Dear Colgate Shareholders
Ian Cook Chairman, President and Chief Executive Officer
In the face of challenging macroeconomic conditions worldwide, significant foreign exchange volatility and slowing category growth, we are pleased to have achieved another year of solid results in 2016. While net sales declined 5.0%, organic sales, or net sales excluding foreign exchange, acquisitions, divestments and the impact of the deconsolidation of the Company’s Venezuelan operations, grew 4.0%. This growth was led by emerging markets where organic sales grew a strong 6.5%. Gross profit margin, operating profit margin and net income as a percent to sales all increased in 2016. Diluted earnings per share were flat on a dollar basis but increased double digit on a currency-neutral basis, after also excluding Venezuela’s results in both periods. *
We maintained our strong balance sheet and cash flow, which, along with the Company’s consistent organic sales growth, led the Board of Directors to authorize a 3% increase in the quarterly cash dividend, effective in the second quarter of 2016. This represents our 54th consecutive year of dividend increases and our 121st consecutive year of paying a dividend.
Our market shares remain strong around the world with Colgate’s leading share of the global toothpaste market at 44.0% for the year. As referenced in the title of this year’s annual report, Powerful Strategies Driving Global Growth, we continue to drive our growth with clear strategies that provide the agility needed to meet the headwinds that come in any given year. We remain sharply focused on our four strategic initiatives, Engaging To Build Our Brands, Innovation For Growth, Effectiveness And Efficiency and Leading To Win, in order to deliver sustained profitable growth.
Strengthening Engagement To Build Our Brands
Engaging consumers everywhere with integrated marketing campaigns that deliver our brand messages has long been a cornerstone of our growth strategy. Now, we are strengthening that engagement by increasing our use of digital media across the board from websites to social media to mobile. On a global basis, digital media now accounts for 20% to 25% of our working media expenditure, up ten-fold in the last decade and continuing to rise. In some of our businesses, like Hill’s, nearly our entire media budget is in digital, as we work to influence the consumer when they first begin to explore the category.
We are engaging with consumers more deeply online by connecting emotionally with messaging that is more brand-purpose driven. Our research tells us that this type of messaging has a strong impact on consumers and drives greater return on investment. While consumers want to learn about the benefits that products provide, they also value an emotional connection with their favorite brands. For the Hill’s brand, this insight led us to create a video described as a special Mother’s Day message to all pet moms. The video shows a number of dogs and cats “saying thank you” to their human moms. The video, posted to the Hill’s Facebook page, received 13.5 million views and 71 million organic impressions.
Hill’s Mother’s Day Message
Another terrific example is a social media video campaign for the Tom’s of Maine brand in the United States. In a series of videos, women share their personal stories about when and why they made the decision to switch to Tom’s natural deodorant. These powerful ads helped grow sales for the Tom’s of Maine brand by over 12% in 2016.
Why I Switched to Tom’s of Maine
We have also established a number of Consumer Engagement Centers in Colgate locations around the world where Colgate people can listen and engage with consumers and track media activity in realtime. Through these centers, our teams are getting closer to consumers and having more relevant communications with them. This interaction also helps us identify influencers and trending topics and allows us to track overall consumer sentiment for our brands.
We are strengthening our engagement with the profession as well, with new capabilities. Hill’s representatives are using technology on their mobile tablets to design a “Perfect Vet Clinic,” which lets pet care professionals visualize how recommended Hill’s displays will look in their offices.
Technology is also helping us engage with young dental professionals across Europe, where we hosted our first virtual dental conference in 2016. Branded #ColgateTalks, the one-day conference included educational sessions, live chats and virtual networking. Over 1,600 young dental professionals attended the live event and over 16,000 professionals visited the virtual conference website during the four months that followed.
Innovating For Growth
Innovation is key to driving growth at Colgate and has long been embedded in our culture. Today, more than ever, our approach to innovation is insight driven. We are competing better locally by tapping into insights market-by-market and leveraging trends across regions. In China, the insight that consumers value natural local ingredients rooted in their culture led to the launch of Colgate Naturals toothpaste with twin lotus flower for soothing gums. Similarly, in India, Colgate Cibaca Vedshakti toothpaste was developed based on the learning that consumers in that country believe in the power of natural ingredients in preventing dental problems.
We are also gaining an even deeper understanding of our consumers by immersing ourselves in their daily lives. These immersions include deep dives by country, by consumer group, such as low-income consumers or millennials, and by topic, such as skin care. In Europe, for example, we learned that consumers feel their skin is very demanding and they look for products that can help improve it, are widely available and are not too expensive. This led to the launch of the Sanex Advanced line of shower gels, deodorants, hand creams and body lotions which delivers skin expertise for specific skin needs.
Implementing Powerful Commercial Strategies
Colgate’s powerful commercial strategies support our longstanding commitment to superior go-to-market execution. We are advancing these strategies to assure that our products continue to be available, visible and irresistible wherever consumers shop. That means online as well as in traditional retail stores. While e-commerce is still relatively small in our product categories, our intent is to invest ahead of the growth curve, especially in must-win areas, such as in China and with our Hill’s business. The objective is to be market leaders online just as we are in brick-and-mortar stores.
