NEW YORK — Hill’s Pet Nutrition clocked the highest year-over-year sales growth for Colgate-Palmolive in the first quarter, despite continued inflation for raw materials. Colgate-Palmolive shared its earnings performance on April 28 for the three-month period ended March 31.
Net sales for the company’s Hill’s Pet Nutrition business were up 21.5% to $1.06 billion in the first quarter. Organic sales rose 14%, driven by growth in the United States and Europe. Operating profit was down 10% to $183 million and accounted for 17.2% of the division’s total net sales. Colgate-Palmolive attributed operating profit declines to “significantly higher raw and packaging material costs,” paired with impacts from recent pet food acquisitions and increased advertising investments.
Noel Wallace, chairman, president and chief executive officer at Colgate-Palmolive, went into greater detail about operating profit dilution, citing impacts from agricultural commodity costs, the integration of several new facilities — including three former Red Collar dry pet food plants and the acquisition of wet pet food manufacturing assets from Nutriamo, an Italian producer, in mid-2022.
In addition to those capacity expansions, Hill’s new wet pet food facility in Tonganoxie, Kan., which was first announced in June 2021, is expected to begin shipping product in the second half of 2023.
“Getting that plant up and running will be strategic for the continued growth of that business. That will happen towards the tail end of the third quarter,” Wallace said. “We anticipate we'll have some startup costs associated with that as we move through the transition of that facility. But overall, we should see that benefit us moving into 2024, particularly at the margin line as our wet business is margin-accretive to us and will certainly benefit the Hill's business longer term.”
Pricing for Hill’s increased 11.5% over the quarter, which served to offset the company’s operating profit declines. The company’s funding-the-growth initiatives and lowered overhead expenses also offset diminished operating profit, according to the company.
During the Q&A session of the company’s first-quarter earnings call on April 28, Chief Financial Officer Stanley Sutula noted the company has experienced inflationary levels in the $300 million to $400 million range on commodities, and that the inflation of agricultural commodities predominantly affect its Hill’s Pet Nutrition business. He noted the company does not anticipate seeing relief on those prices over the year.
Sutula shared the myriad of global conditions causing this inflation, which include heightened prices for corn, wheat and soybeans, as well as drought risk in the United States and global tensions with the Russia-Ukraine conflict. Prices of protein ingredients have also put pressure on the Hill’s business, he noted.
“The pricing we have taken over the past two years helps provide us with the flexibility to fund increased brand investment to support our pricing, build brand health, and drive volume and household penetration,” Wallace said during the earnings call. “We know that the competitive environment is going to be difficult, but we have a brand portfolio that is built for times like these, and we look forward to driving growth and market share performance moving now.”
Hill’s Pet Nutrition accounted for 22% of Colgate-Palmolive’s total sales in the first quarter.
The company highlighted two new innovations to its Prescription Diet portfolio that are expected to drive growth in 2023 — ONC Care and Derm Complete. Hill’s Prescription Diet ONC Care is designed for dogs and cats with cancer, with the goal of encouraging food intake through high-quality nutrition. Those diets launched in the US market in March 2023.
Hill’s Prescription Diet Derm Complete, which was first introduced in the third quarter of 2022, represents “breakthrough innovation” targeting dogs with food and environmental sensitivities. The diets are backed by several clinical trials and can be paired with wearable technology to measure scratching and sleep behaviors. Hill’s Pet Nutrition recently added a puppy formula to this portfolio.
“Despite continued pressure from raw and packaging material costs during the quarter, gross profit margin improved sequentially versus fourth quarter 2022, which helped fund a 14% increase in advertising in support of our pricing and robust innovation across all categories,” Wallace stated. “We expect to drive further gross margin improvement in the balance of the year through continued strong pricing and the benefits from funding-the-growth and other productivity initiatives.
“Looking ahead, while we still see uncertainty in the global operating environment, particularly in the back half of the year, we feel well positioned to deliver on our increased 2023 sales and earnings growth expectations and drive value for our stakeholders.”
Overall, Colgate-Palmolive reported net sales of $4.77 billion in the first quarter, up 8.5% year-over-year. Organic sales were up 10% and overall pricing was up 12%. Total operating profit for the quarter was $909 million, up 5.7% year-over-year.
The company shared its full-year 2023 guidance, including net sales growth expected between 3% and 6%, organic sales growth between 4% and 6%, and earnings per share (EPS) increases reflecting double-digit growth on a GAAP basis and mid-single digit growth on a base business basis. The company also shared it expects its gross profit margin and advertising investment to increase over the year.
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