高露潔 (CL) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Colgate-Palmolive Company second quarter 2007 earnings conference call.

Today's call is being recorded and is being simulcast live at www.colgate.com.

Just as a reminder, there may be a slight delay before the question-and-answer session begins due to the Web simulcast.

And now at this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Ms.

Bina Thompson.

Please go ahead.

Thank you, Dustin, and good morning, everybody.

And welcome to our second quarter earnings release conference call.

With me this morning are Ian Cook, President and CEO; Steve Patrick, CFO; Dennis Hickey, Corporate Controller; and Ed Filusch, Treasurer.

We will discuss the results for the second quarter this morning, excluding charges related to the 2004 restructuring program.

The reported GAAP results, with reconciliations to the results excluding restructuring charges, are included in the press release and the accompanying financial statements, and are posted on the Investor Relations page of our website at www.colgate.com.

Comments about expectations will also exclude restructuring charges.

And during the Q&A we will answer any questions including or excluding these items as you may wish.

We're certainly pleased with our results for the second quarter.

It is clear that our global strategy of winning on the ground is being successfully implemented.

Our restructuring and business building program is on track.

The savings generated from that program combined with our ongoing Funding the Growth Program are allowing us to support our business with meaningful advertising increases in every region of the world.

In addition, we are beginning to see the benefits from our global implementation of Colgate Business Planning in the form of both volume and margin.

As a result, in the quarter excellent momentum continued across all our businesses and throughout the P&L.

Sales and volume were strong, our 100 basis point gross margin improvement funded a significant increase in advertising, and our earnings increased double-digit.

Looking at the balance sheet as well as the income statement, most financial ratios are moving in the right direction.

Working capital declined, cash generation was excellent, and our return on capital increased nicely.

Our focus on the core categories of oral care and personal care is achieving strong volume growth of over 12% and 8% respectively, ahead of our overall target of 5% to 8%.

So let's turn to the divisions, starting with North America.

Our business in North America is very solid, with volume ex-divested businesses up 4.5%, which is on top of 8% growth in the year ago period.

The restructuring activities which we initiated here in North America are beginning to pay off, and are reflected in excellent gross margin growth, well above the 100 basis points for the Company as a whole.

We are achieving exceptionally good growth in toothpaste, up almost 8% behind the new two super premium products, Colgate Total Advanced Clean toothpaste and Max Fresh BURST toothpaste.

Colgate Total Advanced Clean toothpaste, launched late in the first quarter, is showing an excellent repeat purchase rate.

Brooke Shield's third commercial with Total has helped drive consumer awareness and trial, and we continue to reinforce consumer advertising with an integrated marketing communication, in-store activities which leveraged loyalty card programs, and in-store TV.

And in addition, we are also reaching consumers through our focus on dental professionals with a very strong dental detailing effort.

In the manual toothbrush category, we launched the Colgate 360 Degree Sensitive toothbrush this quarter, which has helped increase our market share and positions us as the only major manufacturer with positive growth in this category.

In the second half we expect to reach full distribution in a major club retailer, which should help maintain the excellent momentum.

In the fabric softener category, our Suavitel brand reached record shares as measured by AC Nielson, growing 1.7 points to 13.1% in the general market, and up 3.7 points to 36% in the Hispanic market.

Our third quarter launch of Suavitel Aroma Sensations should help continue this strong performance.

So looking ahead, volume in North America is expected to increase mid single-digits for the balance of the year, with operating profit up double-digit and as a percent of sales.

Turning to Europe/South Pacific.

The very strong volume growth throughout this region is a result of our accelerated business momentum and improving macroeconomics, strong GDP growth combined with a reduction in unemployment and rising consumer confidence.

In addition, our new product activity has helped grow share across categories.

Our regional toothpaste share is at 36.7 year-to-date, up 70 basis points from the year-ago period.

In manual toothbrushes, we have taken market leadership with a 21.1% share, up 70 basis points from the year ago period as well, and the highest toothbrush share ever achieved through the region.

In liquid body cleansing, we have now taken market leadership on a year-to-date basis, with an overall share of 13.6%.

Solid growth in the Western European region has contributed to these strong results.

In bar soaps, our share for the month of May was the highest since 2003 and is up almost a full point on the year-to-date basis, with share increases in 15 of our 19 tracked markets.

And in liquid cleaners, we have maintained our leadership position, widening the gap with our nearest competitor in the most recent period.

Looking ahead, volume is Europe is expected to grow mid single-digit for the balance of the year, with operating profit growing high single-digits.

Turning, then, to Latin America.

The good momentum we have seen in the Latin American business over the past few quarters is continuing and is also benefiting from generally healthy economies enjoying good GDP growth.

As elsewhere, we have launched new products across our categories which have helped to increase volume and market shares.

On a regional basis, we have gained market share in toothpaste, toothbrushes, mouthwash, deodorant, bar soaps, liquid soaps, fabric softeners, dish liquid and all-purpose cleaners.

In Mexico, where volume increased 8% in the quarter, we launched Colgate Total Professional Clean toothpaste, which has already achieved a 1.7% share of the market.

This is a good example of our successful strategy of moving consumers to more premium products across categories.

Our overall toothpaste share in Mexico is up almost 3 points on a year-to-date basis to 83.2%, with an 83.5% share in the most recent period.

Mexico had market share gains in every other category, as well.

Toothbrushes, bar soaps, shampoo, deodorant, fabric conditioners, dish liquid and all-purpose cleaners.

