Colgate-Palmolive Co

NYSE:CL

Earnings Call Transcript 2020-Q3

[Operator]

Good day and welcome to today’s Colgate-Palmolive Company Third Quarter 2020 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com.

Now, for opening remarks, I would like to turn the call over to Chief Investor Relations Officer, John Faucher. Please go ahead.

[John Faucher, Chief IR Officer]

Thanks, Amanda. Good morning, and welcome to our third quarter earnings release conference call. This is John Faucher, Chief Investor Relations Officer.

Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and our most recent filings with the SEC, including our 2019 Annual Report on Form 10-K and subsequent SEC filings, all available on Colgate's Web site for a discussion of the factors that could cause actual results to differ materially from these statements.

This conference call will also include a discussion of non-GAAP financial measures, including those identified in tables 8 and 9 of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's Web site.

Joining me on the call this morning are Noel Wallace, Chairman, President and Chief Executive Officer; and Henning Jakobsen, Chief Financial Officer.

I will provide commentary on our Q3 performance and full year guidance before turning it over to Noel for his thoughts on how we are planning to sustain our growth momentum into 2021. We will then open it up for Q&A. As usual, we request that you limit yourselves to one question, so that as many people as possible get to ask a question. If you have further questions, you are welcome to reenter the queue.

We delivered very strong results in the third quarter consistent with our focus on generating sustainable profitable growth. We delivered both volume and pricing growth. We delivered growth in all four of our categories; oral care, personal care, home care and pet nutrition. And we delivered organic sales growth in every division.

Developed markets organic sales growth was 6.5% and emerging markets organic sales growth was 8.5%. The choices we have made in terms of revamping our innovation processes, continuing to drive our digital transformation and investing in our brands are paying off. And as Noel will discuss, we have further opportunities ahead of us.

Importantly, this growth is driving our P&L. Our ability to expand our growth margins helped us deliver a double digit percentage increase in base business earnings per share despite continued increased investment in advertising, negative foreign exchange, cost associated with the COVID crisis and headwind from higher logistics costs.

Our net sales grew 5.5% in the quarter. Organic sales growth of 7.5% was driven by 3% organic volume growth and the 4.5% increase in pricing. The acquisitions of Filorga, Hello and the Nigerian joint venture added an additional 200 basis points to volume growth, while foreign exchange was a 4% headwind.

Our gross profit margin was 61.2%, up 220 basis points year-over-year on both the GAAP and a base business basis. On a base business basis, this was our best year-over-year performance in several years.

For the third quarter, pricing was 170 basis points favorable to gross margins while raw materials were a 230 basis point headwind, driven by increases in raw materials like fats and oils and the transactional impact from foreign exchange. Productivity was a 250 basis point benefit, while other was plus 30 basis points.

On a GAAP basis, our SG&A was up 20 basis points as a percent of sales. On a base business basis, our SG&A was up 90 basis points on a percent of sales basis driven by a 70 basis point increase in advertising for sales as our advertising spending was up 13% year-over-year on an absolute basis, and by a moderate increase in logistics costs as a percent of sales, as we work to meet heightened demand due to COVID-19.

On a GAAP basis, our operating profit was up 19% year-over-year, while it was up 11% on a base business basis. Our EPS was up 21% on a GAAP basis and up 11% on a base business basis. We continue to deliver free cash flow growth in the quarter, up 5% year-over-year and up 29% year-to-date. We resumed share repurchases during the quarter as well.

And now I have a few comments on our divisional performance. North America delivered strong growth in the quarter, driven by a combination of pricing and volume growth. Oral care growth was driven by toothpaste and improved performance in toothbrushes, aided by the launch of our hum by Colgate electric brush later in the quarter.

The focus on premium innovation like hum by Colgate, Colgate Optic White Renewal toothpaste, and the Colgate Optic White Overnight Teeth Whitening Pen helped to drive strong pricing growth in oral care.

Our personal care and home care businesses continue to benefit from COVID-related demand, particularly in liquid hand soap and dish soap, although our skin health businesses were a drag on growth in the quarter. Overall, we are seeing promotional levels in our categories returning to normal, and we have planned for that to continue going forward.

We were very pleased with our performance in Latin America in the third quarter. Latin American net sales were down 5% in the quarter as 2% volume growth and 9.5% pricing growth were offset by significant foreign exchange headwinds.

We delivered organic sales growth in every hub in the division, including strong growth in Mexico and Brazil. Volume performance for the division improved sequentially as we return to a more normalized promotional cadence due to higher consumer foot traffic.

And we saw benefits from a strong innovation calendar and increased demand for personal and home care products due to COVID. Our innovation in naturals and whitening across the division is helping to drive premiumization in toothpaste as part of our revenue growth management strategy.

Our Protex brand is benefiting from heightened consumer interest in antibacterial products, the re-launch of Protex with the new flaxseed oil formula, and the entry into new segments with products like Protex Face in Brazil. Protex is a great example of driving growth in both the core and in higher growth adjacent segments.

