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On Tuesday, 13 May 2025, Colgate-Palmolive (NYSE:CL) participated in the Goldman Sachs Global Staples Forum, where the company’s leadership outlined their strategic responses to current market challenges. Despite a consumption slowdown, Colgate remains optimistic about its long-term growth, particularly within Hill’s Pet Nutrition, a key focus of the discussion.
Key Takeaways
- Colgate revised its organic sales growth forecast downward due to weaker-than-expected consumption.
- Hill’s Pet Nutrition is a major growth driver, with a focus on innovation and margin recovery.
- Tariffs have impacted Colgate’s financials, with a $200 million incremental growth impact.
- Colgate is investing in international expansion, targeting markets like China and Brazil.
- Strategic investments in digital capabilities and supply chain improvements are underway.
Financial Results
- Margin Expansion: Hill’s Pet Nutrition saw a 500 basis point margin expansion in Q1.
- Sales Growth Forecast: The company lowered its organic sales growth forecast for 2025 due to consumption weakness.
- Tariff Impact: Tariffs announced as of April 24th have resulted in a $200 million impact, affecting growth guidance.
- Private Label Exit: This exit had a 40 basis point negative impact on total company organic volumes and 200 basis points on Hill’s.
Operational Updates
- Innovation: Emphasis on consumer-centric, science-led innovation, including new products like Science Diet with antioxidant and prebiotic blends.
- Supply Chain: Addressing past constraints, Colgate has improved manufacturing capacity with new facilities in the US and Italy.
- Digital and Media Strategy: Investments in digital, data, analytics, and a revamped media strategy are enhancing communication with consumers and professionals.
Future Outlook
- International Expansion: Plans to enter markets such as China and Brazil, focusing on replicating successful growth models.
- Growth Segments: Targeting underdeveloped segments like cats and small dogs, with a strong innovation pipeline.
- Advertising Campaigns: New campaigns aim to boost brand awareness and drive growth across various metrics.
Q&A Highlights
- Market Trends: Despite softer category volumes, the premium pet food segment remains resilient.
- Brand Strategy: Hill’s business demonstrates strength across all segments, excluding the private label impact.
- Profitability: Continued focus on pricing and cost-saving initiatives to enhance margins.
In conclusion, Colgate-Palmolive’s strategic focus on innovation, international expansion, and operational improvements positions the company for long-term growth despite current market challenges. For further details, please refer to the full transcript below.
Full transcript - Goldman Sachs Global Staples Forum:
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: All right. Good morning, everyone. Thank you all for joining us today. I’m Bonnie Herzog, Senior Consumer Staples Analyst at Goldman Sachs. And Leah Jordan, our Packaged Food Analyst, and myself are thrilled to welcome you all to our Annual Global Staples Forum.
So our expectations for ’25 have evolved meaningfully compared to how we were thinking about this year when we look back December of last year. What was expected to be a return to more normalized operating environment after several years of disruptions has proven to be anything but normal so far. So we’ve been seeing significant macro volatility, especially with tariffs and immigration, among other policy changes, which has caused consumers to take a pause and reevaluate their spending behavior. So as we contemplate yet another year of challenging backdrop, we have a great lineup of companies for you today, which should make for robust conversations to understand what companies are doing to navigate these tumultuous times. So with that, we’re excited to kick off this year’s conference with Colgate.
And it is my pleasure to welcome Colgate’s President of Hill’s Pet Nutrition, John Haslin and Chief IR and EVP, M and A, John Pochet, to join us on stage. So John Haslen has close to three decades of experience at Colgate, having served in several roles across his illustrious career at the firm. He has been serving as President of Hill’s Pet Nutrition since 2022. Hill’s remains an important business for the company, which has seen significant sales growth since John took over. And then segment margins are really on track for significant recovery as well with 500 bps expansion in Q1 with more likely to come.
So there’s a lot to unpack on Hill’s path forward and how it fits into Colgate’s broader strategy. So thank you both for joining us today. Nice to be here. I was laughing. We have two Johns on stage today, so I’m gonna try and direct my questions to the the correct Johns.
