Good day everyone and welcome to today’s Colgate-Palmolive Company fourth quarter 2020 earnings conference call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. For opening remarks, I will turn the conference over to the Chief Investor Relations Officer, John Faucher. Please go ahead, John..

Greater China, India, the Philippines, and South Pacific. In India and China, our growth strategies are driving improved toothpaste performance through Colgate Miracle Repair in China, Colgate Vedshakti in India, and our re-launched Colgate anti-cavity business across the division.

Our personal care and home care businesses also benefited from COVID-related demand in the South Pacific region. Africa Eurasia net sales declined 1.5% due to significant foreign exchange headwinds as the division delivered organic sales growth across all three categories and in every hub.

Toothpaste organic sales growth was led by Colgate Herbal, Colgate Max Fresh, and Colgate Total. Meridol also delivered strong growth as we look to gain share in the pharmacy channel. Hill’s finished the year with another quarter of strong net sales and organic sales growth despite continued difficult comparisons.

Organic sales growth was again led by the U.S. with ecommerce up significantly, but Europe also delivered double-digit growth. Encouragingly, we are seeing a re-acceleration in our prescription diet business as vet channel traffic continues to improve. Now for guidance. We expect organic sales growth to be within our 3% to 5% long term target range.

Using current spot rates, we expect foreign exchange to be a low single-digit benefit for the year, although we expect currencies to remain volatile. We expect net sales to be up 4% to 7%.

We expect our gross profit margin to be up year-over-year in 2021 despite difficult comparisons given our performance in 2020, increases in raw materials, and the continuing uncertainty associated with COVID. Advertising is also expected to be up on a percent of sales basis, although less so than in 2020.

Our tax rate is expected to be between 23.5% to 24.5% on both a GAAP and base business basis. We point out that our guidance range does not account for any changes in U.S. corporate tax rates given the recent change in administration. On a GAAP basis, we expect earnings per share growth in the low to mid single digits.

On a base business basis, we expect earnings per share growth in the mid to high single digits. Obviously this is a wider range than what we normally provide, which we think is prudent given what we consider to be a heightened level of uncertainty as we plan out the year.

There are several factors that could impact where we fall within this wider range. First, COVID-related consumption. In the categories where consumption has risen during the pandemic, primarily liquid hand soap, dish soap and cleaners, we are expecting lower rates of growth or even declines year-over-year in 2021, depending on the market.

However, we expect overall consumption in these categories to remain elevated versus 2019 levels. Also, particularly in emerging markets, movements in foreign exchange could impact our ability to take pricing.

We are optimistic about our pricing plans for 2021 and believe they are appropriate given recent raw material trends, the competitive environment, and foreign exchange. Raw materials - we have budgeted for increased raw material costs, but we do highlight that many raw material prices are accelerating faster than anticipated.

If this continues, it could pressure on gross margin expansion depending on our ability to take pricing or drive additional productivity. Finally, logistics - we have seen a further rise in logistics costs over the past few quarters, particularly in the U.S. but also relate to shipping containers in Asia.

We expect these costs to remain elevated in the near term but to moderate later in the year. With that, I’ll turn it over to Noel..

premium innovation, revenue growth management, funding the growth, discipline on overheads, and laser focused on all cost elements throughout the income statement.

Looking forward, we have to do more than offset the expected increases in raw material costs and logistics and in other areas, so that we can continue to invest in the transformational capabilities that we’re deploying and that will rely on pairing growth and productivity more effectively.

The third reason is that we’re making the necessary transformation to our culture to unleash the true potential of Colgate people. As anyone who has come here from the outside can tell you, the desire of Colgate people to win is unmatched. In 2020, we took several steps to accelerate the rate of change to build an organization for future growth.

To that end, we made real progress on ecommerce, where we have brought in more external talent while up-skilling existing talent across the enterprise, launched more online-specific innovation like the Optic White Pen and the Miracle Repair Serum, and invested broadly behind enhanced digital capabilities.

All of this paid off in more than 50% online growth in the fourth quarter and we’ll exit the year with ecommerce at a double-digit run rate as a percentage of total sales. Lastly, it’s building out the right team. You need to provide the right tools to them, the right technology to digitally transform the organization.

We continue to invest in systems to enable this transformation, like our transition SAP S/4HANA that’s giving us better system speed, far better reporting, streamlined processes, and simplified transactions.

We’ve developed our cloud capabilities, which is giving us far more agility, speed and capability building, our ability now to develop applications much faster and realize the value of those applications much faster, and with our partners building support for our data and our analytics journey ahead.

We also recently rolled out a new global system with our Colgate business planning process - you will remember that was called CBP, that will significantly reduce the process time required by providing greater opportunity for our teams to do analytics, particularly in the commercial area and particularly around revenue growth management.

To sum it up, I look back at 2020 as a year where our company battled through uncertainty to deliver really strong results. I would also look back at a year where we elevated our performance and capabilities and positioned ourselves to deliver sustainable, profitable growth into the future. With that, I’ll be happy to take your questions. .

