高露潔 (CL) 2003 Q2 法說會逐字稿

Welcome to today's Colgate Palmolive Company second quarter earnings results conference call.

Today's conference is being recorded and it's being simulcast live at www.

Colgate.com.

There might be a slight delay due to the web simulcast.

At this time for opening remarks remarks, I would like to turn the call over to the Vice President of Investor Relations Ms. Delia Thompson.

Thanks, Jessica, good morning and welcome to our second quarter earnings release conference call.

With me this morning are Reuben Mark, Chairman and CEO.

Steve Patrick, CFO, Dennis Hickey, corporate controller and Ed Stillis treasurer.

We're pleased with the results we’ve reported this morning, which reflect another good quarter and first half.

Colgate set all-time records in sales, operating profit and operating profit margin, net income and net income margins and EPS.

Return on capital grew almost 400 basis points to a record level as well.

As you've already seen in this morning's release, and in keeping with our commitment to continuous improvement, we have included a balance sheet and cash flow statement along with the P&L.

You may have seen that essentially all of our key ratios, again, move in the right direction as they have for several years.

Colgate's fundamentals are sound Our business is healthy, and we expect good good results to continue.

Let's begin with the P&L.

Volume in the quarter was up 4-1/2% and again as in the first quarter and recent years, every operating division contributed to the solid volume growth.

Positive worldwide pricing added another percent and a half of sequencial improvement from the first quarter when pricing added 1%.

A small net positive on foreign exchange added another 1%.

Accordingly, total worldwide sales increased 7%, continuing the strong top line growth of the first quarter.

Growth margin again increased at the higher end of our targeted range in the quarter up 80 basis points to 55%.

Growth margin increased strongly in every division except Latin America.

We'll talk about Latin America more in a few minutes, but as expected,maxi-devaluation and macro economic difficulties throughout Latin America caused the expected drop in both profits versus a year ago quarter.

Excluding Latin America, world worldwide growth gross profit was up 140 basis points.

This is particularly gratifying since it indicates that our cost savings programs have been able to overcome the increased material cost pressures we and the industry have been facing this year.

Specifically, the gross profit performance is a result of our focused,, ongoing, SAP driven cost savings initiative.

Further progress in consolidation of worldwide suppliers and the continued move to factories all of which we discussed previously.

Also, continuing strategic efforts to shift our product mix to higher margin categories, play a meaningful role in increasing gross profit and will continue to do so.

As you know, we strive to increase gross margin while working hard to contain overhead overhead.

Overhead expenses in the quarter re remain flat as percent of sales and should remain flat for the year as well.

Total commercial investment worldwide behind our brands in the quarter increased robustly, both absolutely and as a percent to sales.

Media alone increased double digit on a worldwide basis.

Advertising was strengthened behind both regular and new products.

You'll hear more about the specifics of these new product programs and their success when we go through the divisions.

In Latin America, I think you know our strategy during macro economic turmoil is to maintain a base level of media and reduce promotion expenses.

As you'll hear in a moment, this strategy continues to work and market shares are strong and growing across Latin America.

Looking at profitability, operating profit in the quarter increased 8% to a record 22.7% of sales.

Excluding Latin America, operating profit increased 17%.

Net interest expense declined slightly as a result of lower debt levels from a year ago, and lower interest rates.

Our tax rate was 31.6%.

Our guidance to you going into 2003 and most recently in the first quarter conference call, was that the tax rate for the year would be between 31 and 32%.

The full year will indeed be in that range.

Net profit after tax increased 10% to an all-time record 14.6% of sales.

Earnings per share also reached a new quarterly record of 62 cents, up almost 13%.

The 29th consecutive quarter of double digit earnings growth.

And now turning to our balance sheet and cash flow, net cash from operations in the first half is up 12.5%, global working capital is at a very low 3.6% of sales versus 4.6% in a year ago period.

Looking forward, we expect cash generation and working capital to be strong for the full year.

All of our interest coverage ratios continue to improve and are well above the range that we target to maintain our Double-A credit rating and our return on capital as mentioned earlier is at a record 35.9% after-tax, after 32.1% for the first six months of 2002 2002.

So overall, we are quite pleased pleased.

Turning to North America.

Volume in North America increased 7.5%.

In the U.S. portion of this division, volume was up 9%.

Sales for North America also increased 7.5%.

And it is encouraging to note that north American pricing was considerably less negative than in the first quarter.

Total commercial spending and media in North America was up very strongly in the quarter, up both absolutely and as a percent to sales.

Even with the strong increase in commercial spending and media in support of our continuous flow of new products here in the U.S.

U.S., operating profit increased almost 14%, up both absolutely and as a percent to sales.

New products, as always, continue to play an important role in the north American business.

So far this year, we've launched 11 new products and expect to launch another 11 during the balance of the year.

And as you'd expect, new products have helped drive market share.

Our second quarter national market share in tooth paste, as measured by Neilson, was the firm market leader at a 34.5 share, up 1.7 share points from the second quarter of a year ago.

The franchise of Colgate total was particularly strong.

As you know, we launched the most recent variant in the total line up, total Advanced Fresh, earlier this year.

This new product started building distribution at the end of the quarter and it's barely reflected in the strong market share.

This does bode well for the balance of the year.

Our share in manual tooth brushes built through the quarter with positive momentum from the new Colgate massager toothbrush.

We closed with 21.6 share of the market.

Massager had a 1.7 share in April 2.1 share in may and 2.3 share in June.

In liquid hand soap, our share was up about a half a share point in the quarter, to about 45% of the market.

This came from continued strength of the new products which have been launched over the past year.

Soft soap natural milk and honey, soft so many arome that therapy.

More new products are slated for the second half.

And the success of our fabric softner [suave tell] continues.

It stands at a national share of 7.8%, up well over a pint from the second quarter of last year.

This national share translates to a market share of over 30% in the fast growing Hispanic market market.

At home whitening category still offers enormous opportunity for growth.

The category is growing at about 80%, yet penetration is still low, under 10%.

Colgate simply white and simply white night shares is at about 30% of this growing market.

And recent consumer trial and repeat purchase data shows significantly higher rates on both measures than our nearest competitor at the same position in time.