In Brazil, where volume increased over 20%, toothpaste market shares are up over 2 points on a year-to-date basis.

In toothbrushes, with the continued success of Colgate 360 Degree toothbrush, our market share is up over 4 points, with a record high share in the latest period.

Another category in Brazil where we have made great progress is mouthwash.

We recently launched two new products, Plax Alcohol Free and Plax Ice, which have helped us to halve the gap with the market leader to 10 points versus 20 points in 2006.

So we're now a strong number two, approaching a 30% share of the market.

Consistent with our strategy to prioritize oral care and other high-margin categories, we have now established market leadership both in Brazil and Venezuela in liquid body cleansing, and see further opportunity in that category going forward.

So looking ahead, we expect Latin American volume to increase high single-digit for the balance of the year, accompanied by double-digit operating profit growth.

Greater Asia/Africa, excellent momentum continues in this region, as well.

We are particularly pleased with our robust results in greater China, where volume increased 20% and the overall business continues to strengthen.

Consistent with our strategy to provide innovation to the consumer in both the premium and low-price segments, Max White toothpaste was launched in June, following the launch of our lower-priced whitening toothpaste in February of this year, and a lower-priced anti-cavity toothpaste at the end of last year.

And as a result, our toothpaste market share in China in the second quarter was up over a point.

Our toothbrush business in China is also doing well, following a similar strategy of new product offerings across price points, Colgate 360 Degree toothbrush at the high end, and Twister Fresh toothbrush at a lower price.

Our market shares are up 230 basis points on a year-to-date basis to 35.5%, firmly reinforcing our market leadership position.

India enjoyed another good quarter with solid volume growth.

Both our toothpaste and toothbrush shares increased.

And also during the quarter, Colgate was ranked number one as India's most trusted brand across all categories for an unprecedented fourth consecutive year in Brand Equity's most trusted brand survey.

And Russia continues its excellent performance with strong double-digit volume growth.

Our toothpaste market share is now over 33%, up 3.6 points from the year-ago period, and our manual toothbrush share is at 45.6%, up almost 5 points.

And shares increased on a year-to-date basis, as well, in bar soaps, shower gels and hair care.

Looking ahead, volume in greater Asia/Africa is expected to grow high single-digit in the second half, with operating profit growing double-digit.

And finally, turning to Hill's.

Hill's continues to perform solidly despite rising commodity costs and the industry-wide pet food recall earlier this year.

Volume and consumption remains strong, despite price increases taken to offset increases in commodity cost.

In the U.S., consumption growth at our largest accounts remains healthy.

And this has been driven by successful consumer promotions, in and out of store activities, and a strong sales focus behind Science Diet Lamb and Rice, Large Breed and Small Bites Canine Diets, as well as Indoor and Light Feline Diets, and an ongoing focus on supporting veterinary professionals.

As we told you on our first quarter conference call, we have continued to conduct research to measure the effect of the recall on our business, most recently in May and June.

Hill's remains the clear leader among vets as reflected by brand recommendation levels.

The Hill's brand vet endorsement rate for healthy pets in June was 76%, an increase of 9% from April.

The Hill's brand vet endorsement rate for sick pets in June was 83%, increase of 6% from April.

And most importantly, this has resulted in increased market shares in both the pet and vet channels.

Our international growth was strong, as well, with market share gains being achieved in Italy, France, and the UK.

And in Russia, we continue to increase distribution, resulting in very strong volume growth.

So looking ahead for Hill's, we expect volume to continue its solid mid single-digit growth.

Operating profit is expected to grow double-digit for the balance of the year.

So in summary, we are extremely pleased with our strong momentum in 2007.

Our solid second quarter results reflect the ongoing success of our four strategic initiatives, getting closer to the consumer, the customer, and the profession, being more efficient and effective in everything we do, continuing to deliver innovative new products around the world, and building a strong team of leaders for today and tomorrow.

So we look forward to sharing our continued progress throughout the balance of the year.

So now, Dustin, that's the end of my prepared remarks.

If we could turn it over, open it up to Q&A.

(OPERATOR INSTRUCTIONS) Ali Dibadj, Sanford Bernstein.

A couple of questions.

The first one is just to dig a little bit deeper on Latin America.

It looks like good volume results there.

But it looks like operating margins were down about 100 basis points year-on-year.

And I guess - tell me if this is wrong - but I guess that that's mainly from increased advertising in the region to keep the volumes up, particularly as reports of slowing growth come through from other retailers in the region.

How should we think about that?

Is that kind of a one-time thing?

Is there innovation that was driving that decline, an increase in advertising?

Is that something that we should think about going forward in terms of the new margin progression for the region?

Just some more detail there would be helpful.

Ali, good morning, it's Ian.

Hi, Ian.

Let me try and answer the question.

To your first point, the answer is yes.

It reflects an increase in advertising investment, which is partly driven by the timing of product activity in the region.

So that would be the first answer.

Relative to your second comment in terms of effect on operating profit, out in time, given the slow down in some retailers, I assume having read your note, that that's particularly driven by your comments on Mexico and the slowdown there.

Yes.

And the answer to that, I would say, is first of all, our Mexican business volume was up 8%-plus in the quarter.

And whilst as you know, I can't get in to the detail of Walmex numbers, neither ours nor theirs, suffice it to say that our categories in that retailer are growing high single-digits, and we are outpacing the growth in all categories in that retailer.

