Chief Investor Relations Officer at Colgate-Palmolive
Thanks, Jennifer. Good morning and welcome to our 2021 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 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 a discussion of non-GAAP financial measures, including those identified in Tables 8 and 9 in 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 Q3 performance, as well as our latest thoughts on 2021 guidance before turning it over to Noel to provide his thoughts on 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.
Our focus on innovation, premiumization, pricing and productivity allowed us to deliver solid Q3 and year-to-date results despite a very difficult operating environment. We continue to deliver against our targets because we are executing consistently on the strategy Noel laid out at CAGNY back in 2019. We are focused on delivering consistent, sustainable, profitable growth; both volume and pricing growth, growth in all of our categories, growth in all of our divisions, emerging and developed markets. And this has enabled us to deliver 11 straight quarters with organic sales growth in line with or above our long-term target of 3% to 5%. This is despite very difficult comparisons and a challenging operating environment.
The current operating environment is challenging in many different ways. Consumer mobility is limited in many markets, particularly in Asia, due to government restrictions to stop the spread of COVID-19, which is having a negative impact on category growth. These restrictions have also led to temporary closure of manufacturing facilities across many industries as you've heard in the news and from other companies. We are not immune to these restrictions, although, given the essential nature of our categories, we produce products that people and their pets use on a daily basis to lead healthier lives. We have been able to resume production throughout our network, although, sometimes at a lower-than-normal level.
This did have a slight impact on sales in the third quarter and we expect a modest impact in the fourth quarter as we ramp production back up. We are fortunate to have a flexible and resilient global supply chain that has helped us to offset some of the effects of the supply chain challenges, albeit sometimes with additional logistics costs.
Speaking of logistics, the stress on global logistics networks is creating shortages of raw materials, lengthening shipment times, increasing costs and adding additional uncertainty. All of this is on top of the significant increases in raw material costs and continued movement in foreign exchange. These challenges will continue into next year but we will continue to meet them head on.
Our net sales grew 6.5% in the quarter, driven by 4.5% organic sales growth and a 2% benefit from foreign exchange. Our organic sales growth in the third quarter was led by Oral Care, where we were up mid-single-digits, and Pet Nutrition, where we were up double-digits. We delivered organic sales growth in Home Care, despite a difficult comparison, which puts our Home Care business at double-digit growth on a two-year stack. As expected, organic sales in Personal Care declined mid-single-digits as we lapped the COVID-related growth in liquid hand soap in the year ago period but sales remain above 2019 levels.
We grew volume 1.5% in the quarter. Pricing grew 3% in the quarter, up sequentially from Q2, despite a more difficult 4.5% comparison as we continued to layer in new pricing to try to offset accelerating raw materials costs. Pricing was up in every category and every division.
Raw materials continued to increase in Q3, putting further pressure on our gross margins, despite additional pricing and productivity efforts. Our gross margin was down 180 basis points in the quarter. Pricing was a 110 basis point benefit to gross margin, while raw materials were a 510 basis point headwind, despite a slight benefit from transactional foreign exchange. Productivity was favorable by 220 basis points.
On a GAAP and Base Business basis, our SG&A was up 50 basis points on a percent of sales, driven by significant increase in logistics costs as advertising was up on a dollar basis, but flat on a percent of sales basis. Excluding logistics and advertising, our overheads were down slightly on a dollar basis and down nicely on a percent of sales basis. We continue to increase our investments in capabilities like digital, e-commerce and data and analytics, but this was more than offset by sales leverage and tight expense controls. For the third quarter, on a GAAP basis, our operating profit was down 5% year-over-year, while it was down 3% on a Base Business basis. Our EPS was down 7% on a GAAP basis and up 3% on a Base Business basis.
A few comments on our divisional performance. Net sales in North America grew 1% in the third quarter with organic sales growth of 0.5% and 50 basis points of favorable foreign exchange. Volumes were flat in the quarter, despite a negative nearly 400 basis point impact from lower liquid hand soap volumes, while pricing was slightly favorable. We made significant progress on our North American business in the quarter with solid Oral Care growth, driven by mid-single-digit growth in toothpaste, which led to improved toothpaste market share performance through the quarter. Personal Care and Home Care were both down as we lapped COVID benefits in the year-ago period, although EltaMD and PCA Skin delivered strong growth in the quarter.
