feel pretty good about the phasing of gross profit accretion moving forward.
Operator: Our next question will come from Steve Powers of Deutsche Bank. Please go ahead.
Stephen Powers: Hey. Thanks and good morning. I wanted to ask more of a general question on the state of the advertising industry as you see it. You talked obviously making increases, the 20% increase this quarter. I guess the question I'm left with is just how you're seeing the efficacy of that advertising. Do you believe the efficacy is up commensurate with the increased dollar investment or is there inflation or other dynamics cutting into that efficacy just as you the environment today as you plan ahead?
Noel Wallace: Yeah. Thanks, Steve and good morning. I'll take you back to CAGNY, when Eve (ph) presented a lot of our digital advancement and the digital transformation and ultimately how our focus on digital advertising is yielding a much higher ROI, we have the ability to analytically measure that much more effectively than we have in the past. Our copy effectiveness is getting much better. So we're seeing the efficacy delivered there through the brand health measures that I talked about earlier. We're obviously spending more money on generating first-party data. That allows us to obviously look more holistically across the market and get more targeted media that's more personalized and effective, which has been terrific. And as I mentioned upfront, the non-promoted volume share in the U.S. is a big metric for us because that clearly indicates that our advertising is driving more non-promoted share. So we were up about 100 basis points in non-promoted share and that's excellent. That's exactly what we want. Now we may have pulled back, as I mentioned, a little too much on the promotion, but we'll get the balance right as we move forward. So the efficacy overall, we're very pleased. And that's clearly demonstrated in some of the market share performances as we have around the world, where we've had elevated advertising to support that, particularly across some of the brands -- non-Colgate brands. I mentioned Sanex in Europe. We talked about the Suavitel business and the Axion business in Mexico, which is obviously well supported. So overall, we see a more healthy balance of advertising across our categories. And over time, this is going to lead to more sustainable growth.
Operator: Our next question will come from Robert Ottenstein of Evercore ISI. Please go ahead.
Robert Ottenstein: Great. A quick follow-up and then my other question. Where your volumes are down, particularly in the U.S.? Has that gone to competitors or is it more of a function of consumers postponing purchase or orders being postponed? So that's just kind of the follow-up. And then my main question is, where you see yourself in digital and e-commerce. Arguably, a few years ago, you were unsatisfied and have made a lot of investments and they're certainly panning out particularly in China. Do you believe that you're kind of where you need to be, to be fully competitive globally in digital and e-commerce now? Thank you.
Noel Wallace: Yeah. Thanks, Rob and good morning. So on the volume, particularly in the U.S., as I mentioned already, we saw some -- our promoted share fall-off across a couple of our categories in the U.S., as we pulled back on some of the promotions and established some of the new pricing. Where it's gone to is a multitude of the competitors, obviously, where they have not pulled back on their promotional levels as much. And therefore, we saw a little bit of migration to them. But clearly, that consumer typically responds to promotions, whether it's couponing or otherwise. And they're not that difficult to get back, but we want to get -- we want to get those consumers back in a much healthier way moving forward. So the overall structure of the U.S. P&L improves and that's pretty consistent around the world. When you pull back on promotions, you're going to have a highly driven consumer that looks at pricing and value, and you need to ensure that you're obviously providing that value moving forward. So we'll get the balance right. Our digital -- on that, we've talked a lot about our digital transformation, yeah, three years ago, we weren't where we needed to be. And I would say we're very, very pleased with where we are today. We do an external study with BCG, which assesses all of our peer group vis-a-vis their digital capabilities. And three years ago, we were below the peer group. Today, we are above the peer group. And we're not best-in-class yet, so we feel we've got more room to go. And Brigitte and Diana and Prabha and all the operating units are very focused on this, and we feel we’ve got good plans in place to continue to advance that. And our goal is absolutely to become best-in-class.
Operator: Next question is from Lauren Lieberman of Barclays. Please go ahead.
Lauren Lieberman: Great. Thanks. Good morning. I was hoping to maybe talk a little bit about Latin America. I know it's a market where you've been putting a lot of premium innovation in place. It's been a core part of the strategy, particularly in Oral Care. And yet there's significant inflation in some markets. So I was just curious for an update there may be on premiumization versus affordability, what you're seeing in terms of consumer trends outside of the reported results, but kind of what the dynamics are from a consumer environment standpoint and how you're managing those two ends of the pricing ladder. Thanks.