And our global rollout continues, meeting with strong trade and consumer reception in each of the 10 countries in which it has been launched.

Looking forward, we expect north American unit volume and operating profit to be excellent for the year 2003 as a whole.

We've already -- as a whole.

We've already told you that strong results in the second half of last year will lead to a difficult comparison the second half of 2003.

Nonetheless, we expect to show good top and bottom line growth on an ongoing growing basis.

Turning, then, to Europe.

Volume in Europe increased 2%.

Pricing and consumer and trade promotions showed a 2% decline.

Foreign exchange added 18%.

All of which translates to a $dollar sales growth of 18%.

Total commercial spending was up very substantially in Europe on a dollar basis an as a percent to sales.

And even with the strong investment spending, operating profit grew 29% both absolutely and as a percent to sales.

So we're pleased with our growth in Europe, since it was accomplished in the face continued sluggish economic conditions across most of the region.

For example, Germany and Italy experienced negative GDP growth in the quarter.

Despite this, we have continued with our strong new product launch program and market shares reflect their success.

In France, year to date shares are up in 13 of 19 categories.

Total Plus Whitening has been one fact factor in the strong tooth paste share with sales double that of last year.

The most recent variant in the Palmolive aromatherapy line-up has contributed Ted over a point and a half.

In Germany, Colgate Herbal plus whitening has been the significant driver lifted tooth paste shares a half a point.

In late may we did launched a new version of Colgate Sensitive no longer is it a dual tube presentation, but in a single tube.

The product is now selling in Italy and the UK with advertising breaking later this quarter.

In Italy, despite competitive activity, our tooth paste share is up modestly year over year and in the UK, our share is up one full point year over year.

More new product activity is planned for the second half.

In the all-purpose cleaner category, we're now just beginning to ship a range of products, capitalizing on the consumer desire for natural clean cleaning products embodied in the concept of orange.

Ajax all-purpose cleaner, Orange Force, Ajax Orange Spray Cleaner clean are and Ajax Orange White.

Another product which telegraph simple and natural to the consumer is Ajax [MOXET], making the concept of soap, a basic soap bar well known throughout southern Europe in the liquid cleaner category.

Looking forward, volume performance in Europe should be slightly better in the second half than in the first.

Operating profit should continue its strong double digit performance for the balance of the year.

Turning then to Latin America.

Volume in Latin America increased 2%, a bit better than we expected when we talked to you last.

Pricing increased 8%, partly off offsetting an expected but strong negative currency hit of 17.5 %.

As a result, reported sales were down 7.5%, but were up 10% in local currency.

And as you all know, all of the major countries in Latin America have experienced devaluating currencies.

As previously noted as a result of the devaluation, growth margin was down in this region.

As usual our price increases have not yet caught up with increased costs for dollar for raw materials.

But based on our history in all of Latin America, we're confident they will catch up over the next few quarters.

The drop in gross margin resulted in an operating profit decline of about 11%.

Despite that, Latin American operating profit margin is at 28%, well above the company average.

And importantly, while many countries within the division continue to be in macro economic turmoil, our market shares continue to strengthen and the fundamentals of our Latin American business are sound.

In Brazil, despite continued delicate macro economic conditions, our business is good with excellent market share progress in tooth pastes and bar soaps.

Looking ahead to certain key economic indicators show improvement, including a strong trade surplus and the current deficit.

The government situation is delicate but appears to be manageable.

Brazil continues its strong fiscal effort in order to meet commitments agreed to with the I IMF.

And as you may know the currency we have was re revalued somewhat although still below last year's exchange rate rate.

In the second quarter in Brazil, we launched [inaudible] refreshing.

The latest in the [inaudible] tooth paste line-up.

You may recall that last year the launch of [Sorriso] [inaudible] met with unprecedented success.

Sorriso Super-Refreshing has after five years reintroduced the nationally recognized COLINAS Equity Values through packaging and advertising.

This latest launch resulted in 25% higher sales than even – [inaudible] setting yet another record.

Brazilian national tooth paste market shares year to date are up almost 5.5 points.

In soaps, the continued success of both Palmolive, Suave, and [Protex] Herbal has resulted in the highest Brazilian market shares in the last 10 years, reaching almost 20% of the market.

In Mexico, the economy remains difficult, although GDP has been growing modestly.

Given that country's strong trade ties with the U.S., the expectation is that recovery will follow the recovery here in the states.

Despite these conditions, Colgate's volume in Mexico was up in the quarter, following a very strong volume increase in the first quarter of 2003.

Although still a small business in Mexico, Colgate simply white was launched late in the first quarter.

We're the pioneer in this market in the at-home whitening category bringing profits to the oral care business.

We achieved record distribution within the first two months of shipments and sales are doubled the original forecast.

In other categories, our shampoo business in Mexico reached record share levels in the recent period, helped by a new specialties line, offering benefits such as color protection and anti- dandruff.

The launch of the entire Palmolive Naturals line has boosted share by half a point.

New product activity continues to be strong across the region, resulting in good share gains in all subsidiaries.

Venezuela, the hardest hit, continues to post record market shares in many every category.

The country is in a very precarious situation with an ever-present expectation of further currency devaluation.

Volume in Latin America is expected to grow modestly for the rest of the year, due to the ongoing region wide sluggish economy and hyper inflationary conditions.

Latin America dollar operating profits should be substantial for full year would you 2003, but it's budgeted and expected down slightly from last year's levels.

Looking forward, expectations are that healthy growth will return to Latin America in the

first half of next year.

Turning then to Asia/Africa.

Volume in Asia/Africa increased 6%.

Foreign exchange added another 7.5% and pricing coupons and consumer and trade promotions was negative 2%.

Reported sales increased 11.5% Total commercial spending was up strongly absolutely and as a percent for sales.

Operating profit increase 21%, even with a healthy increase in commercial spending.

Part of the strong increase was the result of a significant increase in gross profit.

I think some of you have heard us talked about you are ultrahigh speed tooth paste line line.

We've installed these in the state of the art manufacturing plant in China.

This facility is now operating with a high rate of efficiency and these savings contributed to the margin increase.

This bodes well for our many other tooth paste facilities around the world which have yet to be upgraded to this very latest manufacturing technology.