So for our businesses, we are not seeing that kind of a slowdown.

And to your third point, in terms of how we should think about operating profit going forward, given the volume response we have seen to our increased advertising investment, particularly in this region, we will continue to maintain a healthy rate of double-digit advertising growth, but sequentially expect our operating profit ratio to sales to increase, and for the year will be up.

Okay.

Okay.

That's really helpful.

And it's good news then that you are not seeing any of the declines in volumes, as other people have seen in some those major retailers.

That's good.

How much of that, just for kicks, is -- are you seeing in terms of inflation versus not?

Is there any way to quantify that or think about that?

Because certainly their report in Mexico, certainly they have to pull some of those numbers out.

Is there any way to think about that?

Certainly I don't have that to hand, Ali.

We haven't teased out that level of detail.

Okay.

Switching gears a little bit to North America volumes on the flip side.

Those were lower than at least we had expected, and just wanted to get a sense of whether that is kind of one time issues that you feel are from counterfeit toothpaste, is it related to possibly declines in personal care, which is at least what we had seen in the all-channel perspective, or at least all-channel estimates that we have out?

Or is it something else?

Just some more detail there would be quite helpful.

Yes, I think responding to North America, obviously for the six months, we're actually quite pleased with the 6.5% volume progress there, and we fully expect for the full year that we will be in a 5% to 7% range for North America.

And we feel that for a variety of reasons.

First, the new products that we already have just brought to the marketplace, Bina mentioned a couple of them in oral care.

They have already begun to build share and we believe the trial opportunity remains over the balance of the year.

You saw we took our advertising levels up to build that trial, and the repeat for the Total Advance Clean is the highest repeat number we have for a total variant.

So we feel good about that.

We also feel good about the product activity we have yet to come, particularly in personal care in the third quarter.

And finally, on the promotion side, as you have commented before, we have seen some share progress from our leading competitor, largely related to heightened promotional activity.

And as we said on the last call, we have now matched that activity, and are bringing it to the marketplace, but it will have its majority of impact in the second half of the year.

And I would say that factored into our estimate with EBIT still -- operating profit still up, that 100 plus basis points on the year.

So for those reasons, we feel good about that 5% to 7% volume for the balance of the year.

Okay.

Great.

If I could squeeze in one last one.

And that's just around kind of the gross margin savings and how that translates to SG&A.

So I mean, typically what we have heard from you all for a while is, expect half of our gross margin savings to go into advertising.

Clearly this quarter, it was basically all of it?

Is that again, a one-time thing?

Is that essentially a new paradigm we should think about going forward?

Or are you just kind of building a little bit of a cushion going forward?

How should we think about that?

Well, I think I would answer that, Ali, by focusing in on the advertising.

You are right, we have invested behind growing our businesses.

I think I would say that we will continue from an advertising point of view to invest at a double-digit rate of increase for the balance of the year in a way that we'll see our ratio to sales still above 11%.

But in terms of timing of activity, that rate of growth for the balance of the year will ebb somewhat.

Okay.

Very helpful.

Thanks very much.

Amy Chasen, Goldman Sachs.

So, two questions, first of all on mix.

I know that in Latin America you are very focused on improving your product mix and that that has contributed to margin expansion.

And in your press release you mentioned that as a strategic initiative.

Is this becoming a more widespread initiative within the organization?

In that historically you were focused on category mix, but now it seems like it is more at the product level?

I think, Amy, it's always been both.

Maybe we have focused our comments more on the category mix, but it has always been both.

Which is to say, clearly, increasing the mix of oral care, personal care, and pet nutrition is favorable, but very specifically within the personal care and oral care, traditional Colgate categories, it has always been part of our strategy to find value-added offerings that can carry a premium price and be accretive to the gross profit.

So it's no more aggressive now than it has ever been?

I would say in terms within the category, particularly in the developing parts of the world, it is slightly more aggressive, because we have been pleasantly surprised at the share progress of those premium products in those parts of the world.

So the value the consumers see and the benefit and the integrated marketing communications we put behind them, have seen very positive share return, so perhaps there is a little bit more focus there than there was historically.

Okay.

Great.

And then can you also just comment on CBP?

You made a comment that it's starting to help volume and margins.

Can you extrapolate on that a little bit more, and how you are thinking about the prior cost savings numbers that you gave us last quarter?

Yes, we continue to be quite buoyant on CBP.

As I think I have said before, we see this as a platform program for us going forward, and one that we will get better and better at.

By t the end of this year, we will have the CBP solution in place in countries accounting for about two-thirds of our Company sales, and we have conducted the training that goes behind that, and the cross-functional deep dive analytics that go with that.

I think we have said on the calls before that we would expect a benefit of about $50 million this year, and $100 million next year from CBP.

And I would comment that we are on track, if not slightly ahead of track on this year's number.

Great.

Thanks very much.

Bill Chappell, SunTrust Robinson Humphrey.

I guess first just going back to the last press release after first quarter results, you had said you were comfortable with the gross margin expansion being kind of the high end of the 75 to 125 basis point range.

And then in this press release, you said it would fall within the range.

Just wondered, is there any change in stance in kind of your view on oil prices moving up, or anything else we should be looking at?

Yes, Bill, let me just get to the right page here, and then I will answer the question.

The -- a few things to say.

Obviously, as you say, oil prices have risen.

Most recently around the $75 spot rate, and we have obviously seen some commodity price pressure on many of the Hill's raw materials.