So actually, speaking of that, as we kick things off, I did before we get into Hill, I did want to start with you, John Fouche, to help us understand the setup for the company and then really your focus areas, especially since you just reported results. And so if I think back, thinking CAGNY when we were in sunny Florida in mid February, John, you guys really were the first ones within reason at CAGNY to really call out consumption weakness and how that’s feeding into some of the retailer inventory adjustments. So on your Q1 earnings call, you mentioned seeing encouraging early signs in April. So could you maybe update us on what you’re seeing? And if within that, if the end market, you know, has evolved since then.
John Pochet, Chief IR and EVP, M and A, Colgate: Sure. So thanks for having us. What we said in CAGNY was we were getting to a category Mhmm. And that was through, obviously, about the February, and that was through a combination of scanner data as well as some of the tracking that we do with our individual retail partners. And Right?
So growth in January to growth in February, all categories decelerated, and that was driven by volume. Pricing actually held up relatively well in line with our expectations. So what we were seeing and what we thought, and again, is on a category basis, was less traffic, less consumption, less purchasing of our products. As we looked out to March, what we saw was about half the categories continued to worsen and half the categories got better, so a more usual type of dynamic within the categories. And then what we said on the Q1 call, as you mentioned, is that we through the first two weeks of April, we had seen improvement broadly across our categories versus where we were in February and March.
We have another two weeks of data, and I would say what we’re seeing is consistent with that viewpoint is that the categories are still tough. We don’t think consumption is at where levels have been, but it has improved sequentially versus where we were in February and March broadly across our categories, and that’s in The US. On a global basis, I think what we saw was relatively similar, and I’m sure John will talk about Hill’s consumption later, but on a global basis, we did see weaker results in February, a little bit better in March from that standpoint. So very much in line on a global basis. Again, what we said on the call was we expected Q2 to be another difficult quarter, not in line with historical consumption trends, and that was one of the reasons along with the first quarter results that we took down our annual forecast for organic sales growth.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Right. And then I think about framing that as we headed into this year, you know, I think back to how you set expectations with your outlook, you know, going back to q four, you guys were a bit more conservative kinda understanding this year was gonna be tough before it really, you know, got a little bit more challenging from the get go. Right?
John Pochet, Chief IR and EVP, M and A, Colgate: Yeah. I mean, I think yes. I think that’s fair. I think if if you look at how we really, how we started talking about 2025 going back, I would say, to q our Q2 conference call. And we delivered over 9% organic sales growth in the first half of last year.
There was a lot of pricing. We still had easier volume comparisons, so we’re delivering a nice balance between pricing and volume growth. And we knew there was going to be less pricing, both underlying inflationary pricing as well as hyperinflationary pricing. We knew as we began to lap volume growth that our volume comparisons were going to be more difficult. So we talked a lot about having financial flexibility in the p and l.
We talked about increased advertising so that we could deliver dollar based earnings growth in 2025 despite the fact that we knew it was you know, we thought it was gonna be in line with our long term targets of three to five percent, but obviously, the growth not as robust as had been in the previous years. So I think we were well prepared. But as you mentioned in your opening remarks, you know, things have slowed more than we anticipated. Yeah.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: And I know it’s fluid, but just with the most recent changes regarding tariffs and the pause, anything you wanna update us on today, or can you? No.
John Pochet, Chief IR and EVP, M and A, Colgate: So we figured we’d get a question on that given given yesterday’s announcement. So what we included in our guidance Mhmm. Was $200,000,000 of incremental growth impact from tariffs, and that was based on tariffs that were the language we used, announced, implemented, and in effect as of April 24.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay.
John Pochet, Chief IR and EVP, M and A, Colgate: Okay? So lots of moving parts now. We don’t know where everything is going to be, so we’re gonna hold off commenting on that until we get some more certainty.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Fair enough. Alright. And then just one final question for you, John, is just from a longer term perspective. And as we think about the next three to five years, what are gonna be the key focus areas for for Colgate as I think about your path back to, like, the three to 5% long term growth algo? You know, are there certain parts of your portfolio that, you know, you’re gonna double down on, you know, versus others?
And then how big of a role will M and A play?