Noel Wallace: Yeah. Thanks, Lauren and good morning. So you saw the results, another really strong organic sales growth for Latin America. And pleasingly, after five quarters of double-digit pricing, we saw volume improve in Latin America. And I think this is a good proxy for as we think about pricing in other markets and coupling that with strong advertising, ultimately the volume will come back. It's a quite resilient consumer. They're accustomed to inflationary pricing. But as long as you’re bringing a collection of strong innovation and continuing their brand support, which is vitally important to come out of these tougher times with stronger brands, you see the volume return to category. So both Mexico and Brazil delivered volume growth in the quarter and both had very strong growth organically given the fact that they also took pricing. So overall, really pleased with what we’re seeing in Latin America. And likewise, we’re seeing the velocity and the turns improve more than we anticipated given some of the inflationary pressures in those markets. Now we shall watch it very carefully as the inflation continues to mount. But overall, structurally the P&Ls are in good shape, and the consumer seems to be quite responsive to the innovation and the pricing that we’re putting in the market. So overall, we feel we’re in a very good place.
Operator: Question is from Mark Astrachan of Stifel. Please go ahead.
Mark Astrachan: Yeah. Thanks and good morning. Wanted to ask a question on the Hill's business. Again, just maybe thinking about category than your business. So how are you thinking -- or what are you observing from the category standpoint? We can obviously see somewhat U.S. data, but curious how you think about it around the world that volumes overall are a little bit weaker. How much of that is a reflection of just all the pricing that you and your competitors are taking? Is there some of just sort of pause within the category over the -- after the last couple of years of really strong growth and adoption levels? And then longer term, how do you think about -- and maybe this goes to Jason's question a little bit, but how do you think about the contribution to price and mix and volumes for that business over time? And how does that contribute to improving margins relative to where we are? Thanks.
Noel Wallace: Yeah. Thanks, Mark. So clearly, another strong quarter for Hill's, double-digit organic sales growth despite lapping. And I remind everyone that we're lapping 18% growth in the year ago period. So obviously, a really strong quarter. And the quarter a year ago was mid-single digit volume, so ultimately, a good quarter. And on a two-year stack, we were up. So looking quite strong. Categories softened a little bit towards the end of the category -- I mean, excuse me, the end of the quarter. You would expect that given the amount of pricing that’s gone into that over the last three or four quarters. But overall, Europe continues to be very strong. U.S., strong despite very high comps. We anticipate that we’ll see a little bit of sluggishness as we move forward in the categories, only because of all the pricing that’s been taken. But that will be more around the discretionary items in pet specialty than food. Nutrition seems to be okay. I walked stores with some of the CEOs of the big pet specialty retailers recently, and they seem quite bullish relative to the nutritional and particularly the premium segment of the market, where you don’t see a live elasticity in terms of when consumers trade off of diets, particularly on our prescription side. But we’re going to have to watch that quite carefully because there’s been a lot of pricing that’s going into the category. Emerging markets continues to be a real growth opportunity for us. It’s small for us right now, but we need to continue to focus on those opportunities, particularly in Latin America and in Southeast Asia, to a certain extent. So overall, you’ll see us focus on those moving forward. But the categories continue to be quite robust, particularly given the growth headwind – growth head space that we have in emerging markets given we don’t have high penetration there. So overall, we feel pretty good, but we’re cautious on ultimately how the category continues to evolve from a volume standpoint as we see a lot of pricing going in those categories. But again, getting the P&L structured right, getting gross margin up consistently over the next couple of quarters will be very important for us to maintain the high advertising levels that are so critical to drive penetration in that category.
Operator: Our next question is from Chris Carey of Wells Fargo Securities. Please go ahead.
Chris Carey: Hi. Good morning, everyone. So just a couple quick follow-ups for me. Just -- and apologies for asking a North America question. This is more about making sure expectations are set and we know how to think about this going forward. But a little bit of promotions come back in, but you're really focusing on a more sustainable total P&L. Could still see some volume pressure for a bit until you lap some of these strategy adjustments that you made. And by the time we get beyond that, perhaps the volumes start to smooth out a bit more. So am I characterizing that correctly? And then second, just a quick clarification or follow-up. Olivia asked a question about freight. I think the 10-Q just says the year-over-year change. Dan, you had said 9.5% of sales was the freight number in Q1 and you expected it to trend low 9s for the rest of the year. Did that come through in the quarter? So thanks so much on those two items.
Noel Wallace: Let me -- Stan answer the logistics question, then I'll get back to your North American question.