I can say that those are factored into our latest estimate position for both businesses, and we do not expect any second half impact with the oil at $75.

All that being said, I would say that for the year, we will be within that 75 to 125 range, and I would say our estimate position would say we will be at the 100 to 125 end of that range.

So the higher end of the range for this year, notwithstanding the commodity and all price pressures.

Okay.

So you are still comfortable with the high end of the range?

I guess the second question would be, looking at the cash on the balance sheet, it's -- at over $500 million, as high as I can remember.

Any thoughts of what to do with that?

And also maybe talk about what share repurchases were done in the quarter and plans there?

Yes, let me talk about that, Bill.

In terms of share repurchase and i.e., the use of cash, we have year-to-date at acquisition cost purchased about 900 million shares, about $600 million.

And I would say our estimate for the year is a buyback of around $1.2 billion.

In other words, the same rate for the balance of the year, which would be about a 30% increase on the prior year share buyback of about 900 million.

Okay.

So cash should just normally flow through?

Or I mean, are -- any other uses of cash that you see right now?

Not extraordinary uses, Bill.

In traditional order of business, capital expenditure and such.

But not extraordinary.

Okay.

Thank you.

Chris Ferrara, Merrill Lynch.

It was clearly money well spent, but I wanted to ask about the robust rate of the ad increase again.

I think it was a little higher than we had expected.

And you made reference to timing, but I just want to confirm, is that why ad spending was up so significantly this quarter, another 80 basis points after maybe we would have expected a deceleration in ad spending growth?

Timing, Chris, yes.

And as I say, we will be maintaining a double-digit rate of growth for the balance of the year, but it will be at a lesser rate.

So then as you think out longer term, I guess, you guys have that 12% target that is set there, and I assume that's somewhat fluid.

But would it be reasonable to expect that that -- do you still think you'll see diminishing returns at a 12% rate?

Or do you think there's flexibility to be much higher than that in the longer term?

Never say never, Chris.

I think the first order of business is that you could, I think reasonably expect to see us continue to move towards that ratio out in time.

I think we talked about that 12% level for 2008.

And then we would revisit from our subsidiaries up, as we always do, what the appropriate way would be to invest behind the business, and define a position then.

Okay.

And just on the new product pipeline, it seems pretty robust, at least the way you guys have laid it out, at least with respect to the volume of new products coming on.

Is that right?

I mean, are you launching a greater number of new products than you were say, on average over the last five years?

And if so, R&D spending doesn't seem to have spike much.

So could you just talk a little bit about whether that's true, and whether we're at a particular peak right now, or its a sustainable sort of pace?

I don't think we're at a particular peak.

I think we have always had a sustainability to our pacing of new product introductions.

I mean, in the end, there's only physically so much one can sensibly execute.

And even though after we launch a product, we are all onto talking about the next product, we are still in the business of building trial for those products over a period of two to three years.

So there is a natural level that you can accommodate in any operating unit.

That being said, as I have said before, we are focused very much on trying to increase the quality and scale of the new product entries that we have, and we have been quite pleased with some of the more recent entries.

I talked about Total Advanced Fresh, the Palmolive Scrub Buster, the Irish Spring Body Wash here in the United States.

And even the one I mentioned on the previous call in response to a question, that Total Professional Weekly Clean that we have at a significant premium price in test in the UK and Australia, up to a 3.5 share with good trial, the proof will be in the repeat for that additional brushing.

But I would say no peak, sustainability of product activity that we are seeing in shares and volume.

And with the staffing and the focus we have on long-term innovation and intention to try and give ourselves a better chance of having more scale innovation.

Great.

Thanks a lot.

Wendy Nicholson, Citigroup Investment Research.

Two questions.

First, could you give us our outlook for currency?

I mean, the currency impact on the top line this quarter was a lot better than I had been looking for, and that's great.

But what are you looking for the back half?

Just start with that, please.

Yes, in our forecast for the back half, we have a 2% to 3% pickup from currency, but knowing us, that may be a tad conservative.

And that's primarily coming from Latin America and Europe?

That is primarily coming from Latin America, Europe, and a little bit from Asia, as well.

Okay.

All right.

Terrific.

Thank you.

My second question has to do with the SG&A line.

As a percentage of revenue, we continue to see that line creep up.

I mean, it was only up 10 basis points I think in the second quarter, so that's not a big deal.

But even if I look at it over the longer term, last couple of years, that number has continued to creep up a little bit.

And I guess that surprises me, because with the restructuring program and things like moving to the regional hubs in Latin America, I would have thought that at least the overhead component of SG&A would have been coming down.

So can you explain what is in SG&A that continues to go up as a percentage of sales?

And is there a level at which we start to see that flatten out, or even come down with the benefit of that restructuring?

The -- yes.

If you look at the breakout on the SG&A, the real swing factor is the advertising, of course.

But even if I take out the advertising, and that's the thing that I guess is most curious to me, is I think you are talking about more operating margin expansion in the back half.

But it sounds like that's coming from less advertising spending, as opposed to overhead savings.

Yes.

If I look at overheads year-on-year, the overhead piece of the SG&A, the second quarter is down slightly on the full year last year, and it looks like it's going to be about flat year-on-year.

You probably know, Wendy, that of course, freight and warehousing is in that SG&A number, and we have seen something like a 20 basis points increase in freight year-on-year because of the petroleum-based fuel surcharges.