John Pochet, Chief IR and EVP, M and A, Colgate: Got it. So I will start off, and then, John, why don’t why don’t you add on top of that because Hill’s obviously is one of the areas where, you know, we’ve been doubling down on it, and I think we will continue to do so. I think the key for us is as we look at what’s happened over the last five or six years as we’ve reaccelerated growth and gotten back to what we hope to be consistent compounded dollar based EPS growth. It starts with consumer centric innovation, particularly science led innovation, innovating across our core businesses, right? We’ve got these big brands that we need to keep fresh in the consumers’ eyes to drive market share, to drive pricing growth through our RGM opportunities.
I think you’ll see a focus on the profession going forward, and John can talk about that in terms of working with dentists, working with derms, working with vets to drive the business going forward. I think you’ll continue to see we’ve talked a lot about building and scaling capabilities over the last couple of years. We started off with digital and innovation, and we’ve talked a lot about data and analytics as we’ve gone through all of this. AI is a tremendous focus for the company right now. We’re investing a lot of time and capital in our AI strategies, and we think it’s paying off.
So I think, you know, the key for us again is consistent compounded dollar based EPS growth to drive peer leading TSR, but that’s gonna start with investment behind the brand, scaling capabilities, and, you know, I think we’re we’re off to a good start from that standpoint. And Hill’s will be a a key focus. John, you wanna
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Yeah.
John Haslin, President of Hill’s Pet Nutrition, Colgate: I would just say that Hill’s, in some ways, epitomizes what John just described. We are fundamentally a science backed nutrition brand.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Mhmm.
John Haslin, President of Hill’s Pet Nutrition, Colgate: We have strong veterinary or, you know, professional endorsement. And innovation and media are two of the key growth drivers that help amplify the the overall flywheel. And we’ve been transforming our capabilities, especially in data and digital Mhmm. In a very meaningful way. We’ve been building up the data foundation.
We’ve been using data actively in things like clean rooms, which I know we’ve talked about at other forums in terms of how we enhance our media targeting. And we have a very significant proportion of our business that goes through ecommerce, And therefore, you have to have digital and data capabilities in order to keep that keep that going. So it’s those those same scaled capabilities are what we are also delivering across the whole COVID enterprise.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay. No. That’s helpful. And as I think about joining for you, I think it was back in 2022, so a few years now, what are the areas that you think have really worked well and that you’re continuing to push on and then maybe areas of opportunities in in improvement? Sure.
John Haslin, President of Hill’s Pet Nutrition, Colgate: So media is one of the big changes that we brought into the into the business. And and that’s Mhmm. Media spend, but also the communication that goes behind that. We’ve significantly dialed up the way we communicate to pet parents and to veterinarians. Mhmm.
Nutrition is a complicated category. People don’t always understand human nutrition. They definitely don’t understand pet nutrition. And so communication, education, getting people to really understand Uh-huh. Is a fundamental skill set that that we’ve been focused on.
Innovation is another one. We’ve delivered some very, very powerful innovation into the market. In fact, one of the one of the strongest pieces of innovation was launched in 2019. It’s still growing 28% year to date. So really powerful innovation protocol.
Vet endorsement, as I mentioned just a moment ago, very important to our brand. The heart of our brand, pills prescription diet starts with a visit to the veterinarian. The veterinarian diagnoses the pet, provides a nutritional solution. That is word-of-mouth that you just can’t yeah. I mean, it’s just so powerful as a as a as a flywheel.
And then, of course, fixing our supply chain. You’ll know a couple years back, supply chain was a real pain point. It was a capacity challenge which was impacting service, but not only that, it was impacting our margins and our ability to deliver. And so building out the right capacity and changing using that to help change the margin profile were really powerful tools that have helped drive that growth. Do we have growth to go?
We still are relatively low awareness and penetration brand. We’re a big brand, but we operate a very big category. If you think about household penetration of pets in The US, you’re talking about mid 60% of households have a pet. We have single digit penetration. So you can just see the the amount of upside opportunity that that sits there.
Communication, we talked about. It’s been a strength, but we have more opportunity as a science brand to tap into the emotion that is laid in in this category. People love their pets. Science is a terrific place to start because we know we’re delivering the best nutrition, but you how do you marry that with love? We think we’re gonna crack the code with our new communication campaign, and that’s and that’s really important.