Volume was strong through the division.

China continued its good performance with double digit volume growth.

The group of countries was up nicely as was the South Pacific region.

New products helped to fuel the broad based growth in Asia/Africa.

Aromatherapy bath and shower gel, liquid soap, bath soap and talcum powder have been launched across Asia.

In china our leadership continues and our national share stands at 32% of the market.

This quarter, we conducted a market test of Simply White whitening gel.

The test met with excellent success and we will be rolling the product out nationally in the third quarter.

In Malaysia, Colgate Triple Action has been a contributor to increases increasing market share a full point.

Our share is now approaching 80% of that market.

The continued success of Palmolive aromatherapy has boost boosted our share by two points.

In the Philippines we achieved market leadership in the tooth brush category, up almost 8 points from a little over 19 to just over 27.

Volume growth in Asia/Africa should continue at good levels for the third quarter and the full year.

Similarly, operating profits should continue to increase more than 10%.

Finally Hills.

Hills volume increased 4.7%, pricing increased 2% and foreign exchange was a positive 5%.

Accordingly, world worldwide Hills sales increased 11.5%.

Total commercial investment was up both absolutely and as a percent to sales.

Operating profit increased 5%.

On a year to date basis, operating profit was up 17%.

Hills volume was good both domestically and overseas.

The worldwide expanse of our latest Science Diet, Nature’s Best contributed to this growth.

We launched Nature's Best here in the U.S. towards the end of last year.

This quarter we began shipping in both Europe and Japan and in both cases, the launch has been accepted by the trade.

More new products are planned for the rest of the year.

Here in the U.S., we've just introduced Science Diet Advanced Protection for both dogs and cats.

This is formulated for aging pets to enhance their vitality.

It brings the technology used in our Prescription Diet, Brain Diet, BD to the wellness line of products.

Another new product is in the Prescription Diet line, Prescription Diet MD, to help with weight loss and to fight diabetes in cats.

It's Atkins diet for the feline world that is low carbohydrates.

Our international business continues to grow nicely.

In Europe, the speed of distribution and acceptance of our Nature's Best launch has exceeded expectaionts.

Regional rollout has been enhanced by merchandising materials as well as branded customized chef racks.

Consumer trials and activities are being implemented in the second half of the year to ensure further success.

In Japan, despite a sluggish economy, our business continues to be strong with particularly good growth in the Prescription Diet line.

Sales in the quarter were up almost 7% aided by new products enhancements, disease focus programs, educational seminars and sales efforts behind weight management products.

Hill's volume should continue to grow to its historical mid-single digit rates.

Operating profits should be up both this quarter and full year as well.

In summary, we're pleased with our solid results for the second quarter.

Our commitment to continuous improvement has allowed us to deliver improved ratios on virtually every line in the P&L balance sheet and cash flow statement.

Even in the face of macro economic challenges in several parts of the world our business fundamentals are healthy as respect to good volume increases and worldwide improvements to market share and profitability.

We look forward to discussing our continued progress with you as we go through the balance of the year.

That's it for my prepared re remarks, Jessica.

We would like to open it up to Q & A.

Thank you.

Today Today's question and answer session will be conducted electronically.

If you would like to ask a question, do so by pressing the star or asterisk key followed bite digit 1 on your touchtone telephone.

If you are also listening to the conference on the Internet, we ask that you turn down the volume on your computer speakers when asking your questions through your telephone.

Once again, star 1 to ask a question and we'll take our first question from Bill Chappell with SunTrust Robinson Humphrey.

Go ahead sir.

Bill Chappell Good morning, thanks.

One overall question on the share repurchases versus dividend kind of theory going forward.

Obviously this is the first quarter in probably 10, 11 quarters you haven't repurchased a significant amount of shares.

I just wanted to see what that thought process was going forward and you know, how you look at that.

Hi, bill, Reuben.

We -- as you know, over the years, we've purchased a considerable amount of shares over time.

This year, as you know, we have cut in the first quarter and continue.

We have reduced that somewhat, and you may recall that we have increased dividend effective in the second quarter, announced in the first quarter by 33%.

And I think it's our expectation -- I say "I think" we said that in a previous conference call and I'll reiterate it that our intention is to increase dividends at a faster rate than earnings are increasing.

Earnings have been increasing, as you know, in the low to mid- mid-teens.

Historically, and that our intention is to looking forward to raise dividends faster than that.

We continue to buy shares, but at a reduced level.

Also, you know noted that our debt has been reduced by a couple hundred million dollars, and probably will continue to go down a bit by bit.

We are very comfortable at the Double-A rating and as Delia mentioned in her right-up, we are over the top of the ranges, i.e., better than the ranges required for that rating.

And one quick follow-up.

On the S SG&A expenses the ratio was up 70 basis points year over year.

How much of that was just additional promotional and advertising and how much was just currency effect on those expenses?

Well, it was basically -- the increase in A to S, because that's a percentage to sales, it would be all real increases in advertising because, don't forget, the sales line and the SG&A line are affected essentially the same way by currency.

I'm looking at the financial people to make sure I'm right, but so that since actual overhead was he essentially flat on a percentage of sales basis, the increment comes from commercial spending.

Great, thank you.

Thanks, bill.

We'll take our next question from Amy Chasen with Goldman Sachs.

Please go ahead.

Hi.

First question is can you just discuss the north American pricing?

It was much better this quarter than it had been in previous quarters.

Can you talk about what the factors driving that were and whether this is sort of the sustainable rate that you expect over the next several quarters?

Well, the primary reason, Amy Amy, was as we told you, I think last time, that incremental promotional activity in the industry, and I think in all parts of the consumer goods industry were started to accelerate in 2002, and so the primary reason is that it has lapped that start.

And the incremental growth is modest.

I think we're fortunate and I'm sure other people will be as well, is that our gross margins are growing sufficiently fast even after that increase in promotion that we're able to increase advertising and operating profit at the same time.

As you know, the gross profit in the U.S. was quite substantial in the first quarter, first quarter, second quarter and first half.

So are you pulling back on any of the promotional activity?

Or are you still at the same -- at at that same high level, it's just that the comp is easier?

There is substantially more media.