[Operator instructions] Our first question will come from Dara Mohsenian with Morgan Stanley. .

Hey guys. You’ve been able to realize some pretty significant pricing in the last few quarters of 2020. You mentioned optimism on pricing for 2021, also mentioned the rising raw material environment, clearly.

Just wanted to understand the balance between pricing and volume in your 3% to 5% organic sales outlook, how much pricing you’re assuming, and perhaps you can touch on your ability to take further pricing in emerging markets in a weaker dollar environment and given the state of the consumer, and then in the U.S.

the promotional environment also relative to 2020. The gist of the question is, look, it’s a robust organic sales growth outlook relative to last year, so just trying to understand what gives you confidence versus a tough comparison and how pricing plays into that. Thanks..

Yes, thanks Dara. Let me come back again, I guess overarching in terms of strategy for us, because it plays into obviously our ability to deliver sustained profitable growth, which is a balance between volume and price.

Obviously you can look at the details with volume and price across all divisions and categories - it certainly suggests that the underlying momentum and strategy seem to be working, but let me come back and reiterate some of the focus areas that have built that momentum this year.

Obviously the re-focus and orientation around premium innovation, just aside from recovering some of the transactional elements that moved through foreign exchange, we’ve been very focused on getting premium innovation in the market, we’ve been very focused on delivering revenue growth management and discipline and teaching our commercial teams to execute that differently.

We’ve addressed adjacencies in certain markets which tend to give us more margin and value in the categories as well.

We’ve talked about our core strategy, which likewise in some of our big businesses around the world, great superior technology going into the market, allowing us to take more value as we move up, and obviously the discipline that we’ve historically had around just taking pricing to recover foreign exchange transaction, and you’ve seen that particularly in the back half of this year, so we’ll have good flow-through of that as we see an environment that you talked about with increasing raw material prices, particularly over the last couple months.

So again, it’s our ability to deliver balanced growth, getting the pricing where we need to, but making sure that the innovation is there to continue to drive both volume and price. We see it both in emerging as well as developed markets across the board.

Relative to your question on the promotional environment, certainly we’ve seen a slightly more benign promotional environment through the year. Obviously we had some low points, but if you take the back half just as an example in toothpaste, we’re looking now running--the category is running at about 28% of sales on promotion.

Pre-COVID, it was running 31, 32, so it’s back to where it was previously, and my sense is there’s discipline in the market.

We’ll see what happens post-COVID as consumers move back into stores and foot traffic increases and retailers decide to dial up the promotion piece, but right now it’s more disciplined and we’ll continue to manage that going forward.

But again, I think it comes back to the core strategies of innovation, how we’re thinking about premium, core and adjacencies, and then the other piece of this is a lot of good work around revenue growth management across the world that’s allowing us to get better balance and better quality pricing in the marketplace..

Thank you, and we’ll take our next question from Andrea Teixeira of JP Morgan. Andrea, please go ahead..

Yes, sorry. Sorry, just making sure--yes, hello. I apologize for the problem. My question is on shipments, I guess consumption.

If you look at the fourth quarter and how it flows through in the first and perhaps the second quarter, I understand what some of the--when we look at Nielsen, especially in the U.S., we can’t basically see how shipment against consumption is in cat food and all the other categories, so as we look into 2021, how we should be thinking as you see your outlook for volumes.

Thank you..

Sure. Two aspects there. I think behind the question is where are inventories relative to the trade and consumers. Certainly following the pantry load that we saw in the first quarter, we saw those inventories come out in subsequent quarters - second, third and in the fourth, and trade inventories obviously, I think, were well in line.

A little discontinuity in the fourth quarter and into January, I think as retailers came out of the Christmas season. They overloaded in some commodity categories and they’re looking to balance it across the board, but by and large we’re where we wanted to be.

The replenishment of some of the high demand categories is basically there, and we think we’re in a good place relative to where we stand. We still have some opportunities in categories like liquid hand soap and dish, given the heightened demand, but overall inventories are not in a place that has any concern to us.

I think what’s interesting, another point behind your question is obviously that our consumption or our shipments are running ahead of some of the market share trends we see around the world, and that again comes back to the point that we’ve talked about before, that our focus has been in driving top line organic growth, getting to where consumers are shopping, and the high growth that we’ve seen obviously in ecommerce and other channels that are non-tracked is obviously in our shipment numbers and not necessarily reflected in the consumption numbers, given that the non-tracked are growing at a significant multiple to the tracked channels today.

By and large, I think the strategies of continuing to drive balanced top line growth across the growing channels is certainly delivering the acceleration that you’ve seen in the back half of this year, which has obviously been underpinned by strong advertising support and brand building..

Thank you, and we’ll take our next question from Nik Modi from RBC Capital Markets..

Yes, good morning everyone. Noel, I wanted to ask you a question about self diagnostics and self care - I mean, these are increasing trends especially as the population ages, COVID has put kind of a highlight on that.

