NEW YORK — Hill’s Pet Nutrition is looking ahead to greater operational flexibility following continued supply chain limitations and a decrease in operating profit, as reported in Colgate-Palmolive’s third-quarter earnings released on Oct. 28.
“Our focus on science-led, core and premium innovation is providing value at all price points, which is particularly important in today’s difficult macroeconomic environment,” said Noel Wallace, chairman, president and chief executive officer at Colgate-Palmolive. “Our investments in building and scaling our digital and other capabilities across the enterprise are also paying off with our revenue growth management initiatives helping to drive double-digit pricing worldwide.”
Hill’s Pet Nutrition, which accounts for 20% of Colgate-Palmolive’s total revenue, posted $872 million in net sales for the three months ended Sept. 30, up 3.2% year-over-year. Organic sales growth was listed at 7.5%, and organic volume was down 3.5%. Operating profit for the pet nutrition business was $201 million, down 13.7% year-over-year.
The company’s acquisition of several Red Collar facilities is expected to provide “a modest benefit” toward Colgate-Palmolive’s full year 2022 guidance, the company stated in its third-quarter earnings press release. Arbor Investments, the owner of Red Collar Pet Foods, completed the sale of three US kibble manufacturing facilities to Hill’s Pet Nutrition on Sept. 30.
“Capacity constraints at Hill’s had an impact on our volumes in the quarter,” the company stated in its third-quarter earnings prepared remarks. “We expect that the additional capacity from this acquisition should allow us to run our existing facilities at optimal capacity utilization while raising the overall capacity of our Hill’s supply chain. This should allow us to accelerate geographic expansion and expand our offerings of wellness and therapeutic diets.”
According to Wallace, the three former Red Collar facilities came online to produce Hill’s Pet Nutrition products in October. The facility will continue to co-manufacture for Red Collar. The company stated it expects the production capacity added through the Red Collar facilities to add “roughly 200 basis points to net sales” in the fourth quarter, with approximately 100 basis points of negative impact to the company’s overall gross margin.
“We believe this acquisition can help unlock Hill’s growth potential more quickly, and at a lower cost, than building additional capacity ourselves, and is an example of how we can use our balance sheet to drive profitable growth,” the company stated. “We will also continue to invest in capital expenditures to drive growth for Hill’s, particularly in wet pet food, where the brand is under-indexed from a market share standpoint.”
Hill’s Pet Nutrition also announced the launch of its Prescription Diet Derm Complete line, which is specifically formulated to address sensitivities to food and environmental factors in dogs. According to the company, its efficacy has been supported by several clinical trials and uses a wearable technology to measure behaviors like scratching and sleeping.
“For Hill’s, we have used the capabilities of our Hill’s Pet Nutrition Center, cutting edge wearable technology, and our expertise in clinical research to develop Hill’s Prescription Diet Derm Complete,” the company stated.
Pricing was up 11% for the Hill’s Pet Nutrition portfolio in the third quarter, and the business incurred a 4.5% headwind from foreign exchange rates.
“We've been very careful to ensure that it's not just straight pricing — that we're bringing value, whether it's through price pack architecture, through better innovation in terms of science-driven claims, et cetera,” Wallace said. “Specifically on Hill's, I think it's very much about the innovation strategy that we have — the Derm Complete launch, significant innovation, the obesity diets that we have, [and] significant innovation in the market that drives real value with the consumer, [through which] we can communicate and justify the price increases that we have. We'll continue to execute against that strategy, and we'll watch the categories carefully as we balance volume and price moving forward.”
The company reported double-digit organic sales for Hill’s in the United States and Europe, “with the supply chain difficulties primarily impacting the volume performance in our businesses in Asia.” The company described limited flexibility along its supply chain, and reiterated hopes that its acquisition of the Red Collar facilities will provide additional capacity leverage and improved availability of raw materials going forward.
“While our volumes were negatively impacted by retailer inventory reductions and Hill's supply chain constraints in the quarter, underlying elasticity remained in line with our expectations, and we would expect volume performance to improve sequentially in the fourth quarter as these headwinds abate,” Wallace stated.
Overall, Colgate-Palmolive reported $4.46 billion in net sales in the third quarter, up 1% year-over-year. Operating profit was $947 million, down 2% year-over-year.
For the full fiscal year 2022, the company expects net sales growth in the middle of the 1% to 4% range, accounting for an expected 5% negative impact from foreign exchange rates. Its projection for organic sales growth has been raised slightly to between 6% and 7%.
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