I would posit to you that as you you -- as time passes, one becomes a company, assuming there is appropriate discipline and so on, it gets more efficient at that spending, and therefore can get same mileage for slightly less, but we're not not -- we're essentially not pulling back.

When competition is doing so, we are meeting them, but by and large, that pressure will continue, but we feel that the margin movement is up is enough to ensure that advertising can keep growing and that our operating profit will as well.

Okay.

And then, a question on the balance sheet.

The DSLs were obviously very good in the quarter.

Can you talk about how low you think that those can go, and then on the flip side, just touch on why the inventory days were up a bit?

Okay.

The -- on an overall basis, when you look at working capital, --hang on--as you know, the percentage, 3.6% is pretty good.

In fact, it's great.

And if you go back just to REPRISA, it was 3.6% in this quarter.

And June 2003 period.

Last year, it was 4.6% and again, we all know that going down is good.

So that if you read back, 2001 June it was 5.5%.

June 2002 was 4.6% and this is 3.6%.

Then the pecks in terms of days outstanding -- then the specifics, in terms of days out standing you were complementary about that.

It can continue to go down modestly.

It will bounce around, but given the programs, I think that will continue to go down.

The inventory coverage is up very slightly about 2.5 days or whatever it is, but that's a very specific reasons.

There's a number of plant movements, Mexico, we are moving our tooth paste manufacturing with -- you remember we have 80% share in Mexico from Mexico City to the northern factory.

I don't remember whether you've seen it or not, but some of the people have visited that factory in northern Mexico.

Thailand we're doing the same thing, moving tooth paste out of Bangkok and into the country and therefore, there's a buildup, modest buildup of inventory which leads to that.

It's mostly finished goods.

And then there are a number of new product launches around the world that caused that.

But it's a normal fluctuation and obviously the thing we look at is overall working capital.

I think -- there is nothing to it.

I think you'll see it go down again next quarter.

But overall, the working capital is beat last year's all-time record.

Okay, but you said you expect the inventory days to come back down in the third quarter?

Certainly in the second half and probably in the third quarter but second certainly in the second half.

Okay, great, thank you.

We have a question from Carol Wilke will with Merrill Lynch.

Go ahead please.

Thanks, I was curious about two things, with the caveat that we know the market share data is not that accurate given what's not in there.

When you look at the tooth whitening business, you said last quarter that you are expecting simply white night to be either a third to a half cannibalization the simply white excuse me and the rest increment incremental.

We haven't seen that yet.

Is it because there is a lot of new noise out there with both the nighttime products and are you still expecting it to be, you know, about 50% plus incremental going forward?

Well, the cannibalization -- if I was asked or if Ian was asked or shamemus was asked people who were closest to..

What we told you last time, would it be a third cannibalization, we would say probably more.

But because people are finding it obviously much easy to use it once a day versus twice a day.

At the same time, it is slightly more expensive product with regular simply white selling for $9.99 and this selling for $14.99.

But there will be substantial incremental business, exactly how much, who knows .

The whole thing is developing.

What we're especially pleased with and I think Delia mentioned in her write-up, we're getting very good trial and better repeat than we expected in our consumer tracking.

Which, as you remember last time, Carol, I did say that the essence of any of these business is whether it's a sustainable phenomenon, and trial and repeat are the best measures of that.

Thanks.

And just quickly on Latin America, I know last quarter, Venezuela surd a big hit to your total volume and excluding out that your volume is good.

Is that the main reason why the outlook for the rest of the year is for more modest volume growth growth or has Brazil slowed down as well?

In Venezuela, the first half is down 10 or 11% in volume.

But our expectations are for the second half that it will be down somewhat more, and who knows whether that's conservative or not, but in both our currency and economic assumptions, we have assumed a devaluation.

You may know that Venezuela [inaudible] is at 1598.

Whether it should be there who knows, but it's been held there for a considerable amount of time by government action.

One would hope that it doesn't move down, but we have planned for it on a conservative basis to move down on a second half.

And the volume in Brazil, has that slowed down?

I know it was up in the first quarter.

I'll give you Brazil in a sec just one sec.

Let me make sure I give you the right numbers.

Brazil, in the first half in volume was about flat.

It was down a couple percent in the quarter and up very slightly in the first quarter, and it's expected to be again slightly down in the second half for the full year expectation of down a couple percentage points in volume.

Thanks very much.

Okay.

Thanks, Carol.

We'll now go to Wendy Nicholson with Smith Barney.

Please go ahead.

Hi, my first question has to do with the operating profit growth in Latin America, because for years we've seen the negative foreign exchange environment yet we've seen positive operating profit growth.

This is the fourth fourth quarter where we've seen -- is that a function of raw materials and the lagging in terms of when that pricing size cycles through.

Is there something else going on on -- that have margins inside peaked or have overheads been -- your margins are so great.

I'm surprised that the operating profit is still so negative.

When you say "the operating profit" change is bracketed but as Delia mentioned our operating profit as a percent to sales is very strong at over 30%.

Right.

So, it's a very profitability area.

My strong sense is that several countries at once have been having difficulty from an economic point of view, but as per Delia’s comments, Brazil looks like it's coming back, Venezuela will go through more bad stuff before it gets to good stuff.

Mexico, it has some interesting signs, but my expectation, Wendy, is that in the countries, the pricing will catch up, the margins will go back up, and then we will then see either our operating profit go up versus history or we'll further increase our advertising.

But the businesses are healthy.

The one business which is at risk is Venezuela even though the market shares are terrific, simply because that country drops that rate, it will obviously be painful, but nonetheless, I'm sure when we get around to budgeting Latin America for next year, and anticipating a considerably better second half next year than this year, I wouldn't be very surprised if we don't budget operating profit in Latin America up next year.

When you think about , that 30% operating margin is just awesome, but when you think about the next two, three, four years, you know, out that far, you don't see necessarily the rate of increase slowing simply because it is so good, this is more just a temporary, we're in a terrible business environment, but outside of that, we still see Latin America as being a margin expansion or contributor to our overall margin expansion; is that right?

Gross margin will certainly go up, and my strong feeling, I think our strong feeling is that operating profit will increase at a meaningful rate in the years to come in Latin America.