So that's probably going to be a bit of a drag, which is what we're seeing in the number.

Okay.

Interesting.

Okay.

And you expect that to continue in the back half?

Yes.

I would think.

Okay.

Thank you very much.

Bill Pecoriello, Morgan Stanley.

First question was on the restructuring savings program, and how much you estimate you've realized through the end of the second quarter?

And then within the quarter, how much that contributed on the gross margin versus funding the growth, et cetera?

Let me do two separate things here.

Let me first go through the gross profit reconciliation to give you that.

And then let me come back to the restructuring in its entirety.

Is that okay?

Perfect.

So in the normal fashion, prior year second quarter gross profit was 56.1%, as you know.

So if I track you through the roll forward, you pick up a positive 30 basis points on pricing.

You pick up a positive 70 on the restructuring.

120 -- 1.2 points on our traditional Funding the Growth savings, offset by negative material price of 160 basis points.

So a net savings there of plus 30.

And then you have all of the other changes, divestments, et cetera, which takes you to the 57.1, which is the 100 basis points increase year-on-year.

So of that, 70 was restructuring.

I think one observational point on that is, is that the -- if you look at the breakdown of that gross profit, in fact the basis points expansion on the traditional Colgate business was actually up 135 basis points.

The drag being the short-term impact of the Hill's commodity cost increases.

But restructuring was 70 basis points.

If I come back to the restructuring program in total, obviously now we have with our expanded program for the full life of the program, charges of 675 to 775 after tax, and savings in the 300 to 350 range.

If I look at -- let me get the -- if I look at the savings for the year, we expect this year savings from the restructuring program in the 100 to 105 zone for the full year, and in the quarter, we picked up about 20 million to 24 million.

Okay.

Perfect.

I just had one follow-up on CBP.

From the learnings in Mexico, as you continue to go through this iterative process that you described, once you have it in the market, are there any additional earnings you are getting there that are in terms of what the longer term benefits will be after you roll it out around the world?

You said you would be in two-thirds by the end of the year, but Mexico, where it has been additional earnings.

I think you get two additional things, Bill.

And I would have to say the second of them is soft.

The first is that you become better as teams on the ground identifying promotional activity that is better performing.

So the focus of the interrogation of the data turns to what are the promotional techniques we can use that are better than the ones we have had in the past, rather than starting just with the analysis of what is less efficient and turn more to what is more productive.

And the second is that it starts to bring together the various functions within the Company to better improve your planning going forward, because it brings together sales, marketing, administration, and supply chain with that 18-month planning horizon, which just gets you better alignment.

Perfect.

Thanks.

Linda Bolton Weiser, Oppenheimer.

Actually, getting back to the Hill's business.

I believe it looks like the margin -- the operating margin at Hill's was actually up year-over-year.

Can you just explain how that happened given the commodity cost pressures?

Did you cut back a little on support spending or something there?

One second, Linda.

The Hill's operating margin modestly up, basically flat quarter on quarter, flat with the prior -- the prior quarter.

I'm just trying to pull out the detail of the Hill's P&L.

The primary factor, Linda, I've just got it.

The primary factor is that the overheads in the Hill's business were down 80 basis points.

So that's what allowed for the modest increase in operating profit.

Okay.

And just shifting to the issue of North America and your toothpaste business, can you give us some commentary on how you think the counterfeit toothpaste situation might have affected your brand?

Have you done any consumer testing after that?

And also can you talk about if there's any special cost in the quarter related to collecting the counterfeit product?

We have, as you would expect, done considerable analysis on that, Linda, both with the consumer and at the retail level.

The first thing to say is that the impact on the business is vanishingly small.

I think we could trace something like $100,000 of business loss in the dollar-type stores, which is, if you were going to say anything logical, given the nature of the stores that the counterfeit product was discovered in.

So impact on the business absolutely negligible.

Some consumer awareness, but not at elevated levels.

And as the publicity on this has receded, I think it ties back to the negligible impact on the business.

We are obviously a lot closer than the general consumer.

And what we did very speedily, even though of course it is not our product and we do not in anyway sell it, we conducted a pickup of the product in all of those regions where we knew it had been discovered.

But again, the costs of that were very, very modest, less than $0.5 million.

So we have done all of those things.

We worked very hard to put the right kind of communication on our website, so that people understand the difference between a genuine toothpaste and the counterfeit toothpaste.

And obviously, we're working very closely with the various administrations in the United States to try and work back through the distribution channels and get at the root source of this, and try and stop it.

Okay.

Great.

And finally, it's been interesting to see the success you have had with bringing Suavitel into the U.S.

market.

Are there any opportunities -- other opportunities you see to bring other brands or products from other geographies, from Latin America to fit into the Hispanic market in the U.S.?

We also -- we talk about Suavitel.

We also brought up another product from Mexico in Latin America, and that is Fabuloso, which is a highly fragranced, light-duty household cleaning product, which has done very, very well, similarly in the United States.

I would say those are our two points of focus right now.

But we continue to assess other opportunities over time, but no immediate plans.

Okay.

And just one final thing in terms of capital structure.

It's been interesting to see several companies in the sector take sort of leveraging-up actions by increasing share repurchase and increasing debt levels.

You could argue that your balance sheet is underleveraged, as well.

Your leverage ratio is low, your interest coverage ratio is high.

Have you taken that into consideration as a possible action to create shareholder value?

Well, I think two things to say.