Europe delivered double digit net sales growth in the quarter. Organic sales growth at 3% was primarily driven by volume growth, as retail foot traffic improved and slightly positive pricing. Net sales also benefited from the inclusion of Filorga and favorable foreign exchange.

Organic sales growth benefited from strong performance in personal care, driven by COVID-related demand and strength of the Sanex brand behind Sanex Zero% and Sanex Dermo product line. Oral care performance improved sequentially as we saw less pantry destocking and also through increased brand support.

We returned to net sales growth in Asia Pacific in the third quarter. Organic sales growth of 4.5% was driven by a mixture of volume and pricing growth. The organic sales growth was driven by our biggest hubs, with Greater China, India and South Pacific all growing year-over-year.

Our Colgate China business continues to benefit from the premium innovation Noel had talked about at the Barclays Conference in September, while our South Pacific business delivered continued strong performance through COVID-related demand and innovation.

Africa/Eurasia also returned to net sales growth in the quarter, as mid-single digit volume and pricing growth were only partially offset by a low-double digit foreign exchange headwind. Organic growth was broad based, with growth in all three categories and across every hub. Turkey continues to benefit from strong growth across all categories.

Hill’s once again delivered stellar results with double digit net and organic sales growth led by the U.S., Europe, Australia and Canada. Higher consumer demand in e-commerce continues to be a significant driver of growth, although brick and mortar growth in the U.S. improved sequentially in the third quarter as foot traffic increased.

Sales continues to benefit from increased brand support, which is driving higher brand awareness and market share gains on our wellness products. The pet channel remains subdued due to COVID headwinds. The prescription diet sales growth was robust, given the shift to e-commerce.

And now I’ll move to guidance. We are providing annual guidance despite the fact that rising case rates are rising in many of our markets. We still believe the government actions to control the spread of COVID-19 are the biggest risk to delivering on our financial plan.

And shutdowns, like we saw in China and India earlier in the year, meaning significant impacts to our ability to manufacture and distribute our products are not built into our forecast. I want to note that we will not be providing any discussion of 2021 guidance at this time.

We expect net sales to be at mid-single digits for the year. Organic sales are expected to be up at the high end of mid-single digits. Foreign exchange is expected to be a mid-single digit headwind for the year with current spot rates putting us towards the lower end of that range.

We expect gross margin expansion for the full year and advertising as a percent of sales is expected to be up for the year with an even larger increase in advertising year-over-year in the fourth quarter.

On a GAAP basis, our tax rate is expected to be in the range of 21.5% to 22%. On a base business basis, our tax rate is expected to be in the range of 23.5% to 24%. Our share repurchase plans remain unchanged as we plan for less benefit from share repurchase this year, as we pay down debt. On a GAAP basis, we expect earnings per share to be up double digits. On a base business basis, we would expect earnings per share to be up 6% to 7%.

And now, I'll turn it over to Noel.

[Noel Wallace, Chairman, President and CEO]

Thanks, John, and good morning, everyone. I hope everyone is doing well and staying safe. I'll keep my comments quite brief this morning so we have plenty of time to get to the Q&A. Clearly, we're pleased with the results in Q3 and obviously the progress we've made throughout the year.

I think the results speak to the tremendous work of Colgate people and our partners when you think about it from our labs, to the production lines, to our DCs, to getting product in stores, and the incredible work our teams are doing working virtually all over the world.

In that regard, our teams continue to show incredible strength. Their compassion for driving the business forward, the collaboration they're showing and importantly, the discipline and professionalism behind the strategy is clearly reflected in the results. So my immense gratitude from all of us to the teams on the ground and their families.

So John summarized the results I think quite well. And because the quarter, to some extent, speaks for itself, I'll keep my comments quite brief again, and I'll focus on where we're going next.

You've heard me say many times that our growth mindset is really about delivering sustainable, profitable growth and you clearly saw that. While the trends related to COVID have certainly boosted our sales, organic sales growth turnaround was well on its way as we headed into 2020.

So as we look at 2021 and beyond, we'll continue to evolve our strategies to deliver this type of growth that you expect and obviously, growth that drive superior shareholder value.

To that point, I want to expand on three areas this morning; revamping our innovation process, you've heard me talk about that quite a bit, our digital transformation, which is well underway and then clearly investing differently to build our brands in the current environment.

So first, let me start off by revamping our innovation process. You will recall, we talked quite a bit about that at Barclays and we focused on delivering that strategy through the quarter. It's about delivering transformative and disruptive innovation across our entire portfolio.

So to do this, we need to become less reliant on line extensions and by pursuing innovations that really build incremental category growth and market share gains, which is ultimately vital for us to continue to drive gross margin.

And we see incredible opportunities, quite frankly, across the mega trends all over the world that we're seeing on the ground. Naturals and sustainability to give an example, the urbanization that we're seeing in big markets, aging population in developed markets, or younger population and per capita consumption opportunities in developing countries and clearly the rapid growth and channel focus that we have, as we've seen channel expansions, particularly in e-commerce and pharmacy for us.

But you can imagine these demands new skill sets and new incentives, new structures and new processes to get it right. We brought an outside talent to help us change how we think about innovation, and we're really encouraged by the risk taking and collaboration that the teams are showing.