And candidly, Wendy, I think it's an interesting commentary on having 218 countries in the balance geography, that even though Latin America with the size and profitability has had some economic difficulties, we're able to overcome that elsewhere with strong growth as well.

Because interestingly enough, the currency on a worldwide basis, as you probably know, only helps us slightly on the net basis.

Certainly the euro is way up, but with Latin America down, basically it's out of our 7-plus percent sales growth, only 100 basis points comes from currency.

That's a lot better than it has been historically, but it's only 1 point.

Going back to your basic question, Wendy, I think our position is and it's reflected by our on-the-ground people in Latin America, is that operating profit growth will continue as it has in the past.

That sounds great.

My second question shifting gears goes back to Bina, what you mentioned, about the new tooth paste filling machine on the oral care line in china.

Is there any way you can dimensionalize.

I know you talked about oral care margins already approaching 60% globally.

Can you dimensionalize how big a deal that could be?

Are we talking about a 5 year implementation of that new technology is this is that 5 points of margin?

Anything you can say about that?

It sounds kind of neat.

It is neat in terms -- and you may have seen, I think we presented not at the annual meet meeting, but I think we presented a bit of a film, of those extraordinary pieces of equipment.

But that is simply one element in a whole panoply of programs that are designed to get our margin up to get to the 61% by 2008, and that combined with all of the other programs and purchasing programs and SAP and literally dozens of programs add their piece to it.

That's a meaningful one.

It's somewhat sexier to a certain extent because you can see the actual machines chugging along, and they set records everyday.

But it's a piece and it will be a multiyear program because what happens, of course, is when you move that in place of other machines, then the other machines go to some -- another less developed country and they keep moving down the line, and so it takes a long time, rightly, and each step there is a cross savings.

So it's a multiyear program, any way, I would say 3 to 5 would be an appropriate thing.

That by itself will increase -- and this is -- I'm pulling this out of the air, but we'll double check it, longer term will increase oral care margins by 200 basis points, but I will check that and get back to you.

That's terrific.

Now, but I have to follow-up.

You said 61% gross margin in 2008.

Maybe I'm out of date, but I thought the target was 60.

Yeah, but we did -- if you want to let us off the hook you can do that.

No, 61 would be wonderful.

What we did, I think is maybe you were having a baby or something, who knows what.

I'm sorry, no?

She did have, okay, I'm sorry.

But what we did last year was that even though of course net margins dropped a point and a half because of the change in accounting --

Fine.

We did also at the same time increase our target because we were especially encouraged by what was going on to 61.

I'm not sure we did it on a conference call, but we did it broadly, and I believe that the other sell-site guys on the phone probably would confirm that.

It's a question of apples to apples on the accounting.

Yes.

Fine, thank you very much Reuben.

We'll take our next question with Andrew McQuilling of UBS, please go ahead.

Thanks very much and congratulations on the next quarter.

Reuben, I you mentioned simply white trial and penetration in the U.S Can you read the latest figures, if you have anything more up updated than I guess last time.

Did I give it to you last time?

I don't think we're supposed to give it but if I gave it last time, I guess I'm obligated to.

What do you have for last time?

Man I have to check my own numbered numbers.

I thought penetration rates were 7, 8% for the --

let me have somebody look it up.

Can I come back with something else?

Okay.

How about -- like European volumes, did the simply white products start to ship at all in Europe?

Has not yet.

It's going to be actually, I think I may have mentioned last time that our intention in the number of European countries is to start in pharmacies and move out from there and there is almost none in -- actually none in the year to date.

Terrific.

Maybe one question about Mexico.

You mentioned that sales are running two times expectations for simply white in Mexico.

Yeah.

Can you dimension, I guess, per capita consumption of the stuff, what the business can do in a market like Mexico, the simply white piece?

Well, I would guess, and this is a longer term guess, that it could end up being between a 10 and a $15 million business in Mexico.

Which is relatively modest, but nonetheless very profitable and will grow over time.

Terrific.

And whenever you can find the numbers, if you could do that, that would be great.

I'll just bail in.

I have it somewhere.

It's

Thank you.

I'll bail in with it.

We'll now go to Connie Maneaty with Prudential Equity Group.

Good morning, I would like to ask a few questions on North America.

In particular, as you look at the new products that are coming out in the second half, which of the ones that you've announced -- excuse me, are you most enthusiastic about, and are there any slotting allowances that would take this price mix from negative one to back in the 2, 3% negative range.

Well, as I mentioned earlier, Connie, I do think that it's going to fluctuate, a percent up or down, but it would not come from any specific slotting allowances, it would be just a normal fluctuation.

And also, differences in coupon levels between quarter will affect that line as well, don't forget, because now they are included as basically as a price reduction.

But in the second half, as Bina said 11 new products, there are numbers that are being sold.

She mentioned Palmolive wipes, very exciting new product. [inaudible] I guess at least the sales side people have gotten those, very exciting, looks good so far, but again, as always, I think, Connie, that it'll be made up of a number of different products so there's not one that's being held up as the pair Ra gone.

It's a process of launching 20 new products a year.

Could you talk a little bit louder?

Could you also talk a little about the Simply White gel in China?

What's different about it?

Pricing, ethicacy and will that move to other markets, that formulation?

I don't think -- it's no different.

It's the identical product.

It may have been referred to in the commentary as the gel, but they are all gels.

It's a less viscous gel than the tooth paste gel, but it is a gel.

So wherever we're launching simply white, it is the same product, obviously, with different language and it is essentially the same price.

We found in our research, in the 10 countries that has been launched in, it is essentially the same price as it is in the United States.

One final question on North America.

Since advertising seems to be up so considerably and there is a big increase in the operating margin, how much did the gross margin in North America expand?

I guess I'm not not allowed to give that to you, but as always, I will probably end up doing it.

Hang on a sec.

It went up somewhere between 150 and 200 basis points.

And I got to say, Connie, that we were really pleased that excluding Latin America, we expected margins to go down, that gross profit was up 140 basis points worldwide.

Is this volume driven or is there something in particular that's driving it?

It's not -- I mean, our volume this quarter, if anything anything, was a tad less than last quarter and last -- and about the same as last year.