I just wanted to get a sense how--you know, given Colgate’s credentials in science, strong brand name, is this an area that you think you can explore and create a new pillar of growth? Then just piggybacking off of that, how would you do that? Would it be through M&A or could you do it through organic means? Thanks..

Yes, interesting question, Nik. Strategically when you start looking at some of the behavior changes that we’ve seen in categories like oral health and skin health, let me start with oral health where we obviously have a very strong relationship with the professional community and understanding how they’ve begun to embrace telehealth.

What’s interesting is go back two years and telehealth was very much non-existent, and obviously COVID has accelerated trends necessary, and the ability to look at monitoring systems and how those relationships between the dental practitioners and consumers are elevated is a space that we think very, very interesting.

Let’s take the new product that we’ve launched online this year, the Hum electric toothbrush which give you diagnostics live through a consumer app on exactly how you’re brushing your teeth and areas of improvement.

We see that as an ongoing trend relative to connecting and building education at home, and you can start to piece it together long term how you then connect that with the profession in terms of a fully integrated end-to-end process. Likewise in skin health, the same thing - we’re starting to see obviously telehealth expand there.

We’re seeing do-it-yourself procedures being done more at home. The consumers are much more open to taking part in things like skin peel, as an example, where we’ve launched a new entry level skin peel for PCA that allows us to do more do it at home versus having to come to the derm office.

Obviously for the more sophisticated procedures, we continue to partner with consumers to get them into the profession to do that. There’s certainly a trend there.

We’ve got people working on that and then opportunity to continue to elevate our partnerships and obviously bring new growth opportunities to the business as we think about connecting both the profession with the consumer with integrated devices. .

Thank you, and our next question will come from Olivia Tong with Bank of America..

Great, thank you. Good morning.

Wanted to just get a little bit more detail into the key puts and takes to get to the 3% to 5% organic sales target, obviously volume versus pricing contribution to the top line given that promotion should continue to normalize, and obviously FX turning to a contribution, and then just a little bit of a view in terms of growth rate by product segment, oral care versus personal care and home care and Hill’s.

Just trying to get a better sense of your level of visibility and where the flex points might be, given how much the current environment is evolving. Then as you think about what spending is already in the base, particularly for SG&A, versus what you’re planning for 2021, where do you think the areas are for potential upside and downside? Thank you..

Sure, let’s talk a little bit more on the categories. Obviously the uncertainty we have in the categories is exactly when you’ll see categories normalize relative to some of the accelerated consumption you’ve seen, particularly in COVID-related categories like liquid hand soap, like dish liquid.

Our assumptions and plans as we built the 2021 budget were that we would see those begin to normalize in the back half of 2021, albeit at a lower level than we saw growth rates versus 2020 but slightly above the ’19 levels, so we still expect that we’ll see some opportunities for growth in the first half and then normalizing more in the back half versus ’19.

But again, it depends very much, Olivia, on where you are in the world. As you probably well know, the COVID growth in consumption has been very much driven by the developed markets, particularly North America, to a certain extent some markets in Europe which had some pantry loading in the first quarter, and Australia.

You have not seen that in emerging markets; in fact, if you take Africa, to a certain extent Asia, the Middle East, you’ve seen categories, quite frankly, languish and not nearly as robust as you’ve seen in emerging markets, which I think makes our emerging market growth particularly pleasing given the balance that we’ve seen, both in price and volume, across our big emerging markets and the growth that’s come behind that, which has been terrific.

Again, balanced growth through the first half of the year, we’ll see things normalize, and that’s built into the current consensus as John laid out. In terms of advertising, again strategic for us this year. We’ve talked about from the first quarter on that we were going to invest behind the brands.

The increased momentum that we’ve seen in the business has allowed us to broaden our spending across more categories, but particularly focused on where we’re seeing significant growth in the categories.

Let’s take the Hill’s business, which constituted a big percentage of the advertising increase on the year and in the fourth quarter, and you’ve obviously seen the continued very strong performance on that business.

That’s a business with more or less 10% awareness and low brand penetration, so the runway ahead of that business, we believe continues to be very strong and we will continue to obviously put the investment where we’re getting the return on that.

Likewise in the North America business, we obviously put more money into some of the premium innovations that we’ve launched in the back half - the whitening pen, the super premium Optic White Renewal toothpaste, some of the work that we’re doing online and being much more targeted in that space.

So again, the advertising has been very focused, broad in the sense of allowing us to go after certain categories around the world that we had not been supporting, where we saw some good opportunities, particularly in adjacencies, so we’re quite pleased with our ability strategically to get more investment behind the brands given the health of the P&L..

Our next question will come from Kevin Grundy of Jefferies..

Great, thanks. Morning everyone, and congratulations on the strong results this year. Noel, I wanted to spend some time on your emerging markets business, just specifically around category growth and market share momentum, and then tie that into your outlook for the year.

Obviously really strong performance, and that’s been part of the story here, driving the solid results in the back half of the year.