We're encouraged by the new financial models and approach they're taking to innovation and empowering our teams importantly on the ground to take action. So not surprisingly, Colgate people are clearly stepping up and embracing the change that we're trying to implement.

In the last six months, we've launched the Hum Smart toothbrush, the Miracle Repair toothpaste line and serums, the Colgate Optic White Whitening Pen and the Hill’s Science Diet Perfect Digestion just to give you a few examples of that.

John mentioned Protex, another great example of how we're changing the way we innovate. While it's a brand you're probably less familiar with, it has a strong antibacterial skin health credential. Before COVID, we felt the segment was becoming highly commoditized and overly promotional, and we were highly dependent on line extensions. So what did we do? We focused on real differentiation for the brand.

We re-launched the entire core line of Protex bar soap through the flaxseed-based antibacterial formula. That flaxseed oil boosts your natural skin defenses, which is a really interesting idea in the current environment, particularly in Brazil and has truly differentiated us in this environment and we think positions us well for growth moving forward.

We also at the same time launched a line of Protex face products, which is positioned in the premium anti-acne segment, a high growth adjacency for sure and we're driving incremental sales, share and margin for the brand with that innovation. So while in the short term we're benefiting from some of the COVID-related demand in this space, I believe this innovation leaves us well positioned to continue to drive incremental category growth and share for our business.

So next, we're continuing to drive our digital transformation. You've heard me talk a lot about that over the last six to nine months. And we're making great progress. So what do I mean when I talk about digital? It's about changing how we work every day across the company. We’ve discussed our move to SAP S/4HANA, which is allowing us now to analyze our business all over the world effectively with one global standard.

We're also now installing new systems to accelerate our revenue growth management efforts. It's about changing how we interact as well with our customers and consumers. We’re generating much better insights through data and analytics, which allows us to better understand the consumer path to purchase.

As an example, in Hill’s from pet adoption to the first vet visits into their ability to buy product ultimately in store. So really understanding that entire journey is allowing us to drive far more growth and efficiencies with our media and as well as with our partners.

It's about changing how we execute our communication as well. We're improving our digital marketing through programmatic media buying, to more personalized content and we're doing testing that allows us to more accurately predict the effectiveness of our media driving higher ROI in the end. So starting small and scaling rapidly is a big mindset that we've adopted in our digital strategy.

Channel wise, the biggest beneficiary of our digital media investments is clearly e-commerce and we're developing much more sophisticated content to draw attention, increase consideration for our brands, ultimately secure the purchase and importantly, earn loyalty for our brands going forward. And that's driving share gains in key markets, particularly in the U.S. and in China as we've increased our investment in that area.

We'll also continue to build the digital muscle across the entire enterprise. That's really important for us. And if you think about marketing to a consumer on Amazon or Alibaba, it's not the same or marketing to a consumer on Tesco.com or through the last milers [ph] in Latin America. This is where the focus on deeply understanding the consumer journey will truly pay off for us.

So we need to make sure we build flexibility into our model and win across all the different platforms. While e-commerce requires some specialization, and we brought in the talent to do that, we need to ensure that we have training across the entire organization to raise the skill level to ensure that we build that muscle for the long term.

I talked about innovation and I've talked about our digital transformation, so let me talk a little bit about brand investment. We’re spending behind ideas now and capabilities that will broaden the growth in our portfolio in terms of the brands, the categories, likewise the channels which we just spoke about, and the geographies.

Our innovation will be more successful if we invest in marketing that lets consumers know what's truly different, and we're very focused on that. We'll also win in e-commerce if we’re more consistently at the top of the first page and delivering the right personalized content.

In our revenue growth management strategy in driving premiumization will also be more successful if our advertising clearly demonstrates our products are delivering excellent value. And we’ll continue to keep Colgate as the most penetrated brand in the world at over 60% of households by consistently keeping our brand top of mind and preferred.

So these changes I've discussed today are already helping us deliver the better results that you've seen throughout the year. The success of Optic White renewal we talked about is a great example of pairing the right innovation with the right digital strategy with increased brand levels of support.

The Hill's Science Diet re-launched has fueled a lot of the growth at Hill’s, likewise a good example of that. So all these efforts are paying off for us as we head into 2021 and building the momentum throughout the year. And we believe that we’ll continue to drive the growth, particularly as we build those skill sets across the organization for the longer term.

So before we move into the Q&A, I want to offer a word about our announcement this morning that Stan Sutula will be joining the company on November 9 as our Chief Financial Officer. Stan joins us from Pitney Bowes and previously IBM and brings a wealth of experience in finance and strategy to this role. We're excited to welcome Stan to Colgate and think his experience in building technology-related businesses will add a tremendous value to our digital transformation well underway.

Henning Jakobsen will retire from Colgate on December 31 and we are grateful that he's going to stay with us to ensure a smooth transition with Stan throughout the balance of the year before returning to his family in Denmark. Henning’s been with us for 25 years and the service to our company has been exceptional. Henning has served in a number of general management and finance roles throughout the globe.