So it's not -- there is no extraordinary surge in volume, it just again, continuation of the programs, mix, as you would expect, tooth paste and oral care in general did better in the quarter and the half than [inaudible] that always helps, and that's being done by, you know, on a strategyic push basis over many years.

Okay, thanks.

Thanks, Connie.

We have a question from Joe Altobello with CIBC World Markets.

Go ahead, please.

Thanks, good morning.

Reuben good morning, could you give us an update on simply white.

That sounds like a 4Q event.

Is that purely a regulatory issue as far as timing there, and second on advertising spending, it's been up significantly, if you could break that out between volume and sort of pricing, is that just because you are advertising more or because media rates are up?

Okay.

In the first question, I assume gateing means --

[inaudible]

We're not allowed to use jargon at Colgate.

But it is -- it is at least partially a regulatory situation situation, which is one of the reasons we've elected to go first into pharmacies.

But it will go methodically and we will find that by the middle of next year, we'll be everywhere we want to be.

The second question had to do with media, I think if you look around the world, the media rates are up in some places and down in others, and don't forget, our buys are done pretty much in advance, so the current spot conditions aren't really relevant, but from a share of voice basis, our shares of voice voice, I'm generalizing to be sure, but in the United States and other countries, our share voice is up.

That is to say, there is more media weight than there had been been.

Okay, great.

Thanks.

We'll take our next question from [Ann Gillin] with Lehman Brothers.

Go ahead.

Thanks, Reuben, in your out outlook you commented rather unusually about a very full new product pipeline.

And yet you seem to be more cautious on second half volumes.

Can I just try to understand if we're just reading too much into your out-look?

We usually talk about the full new product pipeline.

The new product schedule is quite robust and the U.S., the one that was specifically mentioned, we have a very aggressive program.

I think the reference was only to a comparison, that is to say, last year, you'll remember our worldwide volume and especially our U.S. volume was stronger in the second half than in the first half, and this year, it's very -- it was very strong in the first half and it will continue at that same level, but when compared to the very strong second half, the comparisons will be somewhat, less, as I think everybody knows that and I would assume that everybody has built that into their models.

Nonetheless, we expect worldwide volume and we expect good operating profit and we're content with the external range of estimates for EPPS.

And given the difficult comparison which I know the trade looks at also, is there any sort of way you would balance the type of product that goes out first half, second half half, to compensate for that comparison?

We -- to tell you the truth, since we have been consent consistently been getting, 4, 5, 6% volume increases for a number of years to a certain extent, while we try to manage as best as possible, we are a little less concerned about comparisons -- I mean, we operate on consumption, take away our objective is to meet market share, not build trade inventory, not build our inventories and build market share, and so I have to say that the planning of those things is not so much -- I have to confess -- not so much for external consumption whether or not, you know, a 60/40 split or I 60/40 split, it's more how do we maximize our consumer penetration and get market share.

So I can't say that that's being manipulated.

I don't think it's being manipulated.

And the net result is the volume momentum that we have in terms, if you take number of cases or tons or whatever you want to take, sold per day and per month and per quarter, has been increasing, and that momentum will continue.

If it happens that there is a very tough comparison from the previous year, it may be slightly up or down, but the trend is there because the market share is there.

Terrific.

And just on the commercial spend spending, it feels like given the pricing contribution this quarter, and the SG&A, that as you've increased commercial spending globally, you did put more towards advertising.

Is that correct?

Absolutely.

Because it's a matter of fact, media, I think being mentioned, media was up as a percentage number, worldwide media was up 14%, and that's even with the Latin America flat to down.

And let me -- and I was -- in examining the P&L and hearing some comments earlier, I wanted to make an observation, if I might, spontaneously, about operating profit, which is 22 -- what is it?

It's at a 22.7, which is up 20 or 30 basis points from last year.

A couple observations, number one, last year was the all-time record for operating profits, percentage.

In other words the profitability of the company, so this year is a new all-time record on top of a very high level last year.

And second, I think everybody out there knows or I imagine knows, that as a concept of managing these kind of worldwide businesses, I think, is to generate ultimately cash EPS, and when, for example, this quarter with sales up 7%, which is the largest quarterly increase in years and years, because currency was not against us for the first time in a long time, that allows us to increase advertising, i.e., take it out of operating profit and putting in advertising for next year quarter, the quarter after and years from now for all of the shareholders, so when it is a fortuitus it is situation where sales at the top line are going very well, and one would hope that that currency -- lack of a currency negative would continue, then I think appropriate management is to make sure you spend as much of that money as you can for future profits.

If one did not spend that incremental money, operating profit would have been -- could have been at 24%, but that would have shown an EPS growth that was perhaps a little more than level one but beyond that, you want to spend the money when you have it it.

Our whole financial strategy is driving gross margin up, driving overhead down, taking that money and allocating it between operating profit and increased spending, and unfortunately, you like it to be allocated so that you can make the cash EPS numbers while dropping most of it to advertising.

Reuben, I couldn't agree more more, but that begs the question question, when you drop it to advertising, is it current quarter advertising in the SG&A line or did you also forward purchase?

No, there is no -- I mean, with the exception of Latin American economies, where you can go and make a deal, and besides the fact that accounting rules would say, if you are making a forward purchase, you've really got to use that in the period in which you spend the money up.

I don't know that for a fact, but my knowledge of accounting is sufficient to know that you really can't do that.

So this is all invested in for current quarter.

That's right.

Great, thanks very much.

By the way, all of the accounts gave me a thumbs up when I said that.

Thanks.

We have a question from Andrew Shore with Deutsche Bank.

Hi Reuben it’s Andrew, instead of William.

I want to know what simply white sales in Fiji.

Just kidding.

Fiji?

North or south?

North of Fiji.

Do you have any idea of the implications for your Mexican business sort of hitting on Wendy’s comments about margins, giving the new buying of [Soreyanu Shigante] and how that might impact margins and then I have a follow-up.

I don't think -- unfortunately, neither [Havier] nor Mike [inaudible] are in the room, my sense is that the outlook in Mexico is excellent from the perspective that this latest twitch in the economy has given us some great market shares.

That is to say we have continued spending.

We have continued doing the things we would normally do, and my recollection is our tooth paste share is excellent and so on.