One, I had made the point a little bit earlier that in fact, we are this year taking our share buyback up a fairly meaningful 35%.

We also took our dividend up in the second quarter, and we continue to discuss internally and look at the notion of leverage.

Given the current market conditions, I think we're going to wait a little bit, continue our analysis, and make a determination at a later date.

Okay.

Thank you very much.

Bill Schmitz, Deutsche Bank.

Ian, I know it's kind of an elephant in the room, and you probably won't comment on it.

But do you know where these Unilever rumors came from?

No.

That's it, huh?

Just no?

Sorry?

Just no?

Just no.

I mean the first thing I would say is, we don't comment on those kind of rumors.

I mean, given the nature of them, I would go on to say that there are absolutely no conversations now with Unilever on any M&A activity.

And you well know our acquisition strategy and parameters from before, and they remain the same.

Okay.

Great.

And then can you just talk about the pricing environment in Europe?

Because it looks like it was recovering, and now it's negative again.

And also, are there mix implications on the margin side from growing the body wash business there?

The body wash margin for us is favorable.

So it's one of the higher personal care margins.

Pricing in Europe, we -- hold on a second here.

We were quite pleased, yes, pricing turned slightly negative, again in Europe.

But obviously the growth of the business was quite solid, and we saw in the second quarter an expansion in gross profit.

So in those markets we are going to have to balance our pricing strategies to deal with both the market dynamics and our competitors, and manage between that and the bottom line, which is what we think we're doing reasonably well.

Okay.

Good.

And then you said advertising was up 22%, but you used to give this number total commercial spending.

What was that up year-over-year?

I'm looking around the room here, because I don't have it in front of me.

Okay.

Bill, I think we're going to have to get back to you separately on that.

It doesn't appear to be sitting on the table.

Okay then.

Okay.

Great.

And then just one last one.

On the segment detail for the unallocated overhead, every quarter now, at least the last two quarters it has actually increased pretty sizably, even including charges year-over-year.

Could you explain what is going on there with that number?

Yes, Bill, this is Steve Patrick.

Let me try to explain it.

As you may recall when we announced our 2004 restructuring program, we said we were going to bring certain functions into corporate more than they have been before as part of our global supply chain, as part of our global purchasing, et cetera.

And we've also pulled in the research centers which are overseas onto the corporate books, so we can take total control.

That's all of the increase.

That's 20 to 30 basis points increase.

And the only other change over the last two years has been the 60 to 70 basis points increase that came on as a result of the change on FAS 123R.

And so these are as-planned, and you should -- the levels we are at now, should continue as a percent of sales going forward.

Okay, got you.

This happened in 2006, right, when you did the sort of change over at some of the R&D centers?

But it looks like even now year-over-year, you've got some -- ?

Actually, with the R&D centers started January 1, 2007.

Okay.

Great.

That makes a lot more sense.

And then tax rate, Steve, while I have you on the phone, it looks like it creeped up a little bit.

Is this the rate for the rest of the year?

Or is this a one-quarter blip?

Actually it's 32%, which is the same as it has been every quarter if you back out the restructuring.

The restructuring creates some volatility in the tax rate.

And I'm also backing out the positive in the first quarter as a result of the tax reserve reversal that we had in Brazil.

But tax rate on an apples-to-apples basis on the business as we reported excluding the one-time items is 32% year-to-date and was 32% last year.

That's perfect.

Thank you so much.

Justin Hott, Bear Stearns.

First question, can you update us a little bit on your view on the pricing environment in the U.S., and the consumer's ability to take more pricing, and how it would affect your categories?

The -- well in terms of pricing environment in the U.S., for the majority of categories it is a function of premium mix.

And we're certainly seeing no slowdown in the consumer purchasing of products.

And on the Hill's business, we took, I think a 5.7% price increase generally in the second quarter.

That of course, is just working its way in to the marketplace.

But the general cash outlay for our products, Justin, is relatively modest in terms of the overall shopping basket.

So we haven't historically seen a significant impact in terms of category growth rates.

Okay.

And maybe if we could quantify a little bit better.

Up with thing I'm trying to understand is some of the biggest opportunities for cost savings and working capital going forward.

Can you give, either with or without the Colgate Business Planning?

Just in terms of working capital?

Working capital and cost savings in general, as well.

Well, I think obviously in the working capital area, a particular focus going forward is in the area of inventory, whereas you know we have purposely elevated our inventory levels, both as a percentage of sales and days covered, naturally enough.

And that has been to do with supporting business transitions as we have closed down factories and established new more efficient factories.

And we expect that by the end of this year, and moving in to 2008, that our inventory levels will be back to the 2006 levels.

So that clearly is a very important transitional area of focus.

In terms of the other areas of cost opportunity, we're focused across the board.

We -- both in terms of raw and packing material, both in terms of conversion costs, both in terms of services that we provide to our subsidiaries from global or regional centers, and as we have discussed before, the whole area of indirect expenditure, stuff that doesn't go into the product.

And we have initiatives underway in all of these areas, and would envisage benefits out in time across that array of opportunities.

Okay.

And one last question.

Can you give us some more color on what's -- why the strong volume growth in China?

What channels, maybe if it's come with any -- if this is part of the premium product strategy as well, too, or if it's greater distribution?

Well, China is pleasing progress, indeed.

I think it traces to a few things.

First, as you suggest, Justin, is product activity.

And we have activity in both segments of the marketplace, premium and the entry price point.