Henning’s contributed too much to Colgate not just in the finance function as an executive but also a thoughtful business leader across the leadership team. Most recently, he has been instrumental in our efforts to drive organizational efficiency. I especially want to thank him for his help in my transition to CEO over the past few years. And behalf of all of us at Colgate, we wish him and his family all the best.

And with that, I'll open it up to questions.

[Operator]

Thank you. [Operator Instructions]. We will take our first question from Dara Mohsenian from Morgan Stanley. Please go ahead.

[Dara Mohsenian, Morgan Stanley]

Hi. Good morning.

[Noel Wallace, Chairman, President and CEO]

Good morning, Dara.

[Dara Mohsenian, Morgan Stanley]

So corporate pricing was very strong in the quarter, really the best result we've seen in a decade. Latin America is strong in the second straight quarter [indiscernible] improved sequentially. So two parts to the question. A, just short term, can you give us a sense for how much of that strength is due more to list price increases that are more enduring versus short-term changes in promotional cadence and what you're seeing on promotion from a competitive standpoint? But really, Noel, I was interested more in the longer term and taking a step back and thinking about pricing as a strategic lever. It does seem pretty audacious the level of pricing you took in Latin America during the pandemic and obviously volumes seems to have held up well. You can argue that’s the case globally also. So sort of kudos for the success, but help us understand what's enabling the higher pricing and if the recent success emboldens you at all in terms of how you think about pricing and your approach going forward?

[Noel Wallace, Chairman, President and CEO]

Yes. Thanks, Dara. Let me take the – obviously, a two-part question. The short term, easy to answer. Obviously, as we've seen significant foreign exchange, we have consistently communicated externally that the important objective of our general managers on the ground is recouping the transactional impacts of foreign exchange. And what’s particularly pleasing, as you pointed out, is Latin America following strong pricing in the second quarter at 9% delivered another 9% pricing in the third quarter in parallel with getting volume back into the business. So, again, I think a great result to see the volume coming back in Latin America, behind two quarters of strong pricing and obviously delivering the margin that was required to sustain the higher advertising levels in that division, which is certainly playing out. So short term, it was a combination of list and promotional pricing to a certain extent, but very much a lot of the revenue growth management discipline that we're putting in place around the world. And Latin America, as an example, has done an exceptional job as has Europe, as has Asia in bringing in competencies to ensure that our teams on the ground are really digging deep into our promotional spending and working together with our trade partners to find ways to drive both category and revenue for ourselves. And I'm particularly encouraged with some of the analytics coming out of the revenue growth management teams around the world. And you're seeing some of the short-term benefits of that, and that will clearly play out for the longer term. So if I take a step back now on the longer-term question, listen, getting a pricing into the P&Ls and in the categories is a critical initiative for us. We will continue to find ways to do that with the mechanisms that we have through revenue growth management. Obviously, list price is one of them. But long term, we continue to see opportunities to get pricing up in the markets. We've long talked about the under index of Colgate toothpaste portfolio. We still have an opportunity to drive a lot more premiumization there. You've heard us talk quite consistently about the importance of premiumization across our innovation pipelines and a lot of the innovation that we put into the market in the third quarter, likewise, was very premium-based. I used the example of Protex acne, the acne line in Brazil, all premium priced. We launched the Whitening Pen in the U.S. premium priced; Optic White Renewal, lower ounces but very premium priced as well. So again, I think as the long-term strategy, we continue to find pricing as a key mechanism within our P&L, and it's obviously integral to the fact that the gross margin expansion you saw in the quarter is allowing us to continue to invest more aggressively behind a quite plentiful pipeline of new products.

[Operator]

And our next question will come from Andrea Teixeira from JPMorgan. Please go ahead.

[Andrea Teixeira, JPMorgan]

Thank you. Good morning. Congrats on the results. So if you can help us reconcile the volume growth in basically shipments to fulfill and reset – not reset, but replenish the shelves vis-à-vis what consumption was? And then on your last comment, Noel, on, for instance, Latin America, how much do you think is premiumization basically mix, vis-à-vis just plain pricing?

[Noel Wallace, Chairman, President and CEO]

Sure. Thanks for the question. Obviously, again – let me take the Latin America question first. The strategy that we've been talking for quite some time is obviously getting the core businesses re-launched that allows us to take pricing, moving into adjacencies and premium brands that allows us to obviously premiumize the category and get more margin growth. Looking at certain channel expansion opportunities, particularly across the pharmacy channel, which allows for more premium therapeutic portfolios to get sold through the consumer base there. So all those elements have helped Latin America, as an example, drive the margin growth, drive the pricing in the quarter and there's no question that that strategy that we've been deployed throughout the year continues to take hold through all the divisions. Let me take the question about replenishment. It really has – it's a function of more the markets where we've seen significant demand in some of our categories. So if I take North America as an example, liquid hand soap, dish continues to be about replenishing the shelves. The demand is in excess of some of the capacity that we had in the third quarter. That's starting to reduce itself as we move into the fourth quarter as we improve our capacity. But we still have some opportunities to replenish shelves. We're still trying to meet some of the excess demand that we have there. But by and large, a good portion of the volume in certain categories only. Now it's not the case in oral care where we're not seeing obviously COVID drive a lot of extra purchases or behavior changes, and we had good volume growth on oral care through the quarter. And again, I think that's a result of the innovation strategy that we're putting in place as well as the increased investment.