We still have some underdeveloped segments. There’s some segments that are growing in the market where we have opportunity to grow faster and build and build market share. And, also, that includes geographies where we are subscale and we have a a a still an opportunity to grow.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay. That’s great. And as we think about the categories, you know, what is your expectation for global premium dog and, I guess, cat food over the next several years? And then in the context of that, how do you see the mix evolving for growth between dry dog and I think I’m dry dog versus wet?
John Haslin, President of Hill’s Pet Nutrition, Colgate: Right. Right. So the long term trends of this category are solid. If you look at anybody that interacts with this category, you see the change in human behavior Mhmm. In relation to their pets.
You’ll I mean, I’m not original in making this quote, but you see the pet used to live in the backyard, now they sleep in your bed. This is just a fundamental change in in how people interact with the category. And so we do believe that the underlying trends will remain strong. Some of the underlying trends are also places where growth can be accretive as well. So for example, we see cats as a population growing faster.
We see small dogs as a population growing faster. Those will drive growth over the long run. Both of those pets happen to live longer. In terms of the mix between the the forms, dry is a fundamental part of the category, and it’s here to stay. Mhmm.
It delivers great nutrition for especially hills dry. It gets delivers great nutrition, but there’s also a convenience and cost factor. So it makes sense as part of the nutritional building the bowl strategy. Wet provides variety and texture. Some pets like variety.
Some pets actually don’t care, but people like variety. So therefore, it becomes an an important part of how people are treating their pets. And then fresh, a very interesting humanized form, sort of a an extension of wet if you think about it that way. It’s it’s another way of of feeding variety and texture, and it makes the pet parent feel very good that they’re that they’re doing that.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: I’m smiling just thinking about this, and especially in this backdrop with some strains on the consumer. So I’d be curious to hear how consumption patterns or purchasing patterns have changed as they think about being pet parents. Are they scaling back given the tough environment, or are you seeing, you know, down trading? And then how do you navigate within that?
John Haslin, President of Hill’s Pet Nutrition, Colgate: So we do see the category volume softer than we would like. That is true. As John said, we’ve seen that in all all the categories, and and that’s true here as well. That doesn’t mean that the premium pet food segment is fundamentally at risk. In fact, a brand like Hill’s
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Mhmm.
John Haslin, President of Hill’s Pet Nutrition, Colgate: You’re talking about feeding pets through their life.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Mhmm.
John Haslin, President of Hill’s Pet Nutrition, Colgate: So we we attract puppies and kittens all the way to adults, senior adults. As I mentioned before, a lot of pets are living longer. Cats and small dogs are living longer. They tend to get sick then. Hill’s press Hill’s prescription diet is designed for pets that are sick.
So we have a a very long lifespan of the pet that we’re able to interact with with with our brands. And we and we see that the premium category is important because if your pet has a health problem, you’re going to try to solve that problem. Yeah. If it’s a chronic problem like kidney disease, if it’s an acute problem like diarrhea or constipation, you wanna solve the problem, and you’re not trading down Right. To try to, you know, walk away from that
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: problem. All good points. And then from the Q1 call and the commentary, it appears the private label exit will be about a 200 bp headwind to segment sales this year and maybe a little bit of a lingering impact in FY ’twenty six. So thinking about Q1 volumes being down marginally, help us understand the growth for this segment for the rest of the year, and I think about it in the context of what John mentioned too on pricing. It’s going to become a smaller part of the equation.
I mean, can we see volume growth for the full year?
John Haslin, President of Hill’s Pet Nutrition, Colgate: In fact, let me just talk about the private label point. Private label, that was simply a service agreement that we created as part of the acquisition of the drive facility. So it’s not a business that we drive. We we drive the underlying Hill brand. That business is healthy.
It’s growing volume and value. It’s growing across all the segments that we compete in. So that business is is still quite robust. Mhmm. In terms of going forward through the year, we’re gonna continue to execute the strategy that we’ve been deploying.
And within that strategy, what we see is our our stronger margin segments continue to grow, prescription diet, cats, small dogs, wet. We are driving that growth through innovation. We have terrific innovation that’s coming, including the relaunch of our science diet life stage brand. So we think innovation will continue to play a role. We think advertising and media will continue to play a role.