Pricing has remained a strong contributor - one kind of understands that with respect to inflation and FX headwinds that the company has been coping with, but I think what’s noteworthy is that volume has been quite resilient in the back half of the year in a way that it wasn’t, even despite the fact you’re lapping tougher year-over-year comparisons.

I was hoping you’d spend a moment, is this sort of the rising tide is raising all boats? Have you observed an acceleration in your categories, perhaps owing to increased consumer mobility related to the pandemic, or are you seeing very tangible signs of encouraging market share momentum owing to some of the strategic shifts in spending and investment that you discussed earlier in the call? If you could just tie that in also at a high level, what is the company embedding in its 2021 outlook related to emerging markets.

Thank you for all that..

Sure, a lot packed in that question. Let me get to emerging categories.

What’s particularly pleasing on our performance this year is that, as I mentioned to Olivia, we’ve seen a slowdown in some of the categories in emerging markets this year relative to the comparison on developed, and a lot of the good volume growth we’ve driven in those markets again comes back to the strategy - more premium innovation where we were under-indexed.

You heard me mention Brazil, where we’ve increased three points in super premium toothpaste, ASPs are up about 12%, and all quality growth in the Brazilian market.

Now, we’ve given up a little bit of share at the low end of the price points where we’ve seen some of our competitors driving a lot of volume at low price points, but the quality of our share and the profitability of our share in that market is far better than it was, given the focus on premium innovation.

The other point that’s driving good volume growth in emerging markets again is our core.

Focusing on core in Asia, a big part of our toothpaste in those markets, where we’ve seen obviously sluggish market growth, are shipments ahead of consumption, which is, I think, a tracked channel issue, again driven by good core innovation - taking pricing, bringing superior value to the consumer, and leveraging some big parts of our business across a couple markets.

The third would be the adjacency strategy that we’ve had in emerging markets, whether that’s in Africa, whether that’s in Latin America, looking at adjacencies that we can get good margin accretion in, that have high growth rates.

Skin and facial products in Latin America, as an example, behind our Protex brand have performed very, very well, particularly in markets like Brazil. So again, the strategies that we’ve been deploying across innovation, particularly core premium and adjacencies, have played out.

The other piece of this is depending on where you are, the emerging growth of ecommerce has been quite important for us, both in developing markets as well as the developed markets. If you take the growth that we’ve seen in emerging, ecommerce is still a low percentage of the total ACV in Latin America and in Africa.

Obviously in Asia, the inverse - it’s significant growth in the category right now, and we’ve had terrific performance across our Asian business, particularly in China behind some of the unique innovation that we’ve put in the market.

We’ll see how ecommerce continues to perform as foot traffic increases, but if you take the China piece specifically where we’ve been very focused on driving our online and digital capabilities, we’ve seen our market shares in ecommerce grow nicely in 2020 based on the strategy that we’ve been deploying.

Overall, I think we’ve been looking at the channel growth in the right way, we’ve been looking at the portfolio strategies from an innovation standpoint in the right way.

Now as COVID gets behind us, you would hope that we’d start to see a re-acceleration of the categories in emerging markets in the back half of 2021, and obviously they’ve been a little bit sluggish given, I think, some of the issues with the mobility in those markets and the significant increase in the virus, particularly in markets like Latin America and in certain markets of Africa.

The belief is that in the back half, we’ll see that start to stabilize and we’ll see markets return, which will give us obviously an increased opportunity to continue to drive volume..

Our next question will come from Wendy Nicholson with Citi..

Hi. My question actually had to do with India, because I saw the numbers that came out of that division yesterday, and it’s obviously the exception that we actually get to see numbers for a specific country for you.

I know it’s small, but the thing that struck me was top line growth was good but not great, but margin expansion was huge, off the charts, and gross margin, I think in India is now north of 70%. I just wanted to ask about it in the context, Noel, of your focus on balanced growth.

Again, India is a small market, but when I think about some of your other big emerging market businesses that should be faster growers over the long term, I think, to help you meet your long-term growth algorithm, at what point do you say, wow, a 70% gross margin in an emerging market business is too high? Are there other countries where margins have really been exploding like that? It just struck me as kind of a surprise in the numbers, and I wondered if there was something more to it in terms of how you think about balancing top line versus bottom line growth over the longer term..

Yes, thanks Wendy. Listen, India is a very important market for us. We were very pleased with the rebound in the growth that we saw in the back half of 2020.

Given some of the COVID issues experienced in the first quarter leading to lockdowns at the back end of that quarter and into the second quarter, generating a 7% organic in the third and just shy of 10% organic in the fourth, we think is just a terrific performance.

Again, coming back to the strategy, India is very focused, likewise given the strong oral care business we have, on premiumizing that marketplace, and we’ve launched premium SKUs in Vedshakti, which is our new naturals position.

We’ve continued to improve on the learning we’re seeing coming out of the naturals segment, which is an important growth opportunity for us.