[Operator]

And our next question will come from Wendy Nicholson with Citi. Please go ahead.

[Wendy Nicholson, Citi]

Hi. Good morning. My question is on Hill’s. Number one, I know you won't give guidance for 2021, but just as we think about kind of underlying trends in that business, I'm just wondering if you can sort of parse out for us how much is being driven by category growth versus market share gains? Because I assume all of those people who have adopted pets during COVID, they're not going to give them up next year. So I'm sort of assuming that the robust category growth will continue. Is there any reason you would disagree with that? And then if you'll indulge me, just because I think it is a big deal, this is the first time we've seen Colgate hire a senior person externally in a while. And I'm just wondering, Noel, as you settle in and you think about sort of the organization and the culture of the company, is this the beginning of maybe more new blood coming into Colgate or was this just a specific value you thought was right for the role of CFO and it's kind of a one-off? Thanks.

[Noel Wallace, Chairman, President and CEO]

Sure. Let me address the Hill’s questions first. Listen, Hill’s continues to hit on all cylinders. We've talked a lot about big core renovations, which obviously have played out very nicely. We've talked about the premiumization aspect and going into adjacencies, which continues to be an emerging growth segment if you take the wet side of the business and they’re doing an exceptional job of capitalizing on those trends. We talked about the low brand awareness that Hill’s has and obviously the significant upside that still exists as we expand or increase our advertising spend to drive relevance to the brand. We talked a lot about the channel expansion opportunities. They've done an exceptional job with e-commerce. All of that is leading to increased market share is when you take the e-commerce shares, when you take brick and mortar shares around the world. All-in-all, we're driving good share growth across that business. You mentioned obviously the pet adoptions are up significantly in the U.S. as a result of COVID. So we think that will obviously bode well for the category moving forward as we move into 2021, and we see the continued acceleration of pet adoptions, particularly in the current environment. So good category growth combined with good shared growth that's driven by an underlying strategy that's very solid. On your second question, listen, we have an opportunity to bring in someone with some really unique experience. We looked obviously at that opportunity very carefully. Particularly someone with Stan's background, the incredible experience he has at IBM as well as the transformation that he was helping drive at Pitney. And as I mentioned in my upfront comments, a big focus for us is really driving our digital transformation across the entire enterprise, not just from a consumer standpoint but how we operate internally, through our back office systems, through the technology that we use through SAP and the things that we're bringing on-stream as we speak and Stan is very well positioned to do that. And we will – as we look for opportunities to continue to elevate our skills as we think about our strategy moving forward, we'll identify candidates on the outside to do that. We've done that in the digital space very, very successfully. We've done that in the e-commerce space very, very successfully. That being said, we have an incredible pipeline of talent in the company. We're developing broad-based skills across the organization and we'll continue to obviously encourage and develop our talent from within, which has been a key success factor for the company for many, many years.

[Operator]

And next, we will hear from Jason English with Goldman Sachs. Please go ahead.

[Jason English, Goldman Sachs]

Hi. Good morning, folks. Thanks for slotting me in. Much appreciate it. And Happy Friday too. So congratulations on great results. It's great to see the organic sales growth, gross margins phenomenal and the reinvestment in advertising, it’s obviously welcome. As we walk through the P&L, we are seeing some more leakage though outside of just advertising in the SG&A, particularly in developed markets. I think in your 10-Q, you're citing overhead inflation as the drag of around 130 bps in Europe, 190 bps in North America. I know Europe’s been running up all year, but North America looks like a sharp inflection. What's driving that? Is it reinvesting in capabilities? Is it underlying inflation? I wanted to just get some better understanding of where that margin pressure is coming from and how durable it may be?

[Noel Wallace, Chairman, President and CEO]

Yes. Listen, as John outlined, a lot of the SG&A increase is obviously largely driven by advertising. We had a little bit of an increase related to COVID-related costs in the quarter, related to some compensation costs in the quarter as well. But overall, we feel the overheads are well under control, well under control around the world. We're making the changes necessary. You mentioned, obviously, we're bringing in some skill sets as we just talked about with Wendy to certainly elevate our game in the digital and e-commerce space. But by and large, obviously the focus right now is continued to drive the gross margin as you saw, keep the overheads where they've been, and we've consistently – we find productivity opportunities in that area and invest behind the business. So, overall, we feel like we’re in a good place, Jason.

[Operator]

And next, we’ll hear from Olivia Tong with Bank of America. Please go ahead.