We’ve just launched a brand new campaign, which I can talk about in a moment. But Mhmm. That campaign, we think, has a very powerful insight, and we think that that will continue to drive consumer attraction to the brand. Mhmm. And even things like expanding the shelf set in our pet specialty retailers.
We’re bringing now with the capacity, we’re able to bring more products into the market and build out our shelf sets. So we’ve had a pretty meaningful increases in in shelf sets, especially on on cat wet Mhmm. And some of the major pet pet specialty retailers.
John Pochet, Chief IR and EVP, M and A, Colgate: Bonnie, if I can just just a a little clear clarification on this. So what we said on the q one call, just because we get a lot of questions on this, is that there was a 40 basis point negative impact to total company
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Yeah.
John Pochet, Chief IR and EVP, M and A, Colgate: Organic volumes, 200 basis points roughly for Hill from lower private label volumes as we look to exit that agreement, as John talked about. We said it would be a slightly greater impact again on a total company basis as we look out through the next couple of quarters as it goes down to zero in the back half, and then we’ll still be lapping a little bit of residual volume as we go through the first half of the year. As John said, you know, that’s a business that is, you know, part of what we did in terms of getting the capacity. We think the real measure of how the business is doing, both Hill’s and the total company, is x that impact.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Mhmm.
John Pochet, Chief IR and EVP, M and A, Colgate: So for us, it’s, you know, I don’t wanna say cosmetic. It’s a little more than cosmetic. It’s in the organic numbers. But we think, you know, the Hill’s business looks much stronger with growth across all the segments, including dry, if you exclude that private label impact.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Right. No. That’s a good point. I wanna verify too because of the exit, part of it is converting the lines, I imagined, and I think you touched on it. So that has already started to happen and will continue?
John Haslin, President of Hill’s Pet Nutrition, Colgate: Absolutely. So the if I if I just go back to the thesis behind the acquisition, we did not have sufficient capacity to serve our business at that time. We were delivering customer service levels in the fifties and sixties. It really should be in the high nineties. So we were we were constrained.
We had to cut back on diets, so we weren’t able to serve the the market. If you think about a product like prescription diet, if the veterinarian is making a recommendation to a pet parent, they need to know that that product is gonna be available when the pet parent comes to comes to shop, and we couldn’t always deliver that. So it was a fundamental imperative that we needed to fix the the the capacity, but it was always a thesis for Hill’s volume. Now some of those factories in fact, most most manufacturing cannot produce our formulas. Our formulas are very sophisticated.
Mhmm. So they require us to make investments in the factories to convert the lines. Mhmm. But that was a really important point because we were we were putting overflow volume into contract manufacturing. They’re not able to deliver the same standards without lots of help.
So it was really important to get the get the product in house, obviously, helps the margins as well.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Right. And so that’s another key driver here, and we’re gonna start to see margin lift as we continue to exit. You touched on this also with the new campaign, so I definitely wanna hear a little bit more about that. But I think about the investments or stepped up investments you’ve made in the form of innovation and advertising. I think advertising has been tracking above company levels.
So talk about maybe the gains you’ve seen in awareness, and then touched on household penetration and the runway, you know, and then also the target levels on on household penetration.
John Haslin, President of Hill’s Pet Nutrition, Colgate: Okay. Terrific. So we’ve made meaningful investments in the Hill’s business. So we talked about the capacity investments. We’ve also made meaningful investments in in media.
That media is delivering very strong ROI for the company. We’ve just launched a brand new advertising campaign. It’s based on a very powerful insight that I sometimes feel that I can’t love my pet as much as they love me. It is. It’s I tell you, when we show the video of of us on the street interviews, we get tears.
Yeah. We get tears. And people say, yes. That resonates with me. So we are telling stories about the pet’s unwavering love for their pet parent and the pet parent’s inability to always live up to that love.
Oh, that’s funny. Okay. And, of course, the solution is because you’re only human, there’s hills. Science does more. And so we’re we’re taking the the stress out of the situation because if you use hills, we’ve created a complete and balanced nutrition that’s designed for the life stage of your pet or the health or or sickness of your pet.