So, I guess I'm not in a position to answer that, Andrew, but my sense is that it is business as before, while adapting to changing trade situations.

As you know, Wal-Mart, for example, in Mexico, is an important part of our business, and our market share and our profitability in Wal-Mart is excellent.

So, I would think that as the trade consolidation in Mexico, we will benefit from it as we have -- just as an aside, also, the -- you did hear -- I'm sure you did, Andrew, you did hear that Bina said that excluding Latin America, operating profit was up 17%?

I just want to -- did you hear that?

Loud and clear.

Okay, good.

And then the follow-up is, can you give us an idea of what your weighted market share takeaway is at retail?

Because you know, when you hear other companies talk about trading stock at Wal-Mart.

Who is doing 9% selling in this environment?

Well, there has been interesting enough, I have a chart here somewhere, Andrew, that -- we obviously read in the paper and see all of the reports that say some people are saying about these in fact, in the U.S., there has been a bit of the stocking but nonetheless, we we -- yeah, so that -- let me take a look here.

So basically it's gone from in the first quarter from 9.9 weeks, this is our inventory to 9.7 weeks, so that we've lost basically two weeks of inventory and therefore business, but nonetheless, that happens over a long period of time, and it has -- and that's part of our job is to offset it.

I'm not saying that -- I don't think you've ever heard from us about down stocking, and I don't think you will.

And Reuben, just as aside, my guess is that Wendy's baby is now going to become a crest user user?

I would normally make some crack but I won't in this context.

We'll now go to Linda Bolton with Fahnestock.

Please go ahead.

Thank you.

Given that there has been some entry by a private entry product into the whitening category, are you confident that you'll be able to have $250 million of sales for the year?

Reuben Mark;

I don't think -- I'm not sure Linda that we ever said $250 million.

We will not have $250 million in whitening in Simply White for the year, and I don't think we ever thought we would.

History says, Linda, that private label in these kinds of categories don't do all that well, but let me -- I have -- let me -- I have actually have a chart on that.

Let me read you that.

Hang on.

Linda as you may know, we have over a period of time have pushed our business towards the categories where there is a personal involvement, and therefore, the private labels have not had much of a chance.

So I'm reading market shares in tooth paste, for example.

This is U.S. private label value shares.

In '98, it was 1.1.

It then went to .6 and then to . .2 and it's now at .2.

So literally, less than 1% of toothpaste.

Tooth brushes, it's about 7%.

Deodorants and anti-persperents are .6%, bar soap is 1.7%, body wash is 3.5, and so on.

And so that very, very specifically, we head to that.

I don't think -- my own feeling is people are not going to be as confident putting private label on their teeth as a Crest or a Colgate.

Who knows.

We never expected $250 million.

We're going to have north of $100 million this year in the United States and some more outside, but that that 100 million is on a base of almost $10 billion, so it's a relatively small piece.

I share your interest, Linda, that it would be interesting to see how private label does, but my sense is that it wouldn't -- it's not going to do very much.

We'll take our next question from [Alec Patterson] with [Presner RCN].

One quick clarification and then two questions.

Last year's numbers, SG&A had an unusual gain of 6 million.

Is that right?

I want to make sure because that was change the way the SG&A sales trended.

It would appear so.

I'm not sure how that changes.

Can we look at -- yes, there was a small special charge or a special credit in SG&A last year year.

Can we get back to you on that?

Yeah, that's fine.

Okay.

Secondly, Rubin, could you provide that cost of goods break did this down that you do attributing to raw materials pricing, blah, blah, blah, and then last lastly, just more of an esoteric question, the new product activity you guys highlighted and you seemed to suggest that it's particularly exciting.

I was wondering from a viewpoint of how much of it is patented product activity, Los Angeles total anything along those lines coming out?

Generally speaking, you can expect that out of 20 plus new products in the U.S., that two or three of them have some degree of perhaps more of exclusivity due to either patent process, availability of the ingredient and so on, and I think that's been maintained and will continue to be maintained.

I think that you'll see that next year there are a few products coming out of this country and Europe that really have some real sort of competitive protection, but again, when they come, you'll see them.

Let me give you, if I could Alec, the breakdown.

So we start last year's level of 54 to savings projects are about 1.-- 130 basis points positive, savings projects .6 and purchasing savings . 7, together 1.3.

Material negatives, negative .9.

Mix, all other changes plus including mix are .7, and that is a couple of tenths in there, it comes out to the 80 basis points.

Okay.

Great.

Thank you very much.

So again, as you can expect, Alec, it's driven largely -- I mean largely or exclusively by our inherent sort of proprietor savings projects.

Our purchasing savings which are not roll and packing material price movement as much as our own negotiations, and the strategic mix change of oral care growing faster than the surgeons and so on.

That 90 basis points on pure raw materials, is that a good trend to expect now?

On an overall basis, last time we had said that -- you remember, that we budgeted over all costs up 2% this year, and that what we told you in the last quarter was that we expected them to be down .3 with all of our savings in there.

That's not quite as good, but we're offseted in another of other ways our gross margin actually is higher because mix is better than we had, but that will be more or less flat instead of negative point negative meaning good for us, simply because the oil prices which oil and gas prices which we assumed would have recovered quickly after the Gulf War, have not -- the Gulf War basically isn't over.

And so we expect good gross margin for the ret of the year, actually a little better than we anticipated, but the breakdown of pack something slightly different.

Got it.

Thank you.

We'll go back to Linda Bolton Weiser Fahnestock.

I got cut off earlier.

Oh, did you?

Yes, I'm sorry.

I didn't intentionally, I promise.

No, I know that.

I'll tell you what Forbes says.

You had started to explain how private label hasn't gained a lot of share in oral care.

Are you thick that the private label product I've seen on the shelves will not make it eventually to Wal-Mart?

I really -- Linda, I have to say I don't know.

We have devoted over the last decade or more our driving our business to personally oriented products, and we have found worldwide among 6 billion people that a personally oriented product is less subject to price competition than one that is very personal oriented.

This is one of those.

If -- and I said in the last conference call -- if it turns out that people are willing to pay, you know, half or a quarter for private label then it's not going to be a business that will be a good long-term business for us.

But as I said, you may have been cut off before I said this, this is 100 or maybe 200 million right now on a worldwide basis of 10 billion.

