Chief Investor Relations Officer at Colgate-Palmolive
Thanks, Katie. Good morning, and welcome to our 2021 second 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 2020 annual report on Form 10-K and subsequent SEC filings, all available on Colgate's website for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include the 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 website.
Joining me on the call this morning are Noel Wallace, Chairman, President and Chief Executive Officer; and Stan Sutula, Chief Financial Officer. I will provide commentary on our Q2 performance as well as our latest thoughts on 2021 guidance before turning it over to Noel to provide his thoughts on the current operating environment and how we will continue to deliver on our growth trajectory. We will then open it up for Q&A. As usual, we request that you limit yourself to one question, so that as many people as possible get to ask a question. If you have further questions, you are welcome to re-enter the queue.
As we report results at the halfway point of 2021, we remain pleased, but not satisfied with our performance so far as we navigate through what can charitably be described as a complicated year. For both the second quarter and on a year-to-date basis, we delivered growth in organic sales, net sales, operating profit and net income. This is despite difficult comparisons as we lapped last years strength in categories like liquid hand soap and dish soap. We are also dealing with the impact of COVID restrictions in several markets, economic and political uncertainty, strong competitive activity, and of course, significantly heightened raw material and logistics headwinds.
We expect that all of these factors will continue to impact our business through the second half of this year. Because of that, we remain focused on delivering impactful innovation, leveraging our revenue growth management capabilities to deliver on pricing and driving productivity up and down the income statement. All of these are crucial to deliver long-term sustainable growth that will help us as we look to deliver TSR at the high end of our peer group.
We delivered 5% organic sales growth in the second quarter, which marked our 10th consecutive quarter, delivering organic sales growth either in or above our targeted range of 3% to 5%. As we have discussed before, the key to delivering against our long-term targets is delivering balanced growth, which we did once again in the quarter by delivering both volume and pricing growth. We delivered growth in both developed markets with 3% organic sales growth and emerging markets, which delivered 7% organic sales growth. We delivered organic sales growth in every division in North America. Our largest category, Oral Care, delivered organic sales growth of nearly 10%, with organic sales growth across toothpaste, manual toothbrushes and electric toothbrushes, and organic sales growth in every division. Innovation continues to be a vital contributor to our Oral Care business, as we benefit from new products across all of our divisions. Products like Co by Colgate, Colgate Elixir toothpaste, and Colgate enzyme whitening toothpaste are all delivering consumer desired benefits and premiumizing our portfolio.
Pet Nutrition delivered organic sales growth of 15%. Personal Care and Home Care declined on an organic sales basis year-over-year in the quarter as expected, but net sales remain above 2019 levels. Net sales increased 9.5% in the quarter, which was our highest net sales increased in almost 10 years. Foreign exchange was a 4.5% benefit to net sales as we lap the peak of last year's COVID-driven strength in the dollar.
After a strong gross margin performance in 2020 and in Q1, our gross margin declined in the second quarter due to the rapid acceleration of raw material costs across our business and the lapping of lower promotional levels in Q2 2020. We took additional pricing in the second quarter, which will help offset raw material costs in the second half of the year and we will continue to layer in additional pricing where possible. We expect raw material costs to remain elevated throughout 2021, but we do expect some sequential lessening of inflation as we get into the fourth quarter. Our efforts on premiumization and pricing, along with our focus on productivity, like our funding the growth initiatives, will also help us as we look to improve our gross margin performance.
In the second quarter, our gross profit margin was 60.0%, which was down 80 basis points year-over-year on both a GAAP basis and a base business basis. Year-to-date, our gross margin of 60.4%, down 10 basis points. Again, that is on a GAAP and base business basis. For the second quarter, pricing was 90 basis points favorable to gross margin, less than in the first quarter as we lapped lower promotional spending in the year-ago period when many of our markets reacted to COVID restrictions by pulling back on promotional activity. Raw materials were at 370 basis point headwind as we continue to see significant pressure from resins, fats and oils and agriculture-related costs, and many other materials. This includes a slightly favorable transactional impact from foreign exchange.
Productivity was a 200 basis point benefit. Our SG&A was up 100 basis points as a percent of sales for the second quarter on both a GAAP and base business basis. This was primarily driven by an increase in logistics costs and also by a 30 basis point increase in advertising to sales. Excluding advertising and logistics, our SG&A ratio declined year-over-year as our net sales growth and savings programs drove leverage on our overheads.
For the second quarter on a GAAP basis, our operating profit was up 5.5% year-over-year, while it was up 2.5% on a base business basis. Our EPS was up 12% on a GAAP basis and up 8% on a base business basis. Our free cash flow was down year-over-year in the quarter as we continue to lap very strong working capital performance in the year-ago period. As we discussed previously, our capital expenditures are also up year-over-year as we invest behind growth, productivity and our sustainability strategy.
A few comments on divisional performance. North American net sales declined 4% in the second quarter with organic sales down 4.5% and a modest benefit from foreign exchange. Volumes were down 8. 5% in the quarter, driven by Home Care and Personal Care, which saw strong growth in the year ago period, driven by COVID-related demand. Pricing across Home Care and Personal Care was positive as we worked to offset higher raw material costs. Oral Care organic sales grew mid-single digits, driven by innovation and pricing. I mentioned Co by Colgate before, which is helping us further expand into the beauty and direct-to-consumer channels.