[Olivia Tong, Bank of America Merrill Lynch]

Great. Thanks. Good morning. Obviously, a lot has happened in the last several months or so since the pandemic started to take hold and you’ve launched a number of new products as well during that time. But you had already started to talk a lot more about innovation investments before COVID. So I’m just kind of curious how the current environment has impacted your longer-term view and your strategy going forward obviously on oral care? But then also pet ownership has increased, so how is that impacting your innovation and your thought process with Hill’s? And then soap’s demand could be higher for quite some time. So just thinking through the innovation strategy and where you plan to spend in the pet given the changes over the last several months? Thank you.

[Noel Wallace, Chairman, President and CEO]

Yes. Thanks, Olivia. So, if I go back to Barclays and quite frankly, if I go back to the last 12 to 18 months, we've talked a lot about how we're thinking about innovation and a real concerted effort to organize ourselves both from a structural standpoint as well as the processes and the resource allocation, moving away from those closed-in line extensions to more incremental breakthrough innovation. And that has been very deliberate and a very focused effort across every division in the world and we're starting to see obviously the benefits of that. But the intention is obviously it sets us up for long-term sustainable growth moving forward. If I take the current environment, clearly we have an opportunity to continue to drive premium pricing. And that's why a lot of our innovation, as I mentioned earlier, is on the premium side of the business and we're looking for ways to disrupt the category. We're looking for ways to think about oral health differently than just a toothpaste line extension. And you're starting to see that play out in some of our innovation in the quarter, particularly in North America. Relative to Hill’s, interesting – obviously the Science Diet re-launch has been a big driver, but they're seeing great benefits coming through with some of the innovation they brought in, in early days on prescription diet with far more therapeutic formulas. Metabolic, as an example, is doing extremely well. And if you take some of the innovation opportunities that we see in the wet segment moving forward, we continue to find ample opportunities to drive growth with that. And as pet adoptions and pet ownership increases and clearly we're seeing the trend in the marketplace, likewise, with a move back to science-based, real biology-based products and that obviously plays very well for the Hill’s business, both here in North America and around the world. And we have an innovation pipeline that is very, very robust as we look into 2021. The other aspect of that is certainly vet visits are down as a result of mobility issues in the U.S. related to COVID and the traffic is down. Our home is certainly a great innovative idea that we're bringing into that business to continue to allow vets to extend product to their pet owners directly. And we'll see that increase as we move into 2021, particularly as we see more and more traffic move back into the veterinary space going forward.

[Operator]

And next, we will hear from Kevin Grundy with Jefferies. Please go ahead.

[Kevin Grundy, Jefferies]

Great. Thanks. Good morning everyone and congratulations on the strong results. A question on gross margin with two components to it really, a more near-term aspect as well as a longer-term orientation. So, of course, it was historically good this core quarter. I think it was a high watermark for the company. And we talked about pricing in an earlier question. How did gross margins come in relative to your expectations? Did it beat the Street pretty handily? And I think it was largely on the pricing component as well as funding the growth. And so I'm not asking for guidance, but we have promo picking up, freight costs moving higher, commodities likely less favorable. Even without asking for guidance, how should we be thinking about this line item sort of in the intermediate term? And how is the Colgate company thinking about it? And then longer term, Noel, the 65% gross margin ambition would come up from time to time on these calls. Is that still realistic? Is that a significant priority for the company? And if so, how quickly do you think that you can get there? So thanks for that.

[Noel Wallace, Chairman, President and CEO]

Sure. Let me start. Again, take a step back and for us it's very much around focusing on growth. The growth moves through the P&L. We get increased margin dollars into the P&L. Obviously that allows us to support the businesses more consistently and more broadly as we've communicated in this quarter. You've seen four quarters now gross margins in the 60s and sequentially up from quarter-to-quarter. I think that's a result of a couple of things. One, a much deepened focus behind our revenue growth management. We've talked about that quite a bit. We’ve talked about the importance of premium pricing and innovation that supports that. And we've talked about our ability to react quickly to extraordinary foreign exchange headwinds, as we've seen, both in Latin America and some of the markets in Africa and Middle East. And getting that into the P&L allows us to really control how we want to manage the business more effectively, how we want to spend the money both from below the line and above the line basis, how we want to look at our promotional strategy? So getting that gives us a tremendous amount of clarity on how we want to evolve in the quarter, and allows us to kind of dictate where we want to spend. Relative to the expectations and obviously the revenue growth management is coming in better than we expected; so a little bit better there. Funding the growth aspect continues to be very, very good. So if I walk through the margin roll forward again for you, we started – if we go back to third quarter last year at 59, we delivered 170 basis points of pricing off of – if you follow that off the second quarter, which was at 130 basis points. So again, solid pricing. But the quality of that pricing, again, to some of the earlier questions was consistent all around the world and by category, which was really nice to see. Funding the growth came in at 250, positive in the quarter offsetting material prices at 230. And obviously, that’s a little bit of benefit from a mix, but not a lot. So again, coming down to 61.2, which is one of our – obviously our high point on the margin line, but we want to see that continue to grow. But first and foremost, it's about getting the top line continuing to sustain that healthy growth that you're seeing. That gives us the margin dollars and gives us the leverage. And ultimately, as we implement more discipline around revenue growth management, we take action quickly to offset foreign exchange, we see opportunities to continue to drive margin moving forward.