We’ve launched new adjacencies, new pulling oil mouth sprays in the market with anti-bacterial benefits, which have been terrific, so we’re looking at ways to continue to premiumize that business and move pricing up at the same time, which you’ve seen. I talked about it just earlier, the core renovations that we’ve had.

A big part of the India business is their core anti-cavity business, and we’ve had a significant re-launch underway for the better part of a year now on the core anti-cavity business, which allowed us to get pricing up as well as drive significant superiority into that product in terms of a consumer benefit.

The third would be the revenue growth management aspects that we’re starting to deploy with a lot more discipline and learning, and we’ve got more work to do certainly in emerging markets but we’ve seen great response from the teams getting behind opportunities to look at our promotional spend, specifically price-side architecture and looking for opportunities to drive more margin into the business.

Overall, I think that the focus there is good top line growth - you’ve seen it in the organic, and strategically we think we’ve got some opportunities to continue to accelerate there. The comparisons get a little bit easier in the first half.

We’ll obviously have difficult comps more in the back half given what I just stated, but we think the strategy is working and the investment that we’re putting into that market, as you saw from the release yesterday, is delivering. .

Thank you, and our next question will come from Chris Carey with Wells Fargo Securities..

Hi, good morning. I think you mentioned that toothpaste is running maybe 300, 400 basis points below historicals from a promotional standpoint. You’re probably seeing even lower promotional levels in home care categories.

I guess--and maybe I’m reading too much into it, but it sounded to me like you think that these lower promo levels can potentially hold going into 2021 and maybe even beyond.

Maybe for 2021 but also just higher level, did you learn something in 2020 about how much promotion is actually needed to drive growth in your categories, and do you think that these lower levels of promotion can potentially sustain longer term?.

Yes, thank you. Again, based on how retailers are looking and how we’re partnering with retailers to grow category growth, we’re looking to optimize category by value, and we’ve had a lot more time to spend analyzing how promotion effectiveness is delivering that.

Certainly as foot traffic has come down, some of the retailers haven’t pushed more aggressive promotions, but as I mentioned, the promotional levels are slightly below where they were historically - three points, and my sense is post-COVID, you might see those return to normalization, back to the levels that we had historically, but that will be determined.

This is an emerging market issue more than anything and the developing--excuse me, developed market issue.

In the developing part of the world or in emerging markets, we haven’t seen substantive changes there relative to what we’ve seen historically, so I think what retailers and manufacturers are looking for, how do we continue to drive growth in the categories, everyone is recognizing that innovation is the catalyst to do that, and obviously as things have normalized more around COVID and the demand issues in some of those categories, they’re looking to get back to strategic growth opportunities longer term, and that’s where the innovation comes into play and we’ll continue to bring that to them.

So we’re being disciplined on it, the revenue growth management is having some impact on that, obviously, where we’re starting to pull away from promotions that don’t deliver quality into the category and deliver quality into the P&L for us and our retailers, and you’ve seen some of that obviously in that number that I mentioned.

But by and large, we’ll probably see things normalize in the back of the year. We’ve planned for that, but again our focus right now is on bringing real value to the categories through premium innovation and re-launching our core businesses in certain parts of the world, which drives real value to the category..

Thank you, and our next question will come from Jason English with Goldman Sachs..

Hey, good morning folks, and welcome Stan. Thank you for sliding me in. At the risk of being chastised by Mr. Faucher later today, I’m going to try to sneak in two quick questions, one tactical and one bigger picture.

First on tactical, you mentioned December retail load, you mentioned your comps [indiscernible] quarter pantry stocking, expectation of a bit more of a back half-weighted EM growth story. Should we be braced for a more sluggish start to the year? That’s the tactical question. And bigger picture, ecomm growth, you talked about it a few times.

Can you quantify what it is as a percentage of your sales today, how it compares to where you were before, and how, if at all, you’re re-imagining your marketing and media approach in the wake of the shift? Thank you..

Sure. I think the tactical question, where do we see categories evolving first half versus second half 2021, I think you’re going to see--obviously we saw some of the sluggishness in December in the categories. You’ve heard that from others who have announced, and that’s quite frankly not unexpected.

I mean, I think when you see the ongoing way of unemployment, the delays in stimulus, but more importantly moving into the holiday season--and again I’m talking U.S. here, moving into the holiday season, people obviously prioritizing their consumption against other necessities at that time.

January, the categories have started to come back slightly, so we’re not terribly concerned. The behavior changes that we’ve seen in the categories, whether it’s liquid hand soap, dish liquid or cleaners, I think are there to stay for while, Jason. We’ll see those, at least from a liquid hand soap standpoint, stay there for the medium and long term.

Obviously as people move back into offices and move away from home, you’ll see the impact on dish liquids and APCs, but remember those three categories aren’t a significant percentage of our overall sales.

We’ll see the categories, I think, sustain at higher levels in 2019, probably slightly lower than ’20 as we stated in the first half, and then normalize in the back half. Coming to ecommerce, again a very deliberate focus for us.