We are pleased with the initial performance of the Colgate Keep manual toothbrush. It comes with an aluminum handle and by using our replaceable heads, consumers can use 80% less plastic compared to similarly-sized Colgate toothbrushes. We're also excited about our Tom's of Maine relaunch, which is bringing new graphics and advertising to a historic natural segment brand.
Our logistics issues that we discussed on the first quarter call continue to negatively impact our promotional timing, but service levels have improved and we expect our promotional cadence will normalize as we go through the third quarter. Latin America net sales were up 12.5% with 8.5% organic sales growth and a 400 basis point benefit from foreign exchange. All three categories delivered organic sales growth in the quarter with Oral Care organic sales growth in the high teens.
Brazil and Mexico both grew organic and net sales double digits in the quarter. Our strong innovation performance was led by core innovation behind Colgate Total Reinforced Gums in Mexico, which apparently sounds much better in Spanish and Portuguese than English and several Charcoal variance in Brazil. Volume was plus 2.5% in the quarter despite a sizable negative impact due to political unrest in Colombia, our third largest market in Latin America. We believe this disruption, which negatively impacted our distribution network for some time is largely behind us, but political disruption will remain a risk, not just in Columbia, but in several markets. Pricing was up 6% despite lapping lower promotional spending in Q2 2020 as well as some incremental pricing in the year-ago period as we look to offset foreign exchange.
Europe net sales grew 15% in the quarter. Organic sales grew 5% driven by mid-teens growth in Oral Care, offset by declines in personal and home care as we lap COVID-related demand in the year-ago period. Volume grew 7% in the quarter, offset by a 2% decline in pricing as we lap lower promotions in the year-ago period as store traffic declined in Q2 2020 due to COVID restrictions.
I mentioned Colgate Elixir toothpaste before and we're very excited about this truly differentiated product. We designed it with more of a beauty esthetic, including skincare inspired ingredients, a unique clear recyclable bottle and liquid glide technology that allows the pace to leave the bottle leaving no messy tube or cap. This product began rolling out across the division in Q2 with further launches this quarter.
We delivered 7.5% net sales and 1% organic sales growth in Asia Pacific this quarter, with organic growth in oral care partially offset by a decline in home care. Volume growth of 3.5% was partially offset by negative pricing as we cycled lower promotional levels in the year-ago period given COVID-related lockdowns across the region, with the biggest impact coming on our South Pacific business. We have additional pricing planned in the second half across the division to offset raw material cost inflation.
Volume growth was led by India, despite the impact of COVID related disruption in May. And Thailand, driven by naturals innovation in the Colgate Vedshakti and Colgate Panjaved line as we lapped COVID-related disruptions in the year-ago period. Our volume in China declined on growth on the Colgate business, which was more than offset by weakness in sales for our Hawley & Hazel joint venture, which is primarily related to inventory reductions in our distributor network.
After Eurasia continued its strong performance trend in the third quarter with net sales growth of 15.5%, as we delivered strong organic sales growth throughout the division once again. Volume grew 9.5% in the quarter, while pricing was up 3.5%. Foreign exchange was a 2.5% benefit in the quarter. Oral Care delivered high teens organic sales growth and we are relaunching several of our naturals businesses with new packaging and flavors.
Hill's strong growth continued in the second quarter with 18% net sales growth and 15% organic sales growth. Both developed and emerging markets delivered 10% volume growth as our increased investment around the globe is driving this highly differentiated brands. In particular, we are seeing good results from our Hill's master brand campaign to end Pet obesity as well as our new campaign for Hill's Pet Essentials, our vet-distributed wellness product in Europe.
And now for guidance. We still expect organic sales growth to be within our 3% to 5% long-term target range. There is no meaningful change in our category expectations at this point. The categories that benefited from COVID-related demand are behaving in line with our expectations with sales below 2020 levels, but ahead of 2019 levels. Please note that given widespread COVID outbreaks in many of our markets, we could still see an impact from government actions to stem the spread of COVID and other disruptions related to COVID, and this is not in our guidance. Using current spot rates, we expect foreign exchange to be a low-single digit benefit for the year, although slightly less favorable than when we gave guidance in April. All in, we still expect net sales to be up 4% to 7%.
We have reduced our gross margin guidance for the year and we now expect gross margin to be down year-over-year for the full year on both the GAAP and base business basis given the additional cost inflation we have seen. We expect the gross margin percentage to improve sequentially in the second half, which would leave us down modestly for the year. As I mentioned above, we are taking many steps to mitigate the impact of these costs, including additional pricing, optimizing trade spending, accelerating FTG where available and many others.
Advertising is still expected to be up on both a dollar and a percent of sales basis. Logistics will continue to be a headwind as costs also have risen faster than anticipated, particularly in the U.S. We still expect these costs to moderate somewhat as we go through the balance of the year. Our tax rate is now expected to be between 23% and 24% for the year on both a GAAP and base business basis. On a GAAP basis, we still expect earnings per share growth in the low-to-mid single digits, but most likely towards the lower end of that range. On a base business basis, we continue to expect earnings per share growth in the mid-to-high single digits. Again, we would expect to land at the lower end of that range.
And with that, I'll turn it over to Noel.