Okay. So really, really important advertising campaign that we think is gonna really drive a lot of additional awareness, additional penetration. We we don’t talk about the targets, of course, but we we do expect it to continue to attract new new people to the brand. We’ve all we’ve only been on air for a short period. We’ve already seen some very interesting uplifts in in measures.
The the advertising that we’ve been spending against the brand over the last five years has delivered awareness growth, penetration growth, top line growth, penetration growth, and brand equity measure growth. So we we know that it’s working, and we intend to continue to spend behind the brand.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: So obviously, you’ve seen the growth and the opportunity. And I think in the context of total company, John or sorry. Correct me if I’m wrong, but roughly flat ad spend as a percentage of sales for total Colgate. But then as I think about Hill’s, will you step it up more than that more than the company average for the year? Is that kind
John Pochet, Chief IR and EVP, M and A, Colgate: the way I think? So I will say correct on Colgate. Yeah. And, John, you wanna go over it?
John Haslin, President of Hill’s Pet Nutrition, Colgate: So just just from the start, 2019, we we embarked on this new business strategy to spend media behind the brand. Since that time, we’ve doubled the advertising ratio to sales. So it it is a brand that as a company, we believe in. We think there is a long term growth trajectory. We think media is part of that unlock, and we continue to intend to spend behind, especially what we think is a really powerful new campaign.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay. Wanna switch gears a little bit to innovation because that’s a huge opportunity, and I know another lever of your reinvestment. So maybe talk about your current product portfolio. And then if I think about the growth and the contribution you’re expecting from innovation over the next you know, few years. I don’t know if you’ve ever quantified that, how much of the growth has been coming or driven from innovation and how much it can in the next few years.
John Haslin, President of Hill’s Pet Nutrition, Colgate: Yeah. We do we do we do quantify it. Innovation has been a very powerful engine of growth. In innovation takes many forms as you know. Oftentimes, it is big brand renovations.
So the science diet relaunch that we’re embarking upon now is an example of that. We are launching relaunching the the product with an antioxidant and proprietary prebiotic blend that is designed to help pet pets live longer long healthier lives. So that’s a very powerful big brand innovation, but we also have special areas. So one of our most important diets in The US is what we call Science Diet sensitive skin and stomach. It’s been a great growth driver for adult pets, and we just launched puppy and kitten versions.
We’re already seeing a terrific uptake. We’ve been able to innovate especially in the wet area where we had been we we still are in some cases underdeveloped. An example in our in our feline side, urinary and hairball control is a very important diet for for cat parents. We’re gonna quadruple the number of proteins that we offer in that line. So there’s there’s really some some great things that that go at the strategic, tactical, and and different levels.
On the prescription diet side, we we actually ran relaunched the entire brand last year. We are following up with big brand relaunches and upgrades of the formulas on some of our core diets to improve efficacy, improve claims, but we’re getting into also some very interesting spaces. So as pets live longer, they tend to have cognitive problems and mobility problems. We’re launching a prescription diet formula this year called Cognitive Plus Mobility to help pets that are entering that senior stage of life and give them a better quality of life. So up innovation up and down the the the portfolio.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Sounds pretty robust. And do I think about it? Is it more first half, second half, or pretty
John Haslin, President of Hill’s Pet Nutrition, Colgate: It’s pretty evenly, but the science diet relaunch has already gone out and will be supported as part of this new campaign I discussed.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: K. And then curious about all of the robust innovation. How are you balancing that, you know, thinking about potential m and a opportunities to drive growth ahead?
John Haslin, President of Hill’s Pet Nutrition, Colgate: No. Good question. So we, as a company and as a Hill’s brand, have always used m and a selectively to ensure that we’re going after areas that are aligned with our strategic direction. We announced and the the acquisition of Prime one hundred recently. In fact, we closed the acquisition on May 1.
So we now own the Prime one hundred brand in Australia. For those of you that are not familiar, Prime 100 is the number one fresh brand in Australia. It is also the number one brand recommended by veterinary dermatologists and sold in their clinics in Australia. So we think it’s a very interesting opportunity. Why did we like it?