And as Bina had mentioned, market share responded in the second quarter, clearly volume responded ahead of that.

So part of it is product activity.

I think part of it is the focus we are putting in improving our visibility at retail, particularly in the B, C, D cities where we have a very focused and expanded effort working from region to region, and obviously taking full advantage of the 1.7 million points of distribution that we have in China.

So it's a combination of product activity, distribution depth, and better quality of in-store visibility, merchandising, and promotion.

And can you talk a little bit about your relative share there versus your largest competitors?

I can.

I know in the second quarter, our share -- if we take the second quarter share, then, Justin?

Yes.

Second quarter share, Colgate was just over 32.

Second quarter share for our leading competitor was just under 24.

And then the second major competitor, which is Unilever with the acquired Zhonghua brand is around 12%, and then it's all others.

So your share lead versus your competitors, is that expanding?

If I read that correctly?

We can do this -- .

Yes.

In the second quarter, yes.

Okay.

Thank you, Ian.

Lauren Lieberman, Lehman Brothers.

Great.

Thanks.

I just had one question remaining, and that was about GABA.

In the press release, I had noticed that you actually sited GABA as showing -- as being a big improvement and part of the driver for the European volume growth.

If you can just give an update on what has changed there?

If there's an inflexion point in that business?

Anything else you can share?

Yes, it continues to be a great business for us, Lauren.

We have seen a good sales growth across virtually all markets.

We have seen on a total European basis our market share continue to increase up 20 basis points to a 6.5% total Europe share year-to-date this year, with the most recent May share being ahead of that at 6.7%.

So a good progress in the home European markets, if you will.

Particularly strong growth in the expansion markets.

Italy would be the most obvious, where we now have about a 2% share in the general market in Italy, which was a new expansion market for GABA, while we continue to build share in the traditional pharmacy market.

I think we have two things going on.

One is growth in the base business, and the second is additional incremental share in the expansion markets outside the core European markets, Italy being the most recent, Poland continuing to do very, very well.

And all of that, bringing us back to something like a 23% year-to-date sales increase.

So it's the same model, just expanded.

What would -- I don't know if you have this number, what the share was for GABA across the same countries as you are measuring your total Europe when you bought the business?

It was about 6%.

Okay.

It's now up to 6.7% in the most recent reading.

Okay.

And then that 2% share in Italy, is that in measured outlets, so it does not include pharmacy?

Correct.

That's a mass market grocery share, yes.

Okay.

Great.

And then just finishing up on Europe.

Even in addition to this GABA growth -- or I guess I should say, is the 23% sales growth year-to-date, that is sort of consistent with the rate -- Q1 and Q2 were at a fairly consistent rate, it sounds like?

There wasn't a big acceleration in Q2?

There was actually a timing difference because of selling price increases.

So in fact, the years were kind of inverted in terms of growth rate.

So this year was stronger in the second quarter.

Okay.

Because still the overall -- the acceleration in Europe, it's pretty notable, even beyond the description that you and Bina both gave of the trends in Europe, it could have been the same script from another quarter where you had 3% volume growth rather than, whatever it was, 9%, 9.5%, excuse me.

So what else is there that maybe I'm not understanding for what drove this incredible acceleration?

Yes, we had broad activity in many of our major markets in Europe that the volume responded to.

So in France, for example, our first quarter growth rate was between 5.5% and 6% in the second quarter.

With the marketing and product activity we had, it went up to 8%.

The same in Germany from 4% to 8%.

So we saw some quite broad-based volume increases reflecting product activity and marketing activity in the marketplace having a response.

And our shares in Europe, in general, have been really quite positive this year, up not just as you might expect in toothpaste to the highest level ever, or manual toothbrushes where we have just taken leadership with the highest share ever.

But also, as Bina mentioned, strengthening our leadership in liquid body cleansing, highest share in shower, highest share in bath, highest share in bath soap, and maintaining our leadership position in cleaners.

So the product and marketing activity we have put in place in Europe seems to be driving market share, and in turn, the volumes we're seeing in the subsidiaries.

That's great.

I'm all set, actually.

Thanks so much.

Jason Gere, A.G.

Edwards.

Two questions.

One, just can you talk a little bit about Tom's of Maine, the global launch that you're planning?

And how big do you think this brand could be?

Yes, I don't really want to talk about the global launch we're planning.

But we are assessing where we would expand internationally.

As we have said before, we think that is a terrific opportunity, but one that we probably won't realize until next year.

And we will do it on a market by market basis, and we're just finalizing that right now.

So I would prefer not to spill the beans.

But we see very good signs for a natural offering, and we think Tom's, as we've said before, is transferable.

But I would rather not talk to specifics.

Okay.

And then just going back to I guess one of the earlier questions on North America, the volume versus the margin, the margin being much betterer, and the volume being a bit lighter than what you mentioned in the last conference call as the range.

Can you talk -- and I guess just kind of clarifying on the promotional spending.

It sounded like this quarter you were pulling back a little bit, but then as the summer -- I guess the September quarter plays in in matching I guess your competitor out there, that promotional spending will pick up a little bit more I guess over the next few quarters.

Can you just kind of -- I just wanted to make sure that I understand that correctly.

I think what I would say is that we -- trying to get to the right slide here.

Hold on a second.

I think you saw slightly positive price for North America in this quarter.

As the balance of the year unfolds, we think that's going to be flat to modestly positive, which will reflect the increased activity.