North America operating margins were negatively impacted by raw materials and higher logistics costs. The impact of plant closures on our global supply chain required us to incur additional air freight charges to fulfill customer orders in the quarter. We also incurred some additional manufacturing costs in the quarter that should help improve the long-term profitability of the division.
Latin America net sales were up 11% with 8% organic sales growth and a 300 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-single-digits. Volume was plus-2.5% in the quarter, while pricing was up 5.5%. Brazil and Mexico led the growth in the quarter, while Colombia delivered double-digit growth following last quarter's political unrest. The Naturals segment continues to be a key driver of growth for us across Latin America, particularly Colgate Natural Extracts Charcoal and we recently launched Colgate Zero Toothpaste in Brazil. Our strong Latin America pricing growth highlights the success of our revenue growth management program with a combination of list price increases, premium innovation and trade promo adjustments.
Europe net sales grew 1% in the quarter with organic sales minus-1% and foreign exchange adding 2%. Volume was down 1% and pricing was flat. Oral Care organic sales grew high-single-digits, while Personal Care organic sales were down sharply, driven by difficult liquid hand soap comparisons due to COVID-related consumption in the year-ago period and a decline in Filorga duty-free sales. Colgate Elixir Toothpaste continued to drive growth in the quarter along with strong contributions from elmex and meridol.
Asia-Pacific net sales grew 1% and organic sales declined 0.5% in the quarter, with volume down slightly and pricing and foreign exchange, both slightly positive. Oral Care saw low-single-digit organic sales growth in the quarter, while Personal Care and Home Care were down due to difficult COVID comparisons. We did see government-imposed mobility restrictions negatively impacting category volumes in several markets, including many in Southeast Asia. India and the Colgate China business both delivered strong volume growth behind robust innovation in the ayurvedic segment in India, and in e-commerce in China. Our Hawley & Hazel JV saw significantly improved performance in Q3 versus Q2 with trends also improving sequentially during the quarter.
Africa/Eurasia net sales grew 1% in the quarter with organic -- with an organic sales decline of 1% lapping double-digit organic growth in the year-ago period, more than offset by a 2% positive impact from foreign exchange. Volumes were minus-4.5% while pricing was plus-3.5%. The organic sales growth decline in the quarter was driven by Personal Care as we lapped double-digit growth in the year-ago period due to COVID-related demand and pricing. Oral Care organic sales in the quarter were flat as disruptions in the global supply chain had a negative impact on product availability.
Hill's strong growth continued in the third quarter with 20% net sales growth and 19% organic sales growth with strong growth in both emerging and developed markets. Organic sales growth was driven by double-digit volume growth and high-single-digit pricing through list price increases and our premiumization strategies. Our focus on the Microbiome, which Pat Verduin talked about during our CAGNY presentation this year, continues to pay dividends with the Active Biome Plus technology, including in Hill's Prescription Diet Gastrointestinal Biome and Hill's Science Diet Perfect Digestion, both of which are driving sales growth and share in this important segment.
And now for guidance. We still expect organic sales growth for the year to be within our 3% to 5% long-term target range. As I mentioned previously, we have seen an impact from government actions to stem the spread of COVID-19, including reduced consumer mobility and supply chain interruptions. We are managing through these issues, but we would expect modest headwinds from this to continue in the fourth quarter. 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 July. Please note that at current spot rates, foreign exchange would have a negative impact on Q4. All in, we still expect net sales to be up 4% to 7%.
Given the continued pressures from raw materials, we are projecting a greater decline in gross margin than when we last gave guidance in July. Fourth quarter gross margin is expected to be roughly in line with the third quarter, although the raw material situation remains very difficult. We continue to take additional steps to mitigate the impact of these cost headwinds, including additional pricing, optimizing trade spending, accelerating FTG where available, and many others.
We are focused on recouping the gross margin we have lost due to cost inflation over time and are planning to take the actions necessary to do so. Advertising is still expected to be up on a dollar basis, but flat on a percent of sales basis. Given the issues surrounding logistics networks on a global basis, our logistics costs will continue to be a headwind, particularly in the U.S. and Africa/Eurasia.
Our tax rate is now expected to be between 22% and 23% 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 and, as we said on the second quarter call, 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.