[Operator]

Your next question comes from Steve Powers with Deutsche Bank. Please go ahead.

[Steve Powers, Deutsche Bank]

Thanks. Good morning. Can you go a little deeper into what you've seen in Latin America? I guess what's the – I believe we’re looking for what's the most reassuring across your major markets in that region in the past few months? And what's allowed you to reinstate guidance for the fourth quarter when a quarter ago you didn't feel like you had that same visibility into the third quarter? Thanks.

[Noel Wallace, Chairman, President and CEO]

So, listen, we've got one quarter left. We’re obviously just finishing up October. And we felt comfortable based on what we're seeing around the world. Obviously, case counts continue to be a real concern and will – inevitably, we could see more lockdowns in core markets around the world. And as a result of that, we want to be very cautious. But we felt pretty comfortable given the line of sight that we have on the business right now. And as a result, we gave guidance for the fourth quarter. We'll come back, as we always do, following the fourth quarter and provide you the necessary thoughts on 2021. But we're not getting ahead of ourselves yet. Right now, we're focused on delivering the fourth quarter and we'll talk 2021 at the appropriate time.

[Operator]

Your next question will come from Lauren Lieberman with Barclays. Please go ahead.

[Lauren Lieberman, Barclays]

Great. Thanks. Good morning. Two things, one was just to follow up. You had mentioned freight in passing and I was just curious if you could give just a little bit more color on your outlook for freight in the U.S. and just a relevancy and kind of across the board. And then secondly, more specific to your business was thinking about promotions in the U.S. I think when you'd answered the question though about promotional activity and some of the resources you put in on revenue growth management, you highlighted other markets. In the U.S., Colgate historically has been a heavily promoted brand. So I was wondering to what degree the environment has given you an opportunity to accelerate efforts to kind of bring that down, or if this isn't really the right time, but I’m curious on progress on that front in the U.S.? Thanks.

[Noel Wallace, Chairman, President and CEO]

Sure. Thanks, Lauren. Let me take freight first. Freight obviously continues to be somewhat of a headwind, but we saw costs come in marginally better than they came in, in the second quarter. But that being said, a big caveat there is we see increasing case counts around the world that ultimately leads to more disruption along our lanes all around the world. So we're going to be very mindful as we see that unfold in the balance of the year. But so far, we've done a pretty good job in this quarter, mitigating some of the on costs associated with freight and logistics. On your question relative to the U.S., a lot of work on the U.S. around revenue growth management. That's the team that really embraces data and analytics. They've taken it on. I've talked about it I think over the last couple of quarters on how we're being far more disciplined, not only in categories where we're seeing excess demand, but more importantly not chasing a lot of the price promotions that have existed in some of the categories, particularly in toothpaste where we've seen high couponing from some of our competitors. We’ve pulled back. We don't necessarily want to go after that consumer as much as we want to go after the premium consumer, which we believe has much more durability for the franchise moving forward. So we've been very mindful on our promotional spend in the quarter. That being said, as consumers come back into stores and store traffic increases, we want to be sure we're there and present. And we have the money in the P&L to adjust accordingly. But by and large, much more disciplined would be the message, RGM really taking on a new level of focus in the U.S., combined with obviously getting the dollar value of price increases that we're seeing through our revenue growth management initiatives playing through the P&L.

[Operator]

And next, we will hear from Bill Chappell with Truist Securities. Please go ahead.

[Bill Chappell, Truist Securities]

Thanks. Good morning.

[Noel Wallace, Chairman, President and CEO]

Good morning.

[Bill Chappell, Truist Securities]

Noel, can you just talk a little bit more about kind of what you're seeing on consumer habits, and presumably people aren't washing their hands or maybe even brushing their teeth as much as they were in March and April, and didn't know if you've seen that kind of flatten out to certainly an elevated level. And in that same line, since you gave fourth quarter guidance, what would you expect with the lockdowns in Europe, if you expect any kind of a spike back or if this is fairly different where you don't really expect a whole lot of surge in demand through another lockdown, especially in Europe.

[Noel Wallace, Chairman, President and CEO]

Yes. So, Bill, specifically on some of the more COVID-related categories that we've seen an increase in category growth, liquid hand soap would be one. Our research indicates clearly that behavior will stay, perhaps not at the current elevated levels but will certainly versus historical norms be at a higher level. Likewise, a lot more people obviously cooking at home, so dish liquid’s been significantly accelerated. In that regard, I think as long as we see lockdowns, as long as we see people working from home, which in our estimation would be through at least half of next year, you'll continue to see elevated rates. You are not seeing a COVID-related impact on oral care. Obviously, if you see any panic buying going on in the market, you'll get a little bit of benefit. But I think consumers have adjusted themselves far better than at the onset of COVID to how they're managing their inventories and their pantries. So we wouldn't expect any significant changes on oral care. Likewise, on pet food, a little panic buying at the onset right now. I think it's more stabilized. Consumers understand what they have. Not a lot of destocking coming out of pantries. And I think more importantly, people are being more rational on how they manage their purchases. So for behavior change, liquid hand soap, certainly a change, dish liquid at least through the first half of next year and oral care starting to normalize coming out of the strong first quarter panic, but much more on a historical basis. And we're seeing good growth on the innovation side that's driving more category dollar growth, which is good to see.