As I mentioned in my comments, one, bringing in talent from outside, training and developing our commercial organization to understand how to execute a lot more flawlessly in ecommerce, and it requires a lot more effort to do that.

The sophistication of dealing effectively in ecommerce is very different, and as you look at the sophistication that we brought to the indirect trade over the last 15 to 20 years, it’s that same level of focus that we’re bringing to the online world now, both from a digital standpoint and from an ecommerce standpoint.

The growth was over 50% in the fourth quarter. Obviously as John mentioned, we exited the year with ecommerce at double-digit percentage of our total sales in the company, and you’ve seen strategically in the key markets where we have focused and where ecommerce has become more prevalent, i.e. China, the U.S.

and Hill’s, you’ve seen us obviously driving share, getting the right innovation into that channel, understanding the analytics and learning from that, and building on that momentum.

We see that as a continued growth opportunity, but we’re going to be where consumers are shopping and we’ll see those shifts as we go throughout the year, but the important part for us is that our share is still slightly below our general market share in ecommerce where we get share, which is in not very many places, so we’d know direction and we still have more upside growth to be had there..

Our next question will come from Bill Chappell with Truist Securities..

Thanks, good morning.

If you look back at 2020, just trying to understand, especially for the pet business or for Hill’s, as well as the total business, what type of comparison do you think in terms of--it seems like on the oral care any stockpiling that was done in March and April was kind of de-loaded in the later months, and so on a full-year basis the comps aren’t really that different.

Is that fair? Then on pet, I don’t have a good idea just because vet centers were closed, so didn’t know if you felt like the business ran at full capacity throughout the year, at 85% capacity. Just trying to understand as we’re looking at the growth for 2021, what comps you really see..

Sure, let me take the toothpaste one first. As I mentioned, broadly the categories were sluggish in the first half, started to come back a little bit in the back half of the year, and as we accelerated our innovation pace and our advertising, we saw obviously our shipments accelerate in the back half on oral care, particularly in toothpaste.

As we look to comp that next year, we’ll see how the behavior transpires in the first half of this year. The key is we’ve got strong innovation, as I mentioned, both coming out of 2020 as well as a first half innovation pipeline, that we think is good, so we’ll see what happens.

But again, the message here is understanding the behavior shifts is obviously extraordinarily difficult and very different from market to market around the world. Obviously the U.S. being an important part of our toothpaste business, we’ve seen sluggishness there.

Strong pipeline, as you talked about pantry in Q1, but we saw that come out and we’re starting to see a more balanced approach and more normal approach in terms of consumption moving forward, but our focus is to accelerate that category with the innovation that we’re bringing. Hill’s, obviously the comps were difficult last year.

We comped those with strong growth this year, so if I come back to the Hill’s strategy, again it’s about how do we continue to deliver solid category growth for our partners. We’re doing that with obviously the premiumization of the category.

We’re bringing great new products into the segment, we were pleased to see the prescription diet business start to come back, which I think is representative of a couple aspects on that business which is, one, we’re seeing people return back to veterinarians and the prescription diet business benefiting from that - our Hill’s to Home initiative has certainly helped that.

Obviously the balanced growth we’re seeing across geographies, more so than just the U.S. which has been terrific, a strong performance in Europe this year, again both on the base business as well as prescription diet, so we see that obviously moving forward into 2021.

The comps are difficult to be sure, but again remember this is a business with really low brand awareness and low brand penetration, and a great, great product offering, so as we get the balance right in terms of our digital spending focused on those growth opportunities that we see and the innovation that we’re bringing, both in the prescription on the Science Diet side, we see obviously the ability to continue to lap those comparisons that we’ve had this year.

The category continues to be strong, between 3% and 5% growth depending on where you are in the world, and obviously the new channels that we’re experiencing growth, specifically ecommerce continue to deliver on that.

So again, I think the right level of premiumization, the right channel focus, the right focus on continuing to invest in a business, which you’ll see in 2021, to drive brand awareness and bringing science-based nutrition to the category, which I think is positioned well based on how consumers are behaving.

Comps are tough and we realize that, but we think we’ve got good plans in place for 2021..

Thank you, and our next question will come from Kamil Jagrulla [ph] with Credit Suisse..

Hi guys, good morning.

It wasn’t that long ago, I guess, we were talking about local brands in many of these emerging markets taking share, and it sounds like those share losses have abated, but also if maybe you can provide some context on what’s happened competitively in some of those markets today - you know, did they make it through--are they just as a competitive as they were, did they make it through the pandemic? Obviously you just talked about how trends in many of those markets have slowed and a whole set of other complexities where perhaps you were able to survive in a much better position than them.

If you can just give some context on what’s happening in some of those major markets, that’d be helpful..

Sure.

Listen - you’ve heard it, I think from others, there has been a return to big brands over the course of COVID, and obviously the importance of health and hygiene and trust played into that resurgence, and ultimately as consumers move back into stores and you get the benefit of displays, you will see perhaps some of the local brands reorient themselves and get some benefit of that.