In addition to our brand-specific research, we are investing to understand the general thinking and behavior of online shoppers and we are optimizing our page and content design based on analytics and other testing. This work is already paying off in the United States, where Colgate is now the market leading manufacturer online in toothpaste and manual toothbrushes.
In Europe, we are taking customer engagement to the next level. In 2016, over a week’s time, we hosted a full-day interactive innovation summit for each of our five largest retail customers. We presented strategies for Colgate’s most important brands and held workshops to brainstorm collaboratively on marketing innovations, including ideas for in-store displays and other launch support, to drive growth together.
Enhancing Customer Engagement in Europe
Increasing Effectiveness And Efficiency Everywhere
We believe deeply that business simplification and operational efficiencies increase our agility so we can be smarter and faster. Colgate people around the world are more focused than ever on generating savings to fund increased investment for growth.
One major initiative is using advanced analytics in our supply chain. For example, we have rolled out a demand-sensing application that has improved our short-term production forecast by more than 10%. We are also using advanced modeling to design our end-to-end supply chain, allowing us to better allocate capacity and to optimize our warehouse locations and materials sourcing. This initiative delivered more than $7 million in savings in 2016.
We are also leveraging our SAP enterprise-wide planning system to standardize and automate our business processes. We are developing a new platform to review our operating divisions that we call the “Business Review of the Future.” Standardized reports populated with real-time data will allow us to review any business at any time we choose. While still in its early days, we are working towards a faster review in real time that allows us to get right to the issues and spend more time discussing business opportunities.
Our ongoing funding-the-growth cost-saving initiatives continue to generate savings across all areas of our business. Our Energy Treasure Hunt program, for example, now conducted at 75% of our sites, has identified more than 1,500 projects and $20 million in potential savings since the program began. During this three-day event, a team of Colgate’s global energy experts work with plant personnel from all areas of operations to “hunt” for savings ideas. Over 600 Colgate people have participated in this hands-on, fun event which helps sites strengthen their energy culture and reduce CO2 emissions.
Leading To Win
Critical to developing strong, effective leaders and to the personal growth of all Colgate people is establishing a culture that reinforces our values of Caring, Continuous Improvement and Global Teamwork. One recent initiative encourages all Colgate people to participate in strengthening internal coaching through a series of podcasts and videos that provide guidance on how to enhance coaching skills to further build one’s personal leadership capabilities.
Colgate also demonstrates strong leadership and caring as a member of the global community through our sustainability efforts. As part of our Making Every Drop of Water Count commitment, on World Water Day in March 2016, Colgate implemented a global marketing campaign in more than 60 countries, partnering with over 15 retailers, which significantly enhanced awareness for Colgate and its water conservation message. Colgate remains fully committed to improving the health and well-being of our communities, making our products more sustainable and helping to conserve the planet’s vital resources.
Protex-Little Heroes Promoting Water Conservation
Leadership at Colgate also extends to our strong corporate governance principles. Our Board of Directors receives regular updates on the performance of our strategies by region and category, and on how we are strengthening the most important capabilities needed for success.
Looking to 2017, we believe the macroeconomic challenges, foreign exchange volatility and slowing category growth we saw at the end of 2016 will continue. In light of this, our overarching priority and objective for 2017 is to focus on profitable growth. Our new product pipeline is as full as ever and will be supported with engaging marketing programs and strong advertising investment. To fund this investment, we will be relentless in our focus on delivering cost savings on all lines of the P&L and on reducing our overall cost structure.
Over the long run, our discipline and focus on the fundamentals have served us well and will continue to serve us well. We feel confident that our business strategies, which we have been deploying for over a decade, will provide us the agility we need to continue winning on the ground despite any headwinds we may face as the year unfolds.
As we move ahead together, I wish to thank all Colgate people worldwide for their personal commitment to achieving our goals with the highest ethical standards, and express appreciation for the support of our consumers, customers, suppliers, shareholders and directors.
Chairman, President and Chief Executive Officer
*The Company’s results are discussed excluding a charge resulting from the deconsolidation of the Company’s Venezuelan operations, charges related to the 2012 Restructuring Program and certain other items. A complete reconciliation between reported results (GAAP) and results excluding these items (Non-GAAP), including a description of such items, is available on Colgate’s website and on the Non-GAAP Reconciliation page of this report. Diluted earnings per share growth for full year 2016, on a currency-neutral basis, eliminates from diluted earnings per share growth (GAAP) the impact of the items described above and the period-over-period changes in foreign exchange rates in the translation of local currency results into U.S. dollars. Accordingly, for purposes of calculating diluted earnings per share growth for full year 2016, on a currency-neutral basis, full year 2016 local currency results, which include the impact of foreign currency transaction gains and losses, are translated into U.S. dollars using 2015 average foreign exchange rates by quarter.