[Operator]

And next, we will hear from Rob Ottenstein with Evercore. Please go ahead.

[Rob Ottenstein, Evercore]

Great. Thank you very much. Based on the analytical work that we've done, we see a very high correlation between e-commerce penetration in terms of the category and gross margins, which would suggest – at least in the U.S. that would suggest that oral care could rapidly move to e-commerce. And so the question is, based on what you've learned and seen in China, are there things that you can do to be better prepared for that in the U.S. and how do you rank or how do you rate your ability and momentum in e-commerce in the U.S. if that happens? Thank you.

[Noel Wallace, Chairman, President and CEO]

Yes. Thanks, Rob. You've heard me mention a couple of times the incredible digital and e-commerce capabilities that our Hill’s business has and how important it is that we share learnings across the broader enterprise, and we very deliberately are shifting resources back and forth between Hill’s and Colgate. We're obviously getting the same type of learning now out of Asia in terms of the skill sets. And as I mentioned, I think very deliberately in my comments, we feel very strongly that up-scaling the entire organization around e-commerce and that's not just our innovators, that's not our marketing and our customer development organization. That's everyone from logistics to supply chain to packaging. So everyone truly embraces and understands that channel, we think is very important to our long-term growth, as we see more and more consumers moving into that. So the skill sets are there. The transfer of knowledge is there. And I’ve mentioned also that we're supplementing quite a bit of that by bringing in outside talent as well to ensure that we close any gaps that we might have in certain geographies around the world. You're seeing the benefits of that. Our e-commerce business obviously up, close to 50% in Q1; another close to 50% in Q2 and a very strong growth in Q3. Shares are up across our categories, both in North America as well as China, our two biggest markets. And we're seeing some accelerated growth, likewise, in Europe. Hill’s obviously doing exceptionally well in this space. So we think we're well positioned, but we recognize we have a ways to go, given the opportunities we see to build the skill sets across the company and continue to grow market share where we're seeing significant growth.

[Operator]

And we will take our final question from Mark Astrachan with Stifel. Please go ahead.

[Mark Astrachan, Stifel]

Thanks and good morning, everybody. I wanted to ask about market share. So I get the numbers in the release that are translating back into dollars, so mechanically it looks like you're losing share. But I guess maybe, is there any way to parse out share in some of the key markets on a local currency basis? And maybe more broadly, could you just talk about what you're seeing as growth within your categories globally at the high level, oral care, your segment of personal and household as well pet, and then directional comments on how your business is performing relative to those global growth rates?

[Noel Wallace, Chairman, President and CEO]

So, Mark, you’ve identified obviously the impact of foreign exchange, so let me give you a shared summary on a constant currency basis. So year-to-date, we’re flat or up in every single division, ex Asia. We've talked a lot about Asia obviously that we're in relooking at our go-to-market, our portfolio. We talked about the progress that we're making in the second quarter and we saw that playing through. Likewise, that progress accelerated in the third quarter. So we think we're well on our way there. But across the board, our shares are flat to up in every division on a constant currency basis. Last 13 weeks in North America, we've seen good progress on our toothpaste share, particularly as we've seen the investment behind renewal take hold and some of the other innovations that we've brought into the category. You look around the world, a lot of our focus on our premium business is in Europe, both meridol and elmex and the investment we're putting behind that, we're seeing some good growth. Good share growth in the very short – recent term in both Brazil and Mexico behind some of our innovations there. Mexico now back above an 80 share. And likewise, Brazil not chasing the bottom end of the market, but getting some good premium pricing, as we mentioned earlier, and seeing that translate into more sustainable share growth across the board. Relative to categories, by and large, most of the categories that we compete in have accelerated, obviously some COVID driven, others very pricing driven and from an innovation standpoint, toothpaste in the U.S. now back up into that four to six range on a year-to-date basis. Europe still around 0% to 2%, but again driven by some good pricing. Latin America, down a little bit versus 2019, but again I think driven by a real softness in the categories in the first and second quarters are starting to come back a little bit better in the third quarter, which is encouraging. So, overall, we’ve got some good category growth. We talked Hill’s, likewise, very good growth across the category. And Hill’s and that team is very sustained no matter where you look at it around the world. So, overall, category seems pretty good right now. And I think with the innovation process we have in place and the focus on premiumization and revenue growth management, we’ll continue to bring dollars into the categories in which we compete.

So I guess that's the last question. Let me just close off by again thanking the Colgate people around the world on a really strong quarter and a continuation from the progress we've had over the last four to five quarters executing our strategy, building skill sets across the organization and obviously collaborating in ways that we've never collaborated before. So a great thanks to everyone. I wish all of you a safe and healthy Thanksgiving. And we look forward to catching up again on the fourth quarter results. So thanks, everyone.

[Operator]

And this concludes today's conference. Thank you for your participation. And you may now disconnect.