It’s a science oriented brand. It’s a brand that’s backed by veterinarians, and it’s in a fast growing segment that we think we can learn a lot from and benefit from.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay. Before I switch gears to international, I do wanna verify something because of the innovation, the growth. I wanna make sure you have sufficient capacity. Do you think right now for the next three to five years given especially We do.
John Haslin, President of Hill’s Pet Nutrition, Colgate: We do. We we we acquired the three dry facilities here in The US. We built the Tonganoxi wet facility in Kansas, and we acquired a wet facility in Northern Italy. We we do have sufficient capacity.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay. Switching gears to international, yes, you know, Prime 100, that’s recent and in addition. But can you talk about your strategy, you know, going forward, how we should think about international sales and profits, you know, that mix to maybe evolve over time within your business?
John Haslin, President of Hill’s Pet Nutrition, Colgate: So we would really like to see our international business grow faster. Mhmm. We think that there is meaningful opportunity out there. We are underdeveloped in many of those markets. The great part is that we see the same growth algorithm applying.
So wherever we deploy it, science backed nutrition, veterinary endorsement, our selective distribution policy, amplified by innovation and media, and then further supported by data and insights. It’s a very powerful model. We run it everywhere and it and it works. We are seeing some very nice rates of growth in many of our smaller international markets, we expect that to to continue.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Is that just an opportunity to go deeper in some of those existing markets? And then do you see potential opportunities to enter new markets
John Haslin, President of Hill’s Pet Nutrition, Colgate: Yes. So so both. We think that there is a significant market share penetration upside in markets that we are already in.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Mhmm.
John Haslin, President of Hill’s Pet Nutrition, Colgate: There are places where we are not yet the number one brand recommended by by vets in that market, and we’re we’re striving to to get there. As I said, we can run the same the same playbook, and and it works. Mhmm. And and there are other markets that we are not in. The the number two and number three pet markets in the world are China and Brazil.
Mhmm. And we don’t have a meaningful presence. So we will be looking at that down the road as a as part of the strategic plan Right. To see if there’s an opportunity to enter there.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: And that’s either potentially organic entering via some distribution or maybe m and a?
John Haslin, President of Hill’s Pet Nutrition, Colgate: Yeah. We typically look to organic first. Okay. We think we have a very powerful brand. We know that even in markets that we do not have a brand presence or a meaningful brand presence, we have the support of veterinarians.
Just just as a little bit of a factoid, we our our founder, Mark Morris, Mark Morris senior, his son, Mark Morris junior, wrote the textbook on small animal clinical nutrition. This is a textbook that veterinarians around the world study when they’re learning about animal nutrition. So people know the Hill’s brand. Veterinarians know the Hill’s brand. They know the Hill’s nutritional philosophy.
There’s often latent demand in many of those markets for our brand. We just haven’t taken the the steps yet to to bring the brand there.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: And then just before I switch gears maybe to margins in general, I wanna make sure I understand with Prime one hundred, you know, just any potential cross selling opportunities that you see with that acquisition and given your existing Well,
John Haslin, President of Hill’s Pet Nutrition, Colgate: I mean, as I said, we we’ve acquired Prime one hundred because it fit our our focus areas of science backed nutrition, veterinary endorsement. But fresh Obviously an interesting part of the segment. It’s a growth area. We believe we’ll have a lot to learn.
That business continues to perform very well in Australia. And as we as we take the learnings, we will see where what the opportunities bring.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay. Switching to to margins, I think I mentioned in the opening remarks. I mean, tremendous margin expansion in q one, five hundred bps and really driven by a lot of the gross margin. So how should we think about sequential margin trends for Hill’s for the rest of the year? And I’m thinking about the context of your reinvestment plans.
How are you gonna balance doing everything you mentioned earlier, continuing to invest in the business, innovation, advertising with continuing to potentially deliver margin?
John Haslin, President of Hill’s Pet Nutrition, Colgate: Yeah. No. So margin has been a real focus. As you noted, we’ve been able to rebuild the margin, especially after the cost inflation crisis of twenty two, twenty three. The pet food industry did take it pretty hard through commodity pricing.