It's a very important new product, it's very exciting and doing very well, but at the same time, we are not going to compete on a price basis -- –[inaudible]

Okay, and maybe I missed it earlier, but did you say at any point how much of north American volume in sales growth was due to simply white, both of the products?

I didn't, but I -- let me -- I don't have that specific number, but this was more than half of the growth of the positive inches that was in the growth, came from other things, other than simply white.

As a matter of fact, if you want me to, I can give you -- let me look for that.

On a worldwide basis, again, in this concept of moving our business towards the more important businesses for us, and the ones that have higher margins and the ones that are less subject to price erosion, in the first half, a worldwide oral business, oral care business increased 8%.

Our personal and home businesses which are high priority but lower priority than oral, grew about 4%, and our detergent businesses grew a negative 1% or declined by 1%.

So that when we talk about the volume gains that we got in the first half, it's a composite figure that the core businesses that we are interested in are growing faster.

So that's worldwide.

In North America, it was even greater than that. detergents were down 12 nf percent, and tooth paste, oral care in general was up over 10%.

Okay?

Okay, thanks a lot.

Thanks, Linda.

We'll take our next question from Neil [Goldman] with State Street Global Advisors.

Please go ahead.

Thanks, a really quick question.

I want to be sure I heard this right.

I think I heard Bina said the rolling Simply Whiteout in China, did I hear that right?

You're going to be in the third quarter?

You heard it right.

Is there enough -- stupid American question, but is there enough per capita income in china at this point to really support this type of product?

Yeah, per capita income is a dangerous concept.

I mean, we use it all the time, but it's still dangerous, in that you're not trying to sell it to per capita.

You're not trying to sell a product like that, I don't think so to the 1.2 billion people in China.

You're probably trying to sell it to, say, the equivalent of the population of France or Germany or -- which are the people in the top two or three percent income bracket that do have the disposable income to buy it, and we've done a considerable amount of testing there and it would appear very clear that there are a large -- absolute number, small number relatively because they have an enormous population, of people who say they are inclined to and when given the product swear by it.

So we shall see.

Again, I doubt if it'll be in every home in China.

It will not be in every home in Mexico or every home in the United States for that matter, but all of the testing indicates that it will be a good business and that is a big of a larger new product and we'll keep our volume going and keep our margins going and as I say –[inaudible]

Of your multinational competitors in oral care that are in china, if memory serves, I don't think any of them have a scam simply white or whitening product, am I right?

That's right.

None of them are the market lead leader in tooth paste either, as we are.

Thank you.

We have a follow-up question from Amy Chasen with Goldman Sachs.

Go head, please.

Two questions on currency.

First of all, can you tell us what the EPS benefit from currency was in the quarter?

You know, net of the incremental spending that you did, and then secondly, what your expectations are for the FX impact on sales in the third and fourth quarters quarters?

My recollection and we're checking this now, but I think it's 1 cent or slightly less than 1 cent, because basically what happened was as you know, the currencies were down, in Latin America were down 17%, the euro was up 17%, and then the miscellaneous -- in all of those countries were strong, and therefore, the net result was quite small, less 1 cent or less less.

Which is great, because we would would -- I mean historically it cost us 7, 8 cents, but for the fact that it's a slight positive is good.

For the rest of the year, let me read you, if I could, second quarter was as you heard, a positive slightly more than a percent, 1%.

Not to be confused with the 1 cent, but currencies were up 1%, totally in the second quarter.

Third quarter we expect currencies to be up about a percent and a half, and the same thing in the fourth quarter.

Now, that includes the euro, for example, at 113 in the third quarter and what it's worth today, 113 and a half.

And 114 in the fourth quarter, but it assumes Venezuela devaluing in the fourth quarter and who knows what will happen there.

Okay?

Yeah, thank you.

Good, thanks Amy.

We have a follow-up from Carol Wilke with Merrill Lynch.

Go head, please.

It's quick, I promise.

For the Hill's profit for the second half of the year, you said it is expected to be up double digit again.

You've got either pretty tough comps for the second half of the year.

Was the big media program that was mentioned in the opening dialogue sort of a one-quarter, a lot higher than it would be in the second half of the year?

I guess in a nutshell, what's going to make the profit go back to double digit growth when you've got mid-teens comps again in the second half of the year.

Well, but don't forget, even though it happened to be modest, you know, 5, 6, 7% in whatever terse in the second quarter, it was up -- I don't know if we gave the figure up, but very strongly in the first quarter, so the first half eyeballing is in the high teens totally.

And the second half, it's going to be over 10% as well, just on a normalized basis.

And it's tough to -- operating profit in a division by quarter is tough, because it depends where a big coupon drops or -- you but Hill's remains enormously profitable.

Their gross profit was in both the first and second quarter up over 150 basis points and that's expected to for the whole year it's expected to be up well over 100.

Business is good at Hill's.

Thank you.

Thanks, Carol.

Our final question comes as a follow-up from William Schmitt at Deutsche Bank.

It's Andrew again.

Reuben, I want to let you know, I do believe you did say $250 million for simply white because most of us have it in our notes, but I was wondering more particularly.

Oh, eventually $250?

It may have been -- I can't imagine because our estimates were never for the U.S. and over overseas were never near $250.

Then I apologize.

I didn't hear the qualifier that one day it'll be $250.

Could have been, but --

Okay.

Can you give us an understanding understanding, if you could separate the pricing from the pure consumer and trade and couponing?

What was list pricing for example in the U.S.?

I assume it was 0, and I'm trying to get a feel for the other part.

Say that again.

Can you separate the pure list pricing from that new line- line-item pricing, coupons, consumer and trade incentives for North America?

I can't do that right here.

We can -- are we -- no changes in list of the price -- no changes in list price.

If that's the question, that's the answer.

That's the question.

That's a good answer.

All right.

Thanks.

Thanks, Andrew, appreciate it it.

There are no further questions in the queue.

Thank you very much.

Appreciate it.

We'll continue our endeavor to generate the cash EPS and thanks very much for your attention.

Bye-bye.

Thank you.

Again, that does conclude today today's conference call.

We appreciate your participation participation.

You may now disconnect your phone lines.