But if you look at the online world, obviously the big players have really figured out how to target more effectively, how to spend in the right mediums, which was historically a space that local brands and some of the insurgent brands were taking, and so over time local brands will always be a threat, but I think as you’ve seen through COVID, a resurgence to big brand trust and reputation, and obviously as we continue to bring a strong innovation pipeline to reward those consumers who have come into the franchise and continue to deliver against their expectations, we feel good about the movements moving forward.

But I would say we never want to count local brands out.

We continue to keep them very much at the forefront of our strategy and look at them very, very carefully in terms of how they’re orienting themselves locally, based on the insights required to win, and we feel like the innovation structure that we’ve put in place around the world in terms of our focus on H1, H2 and H3 and being more local where required, will hopefully address those increasing challenges that we’ll see as foot traffic increases in the back half..

Thank you, and our next question comes from Steve Powers with Deutsche Bank..

Thanks. Hey guys, good morning. Noel, I wanted to hear a little bit more around your expected gross margin drivers into ’21, obviously off a very strong 2020.

Can you pull apart those puts and takes that John started talking about at the beginning any further? My real question underneath that is John had laid out a couple of caveats - raw materials, inflation, and others - as potentially pressuring gross profit progression as the year progresses, but it didn’t sound like you expected those would be severe enough to actually turn gross margins negative year-over-year, but more simply just govern the expansion.

Is that the right read, or does the lower end of your EPS guidance range actually allow for a scenario where gross margins face some actual contraction if some of those uncertainties break the wrong way? Thanks..

Yes, thanks Steve. Again, let me walk through perhaps the margin roll forward on the quarter and the year.

Obviously we delivered coming out of the third quarter with a 60.2 margin, we delivered 130 of pricing benefit to the margin funding the growth, which was 280 basis points, and you saw the acceleration in raw materials give us a headwind of 320 on the quarter, but ultimately we were able to deliver 90 gross margin points of growth in the quarter and on the year it was 130, with headwinds of around 230 on the year.

I think the important aspect here is good back half pricing that we generated across all of our markets, and that back half will obviously roll through to help compensate some of the increases that we’ll see in 2021.

Now that being said, raw materials are running slightly ahead of what we anticipated for the year in 2021, so we need to ensure obviously that we get that pricing to hold, which we will do our best to do. We need to continue to bring premium innovation into the market.

We need to continue to focus on the strong funding to growth and the productivity that we have in the P&L to ensure that if raw materials grow even further, we’re able to compensate that in the market.

The volatility we’ve seen on raw materials over the years, again it puts us in a place to reorient our focus around getting the innovation in the market, getting the productivity and the revenue growth management initiated, but I think the good story that we have, at least we’re in a position where we took strong back half advertising--excuse me, strong back half pricing in order to help us deliver a flow-through of that into the first half.

But again, that’s based on the current rates that we’re seeing. We’ll see how that behaves over the next couple of months. We’re mindful of that, we feel good about our ability to deliver the gross margin expansion, but based on the current input costs that we have and the current spot rates that we’re seeing on foreign exchange. .

Our next question will come from Lauren Lieberman with Barclays..

Great, thanks. Good morning.

I was curious about M&A, and actually more specifically the strategy with regard to premium skin, because with your core and organic strategies - you know, investments working presumably so well and building momentum from here with all the advertising support and innovation you’ve got, I was just curious about the role that premium skin will play going forward.

I think at the time to me, when you started building that out, it felt a little bit like trying to look for another leg to the stool as things were a bit slower in the core business. I was just wondering how that fits together looking forward, again with the success you’ve having on the core..

Yes, thanks Lauren. Listen, skin continues to be a really exciting category for us long term. You look at the demographics globally, you look at the economics of that category and you look at where we have made careful choices on where to compete, particularly around professional skin health, so we like the dynamics of the category strategically.

Obviously post the acquisitions, we ran into a significant headwind related to COVID, particularly with foot traffic starting in derm offices, foot traffic basically coming to a halt in spas, foot traffic obviously related to travel retail coming to a halt in 2020, so we started to see importantly in the fourth quarter this year, we started to see growth back in those categories, which is terrific.

We’ve spent the year, Lauren, and this is a real benefit, I think, to the quality of the performance we had this year, we spent the year investing behind those businesses.

We weren’t taking cost out; we were looking to optimize the cost, we were looking to build more capabilities in those businesses, so we had the benefit of spending behind those brands and capabilities to set ourselves up for obviously what we would expect to see a return to growth in those categories, particularly coming out of COVID, likely in the back half.

But as John mentioned, we saw some growth of those businesses in the fourth quarter, which was terrific, and we think we’ve set ourselves up relative to seeing those businesses deliver good, sustainable growth for us longer term, and it continues to be a real strategic growth opportunity for us in the long run, hence the reason why we decided to invest in those specific areas that we think give us a unique opportunity to add value to and drive incremental growth in the longer term.