Very proud of the team that’s built the margin back through a lot of our traditional Colgate levers, revenue growth management, premiumization, looking for ways to increase the mix of some of our, you know, our strategic faster growing categories which also have higher margins. So prescription diet, cat, wet, small dogs, it’s nice when your strategy aligns to to where margin is also coming. Are funding the growth program that we’ve been running for decades, has also been a really important driver. We’ve quadrupled the number of savings that we’ve been able to deliver over the last couple of years with that program. We talked a lot about the the the dry acquisitions and the build out of wet.
Both of those the the first problem we were solving was capacity, but the underlying opportunity is margin. We were so full with with or or so lack with such lack of capacity, we were running overtime. There’s material losses. We’ve been able to improve and reduce overtime, material losses, throughput as we bring product in from contract manufacturers that that drives important margin improvements. Our new Tonganoxi factory in Kansas is the Colgate Palmolive state of the art factory.
When we move product into that line, we get a a variable cost benefit. So there’s really important margin opportunity that’s still to come either through the pricing initiatives or the cost savings initiatives that we see will continue to play out.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: And speaking of the production in house, can you say what percentage you have currently in house and what’s still gonna be brought in? Are you fully
John Haslin, President of Hill’s Pet Nutrition, Colgate: We’re in on the dry side, it’s almost all in house. Okay. There’s certain bag sizes that we that we still use, majority is all all in house. There’s still some wet products that we don’t have making capacity for that are out that are in co contract manufacturers.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay. So that’s over the next year?
John Haslin, President of Hill’s Pet Nutrition, Colgate: Yes. We’re still we’re we’re building out capacity to bring as many of our products in house as we can.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: And so thinking about the margins, they’re still well below the high 20 range, you know, that we saw historically. So a recovery back to those levels, you know, is that, I assume, part of your strategy over the next several years? Or should we think about just kind of more modest expansion while you continue to reinvest?
John Haslin, President of Hill’s Pet Nutrition, Colgate: Yeah. It’s a good So we if you look at the ’28 02/2018 period, Hill’s compound average annual growth was one percent with the with the very high margins. We took a strategic decision to invest in this business for growth, and I think that that strategic decision has really paid off. So we’re focused on continuing to drive strong top line growth
John Pochet, Chief IR and EVP, M and A, Colgate: Mhmm.
John Haslin, President of Hill’s Pet Nutrition, Colgate: And strong operating dollar growth behind the investments that we’ve that we’ve made. And and we’ve talked about investments in capacity, capacity, investments in media, investments in innovation, all of those things we think are delivering a better business proposition than than what we’ve been experiencing before.
John Pochet, Chief IR and EVP, M and A, Colgate: Okay. And, Bonnie, if I could just add, I mean, from a total company basis, right, we’ve increased the level of investment across the entire business. You know? But for Hill’s, it really is a growth driver looking at Colgate Palmolive as a as a company, particularly because of its geographical profile in terms of delivering, as John said, dollar based profit.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: True.
John Pochet, Chief IR and EVP, M and A, Colgate: And so, you know, the key is continuing to fund that growth and so that we make sure it continues to be a top line and bottom line growth engine for years to come.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Okay. Just have a little bit time remaining. So maybe we’ll end with, you know, as we sit here today and talk about all of this exciting, you know, the initiatives. But what do you think you’re most excited about at Hill’s? And and then maybe where do you see the greatest potential risk?
I know we almost assume it’s Yeah. We do so.
John Pochet, Chief IR and EVP, M and A, Colgate: I’ll just
John Haslin, President of Hill’s Pet Nutrition, Colgate: try to be quick. We just think that the therapeutic nutrition category has a lot of growth potential. There are so many more pets who should be using therapeutic nutrition than who are. Mhmm. And as the inventor and pioneer of that category, we think it’s our duty to continue to grow that category and benefit with that with that growth.
You know, the the risks, as I said before, the underlying trends we believe are super strong. The fundamental behaviors have absolutely changed, and we see that continuing over the long run. We’d like to see the short term market pick up a little bit faster.
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: Yeah. All of us do. Alright.
John Pochet, Chief IR and EVP, M and A, Colgate: Well, on
Bonnie Herzog, Senior Consumer Staples Analyst, Goldman Sachs: that note, thank you. Thank you very much, Bonnie. Thanks, everyone.
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