Stan Sutula: Yeah. So logistics is playing out like we expected and improved slightly from the previous quarter. And we expect that, that improvement will also continue in the second half.
Noel Wallace: Chris, on North America, so I think you said it well. I mean, we're looking very deliberately to improve the structure of that P&L as we move forward. Again, it's -- the inherent objective there is to improve brand health. So we will clearly continue to fund advertising. We will be very choiceful on where we start to look at elevating promotions to recover some of that promotional share. Our focus is driving non-promoted share moving forward. But we need to be careful that we're not pulling back too much there. So we'll monitor that moving forward. And we'll see, I think from quarter-to-quarter, there will be a little bit of volatility in the gross margin line as we move forward as we see costs ultimately level out and where the pricing and the mix ends up. But we feel good about the back half relative to our ability to continue to drive operating margin expansion. I remind everyone that North America -- the North America HPC business is about 20% of our total business. And what is so nice about the Colgate business is that we have such diversity of our business around the world that as we need to fund opportunities in North America or Asia, we will have the ability to pull from certain regions around the world. So we’re well balanced in that regard. And I think North America has a good plan for the back half and we’ll be very deliberate on their spending and their focus on recovering some of the share loss that we’ve had in the quarter.
Operator: Our last question will come from Peter Grom of UBS. Please go ahead.
Peter Grom: Thanks, operator and good morning, everyone. So I wanted to just circle back to the top line growth, which the second half organic sales guidance is still relatively wide and implies a decent slowdown, which makes sense as you start to cycle pricing. Can you maybe just talk about the moving pieces that would put organic revenue growth at the higher end or the lower end of that range as we move forward here? And maybe specifically, you mentioned several times throughout this call the sequential improvement on a two-year stack for volume. And just given the step up in investment innovation, should we expect that trend to continue as we move into the back half of the year? Thanks.
Noel Wallace: Yeah. So it's tough to nail down exactly how the balance will end up. I mean, we'll have to watch it very carefully. It's going to differ by category and by geography. But clearly, the comps get easier from a volume standpoint in the back half. You heard me mention around 500 basis points. So that will certainly be a nice tailwind for us. And obviously, the comps on pricing get a little bit more challenging in the back half as we move forward. But we feel very good relative to the guidance that we provided and comfortable that we can achieve that. But we'll see how the categories behave, if the consumer continues to be rather fickle around the world. But as I mentioned, it's been very constructive promotionally. And so far, the resilience, particularly in markets like Latin America, and to a certain extent, Africa, had been very, very good where we've taken a lot of pricing. We'll watch North America quite closely. And obviously, we think we continue to have a lot of hedge based on the Hill's business as we continue to drive penetration and share growth, which, incidentally, I didn't talk shares on Hill's. They continue to respond very, very well with share growth in the quarter across most of our recipes, which is terrific. So we feel good about where we are in the guidance and we'll see where it ultimately ends up. Obviously, if there's upside, we'll take it. But we feel good that we're in a range that is responsible to continuing to keep the structure of the P&L the way it is. Relative to -- the second part of your question was on -- was on advertising, Peter or what was it on?
Peter Grom: No. It was just the sequential improvement on a two-year stack basis. Just recognizing that the comps get easier, if the two-year stack improves, what does that actually imply? Because it would seem to imply it does improve that there could be some nice improvement in return to volume growth in the back half of the year?
Noel Wallace: Yeah, exactly. And you said it well. I think we'll start to see a return to volume growth in the back half of the year. The two-year stacks, as I mentioned upfront have continued to accelerate. We'll have to -- my expectation, you'd probably see that moderate a bit as we move through the back half, but volumes will improve. And as I mentioned, we still have some pricing coming through that we've taken this year, so we'll see the benefit of that and a little bit of the flow-through from last year. So overall, I think we’ll have a more balanced composition as we move through the back half of the year.
Operator: That concludes the Q&A portion of the call.
Noel Wallace: Great. Well, thank you, everyone, and thanks for the questions this morning. We continue to appreciate your interest in our company. Clearly, we had a strong quarter and I hope you agree, the strategies and the plans in place to deliver consistent compounded profitable growth are there and that will allow us to drive increased shareholder value. We couldn't do this without the incredible efforts from Colgate people all over the world who continue to focus on execution of our strategy and the consistency of delivery. So I thank them and I look forward to talking to everyone in the third quarter.
Operator: The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.