But again, businesses that were severely impacted based on COVID, but again giving us the opportunity to truly understand and build capabilities that we think, long term, those categories will perform quite well..

Thank you, and our next question will come from Robert Ottenstein from Evercore..

Great, thank you very much. I was wondering if you could drill down on the China oral care business.

You made a lot of improvements with Darlie and with ecommerce, both with Colgate and Darlie, so maybe an update of where you are with that; and then if I remember right, the challenge was getting Colgate going on the brick and mortar channel, so maybe an update on all those issues. Thank you..

Sure. Again, this was a complete re-look at our strategy in China over the last year. As we alluded to, we expected performance in 2019 to improve in the back half based on those strategies, which it did.

We obviously had the significant impact from COVID in the first and second quarters in China, which impacted the business, and we’ve seen the business obviously respond quite well in the back half of this year, in line with the expectations that we have.

Our particular focus was around building our go-to-market out differently, specifically with relates to how we want to think about innovation in the online world, which has now become a pretty significant part of that business in China, and pleasingly we have seen shares grow nicely online - again, I think a testament to a reorientation behind premium innovation.

An interesting index for you - pre-COVID or pre-the re-launch strategy in China, our indexes were running around 80% in the online world versus the category, so 20% below the category.

Coming out of COVID and into the fourth quarter, our indexes are now running north of 110% to the category on average, so again clear, focused orientation around premiumizing our business, delivering online premium innovation like the Miracle Repair line, like some of the focus that we’ve done in electric toothbrushes have allowed us to really drive the pricing in that category, which has driven incremental value share.

Now, the brick and mortar continues to be a bit soft on the Colgate side, quite strong on the Darlie side.

Again, the Colgate side is against the significant changes we’ve made in some of our go-to-market that’s taking a little bit more time and obviously impacted by the fact that foot traffic in China was down quite significantly, particularly in hypers and supers as consumers moved online as a result of both behavior change and COVID.

Overall, pleased with the progress that we’re making in China, pleased with the go-to-market changes that are starting to take hold, and encouraged by the early signs of growth momentum in ecommerce and our ability to deliver product innovation digitally in a more effective way..

Thank you, and our final question will come from Mark Astrachan with Stifel..

Thanks and good morning everybody. I guess I wanted to ask you maybe a bigger picture question to end here.

Overall EBIT margin is down a bit in recent years - I think you ended 2020 around where you were in 2012 or so, but sales have obviously accelerated, so how do you think about the give and take here? Can EBIT margin go back to where it was pre-2019, and if so, how do you think about contribution by line item - you know, gross margin, can that expand realistically from here, SG&A? Is ad spend, which is now above where it was a couple of years ago, at the right level, is it too high, too low? If you can just give some bigger picture thoughts there, that’d be helpful, please..

Sure. First of all, growing operating margin long term starts with obviously delivering sustained top line growth, and that’s been our focus, and revenue is the best creator of operating leverage.

Secondly, we have many levers that we use to drive growth, and you’ve heard me talk about quite a few of those today - obviously premiumization efforts, which drive more leverage through the P&L, our revenue growth management efforts which translate right through the P&L as well, you saw the examples I talked about in big markets like Brazil which are certainly bearing fruit, the personal care and home care leverage that we’ve seen obviously in those categories, and as we expect oral care to re-accelerate, it will drive more leverage through the P&L.

Obviously funding the growth and productivity is a real focus for us.

Great funding the growth in the back half of 2020, a real dialed-up orientation behind some opportunities particularly around our supply chain and looking at our supply chain differently to drive more efficiency of that moving forward, which we think will translate into more leverage.

The real cause of that--of your point there was obviously an acceleration in our spending and increased logistics costs, which impacted a bit on the leverage, and those logistics costs, we hope will subside in the back half.

We’re looking at ways to continue to optimize our warehousing and freight services around the world and very focused on finding opportunities to be more efficient there, but the key driver of it is again investing for the long term health of this business and putting advertising into categories and key geographies where we’re seeing real return on growth, as I mentioned particularly Hill’s, the U.S., China, as well as India.

So overall, we’ll see that leverage come through, but our focus right now is delivering operating margin growth through the top line and continuing to accelerate gross margins to allow us to spend behind the business, so overall it’s about growth and we’ll see that leverage come through as we continue to deliver that..

Thank you, and at this time we’ll turn the conference over to Mr. Wallace and presenters for any final or closing remarks. .

Yes, thanks. Again, a strong quarter, pleasing to see obviously the broad-based growth we had on the business, and very pleased around the capability building and how we’re thinking about the business and the changes that we made throughout 2020.

Again, to all Colgate people who are really behind this success, thank you for your commitment to our values and our purpose. Thank you for everything that you’ve done. I’m deeply grateful for your commitment to the business and always optimistic that the way we work together, we’re going to continue to build a healthier future for all.

Thanks everyone. Stay safe, and we’ll talk to you soon..

That does conclude today’s teleconference. Thank you all for your participation. You may now disconnect..