But as I said earlier, we expect the operating profit to be up north of that 100 basis points that we had talked about for the U.S.

this year.

And that in large part is driven by gains we will make in operating -- in gross profit, ahead of the Company average, largely driven by some of the restructuring activities that we have underway.

Okay.

And then with the volumes in the quarter, obviously the first quarter you had a very strong period.

So I mean, I guess is it fair to say that the pull back in some of the promotional spending, maybe there was a little bit more buying in on the first quarter, and that just may have trickled over to the second quarter?

But I mean your guidance of 5 to 7 for the full year certainly gives comfort that you are looking at that mid single-digit for the rest of the year, and as you were just mentioning about the pricing.

Certainly, if that's a little bit lighter, then I guess second quarter, then we should see an acceleration in volumes for the rest of the year.

I think the way I would say it is the underlying fundamentals in terms of product activity were effective.

We saw in the premium segment, share move with product.

The adjustments to our promotional activity, we didn't fully deploy in the second quarter, which you see in the price.

They will be fully deployed across the second half of the year.

Got you.

Thanks a lot.

Joe Altobello, CIBC World Markets.

First question is on 2008.

I guess it's still pretty early in the budgeting process, obviously.

But in today's release you talked about doing another 75 to 125 bips of gross margin expansion.

Given that assumption, are we looking at another year of $75 oil, or are you assuming that eases off a bit?

We haven't got there, Joe.

This is very early in our budget cycle.

We are literally just starting now.

Okay.

So it seems like given that you just gave us that number this morning, that you have pretty good comfort that you could do at least that number with the savings project you have in place.

We do.

Okay.

And then secondly in terms of the advertising spend, the incremental spend that we have seen the last couple of quarters, how does that compare to your traditional mix of advertising spend?

Is it more TV, is it more print, is it more alternative media?

The answer, Joe, candidly, is it depends.

It depends on the brand, and it depends on the geography.

In the developing world, there is still an enormous emphasis on traditional, let's say, media, which would be television, magazines and radio, because that's the way to reach the consumer in those geographies.

In the developed world, depending again on the brand and the messaging, you do see both experimentation and actual conversion to alternative media.

In the United States, for example, we are spending about 10% of our investment on Web-based communication with consumers, either because of the nature of the message, or the ability to target the consumer.

So it very much varies by geography and by brand.

But we are experimenting where we see the opportunity to be either more efficient or more effective in reaching the consumer.

Okay.

Perfect.

Thanks.

Alec Patterson, RCM.

Thanks for keeping the call going.

Ian, I wanted to drill down a little bit on the question Wendy had about non-advertising SG&A, and you highlighted shipping and handling up 20 basis points year-over-year, sort of suggesting kind of a mid-teens growth rate on that.

That still leaves the rest of SG&A, the G&A component up fairly strongly, and certainly uncharacteristically for Colgate.

And just trying to get a sense, are there other investment spending elements going on in SG&A that sort of doesn't cover the shipping, handling, and advertising area?

I think the only thing I could add is the point that Steve commented to a little bit earlier, and that is the incorporation of research and development in that area.

But beyond what we have said before, I don't have anything substantial to add.

I'm looking at Steve now.

I'm getting a shake of the head.

So nothing to add Alec.

Nothing to add.

Okay.

Maybe on the advertising, that's a component of media spend and I guess consumer-related marketing support.

How have those two been trending?

This 22% increase, is it predominantly advertising media increase, or is it evenly split sort of year-to-date?

Hold on a second here.

Media has been outpacing the consumer promotion.

So in that total growth, media is outpacing promotion.

And is there a general target of the 12% by fiscal '08 for advertising, roughly speaking where media might be as a share of that?

No, I think would be the answer.

We didn't goal it that way.

We tend -- as I answered the previous question, we tend to build both our advertising spend and the media we choose to invest it behind on a country and brand basis.

So there's no specific goal in terms of the mix between the two.

Okay.

Thanks very much.

John Faucher, JPMorgan.

Yes, my question has been answered.

Thank you.

Nik Modi, UBS.

Just a quick question, Ian, from a strategic standpoint.

When you look at your personal care portfolio, do you have any plans in place or are you testing kind of expanding into different areas of personal care?

Perhaps higher margin face, skin, dare I say even hair care?

Any thoughts on that?

I guess two answers, Nik.

First of all, we have, we think, some pretty exciting opportunities to geographically transfer categories that we already have today.

Underarm would be a very, very good example of high gross profit, generally large markets around the world, low barriers to entry, and quite fragmented, so you can build share.

And I think we've demonstrated that in several geographies around the world.

So we think there's opportunity in the businesses we already have.

But we do, for example, in terms of expanding from a personal care point of view, have a test underway right now in Mexico, which takes our personal care business into leave-on skin care lotions and creams.

We have about a 6% market share.

We're goaling a 10% market share.

It fits well with the equity.

It is a nice expansion category.

And if the test market is successful, I think you could expect to see us selectively and carefully expand that business.

So, yes, we are experimenting.

But we still think there's great opportunity in the categories that we have today.

And just a follow-on to that, Ian.

The Palmolive brand equity, and the Soft Soap brand equity, do you feel like that is extendable into the premium end of skin care?

Well, we've started to move -- I don't quite know what you mean by premium end.

If you mean cosmetics -- .

I mean just kind of the upper price thresholds at skin care, and face care, et cetera.

I think in the body cleansing area, the answer would be yes, we think we can move into the premium mass area, but not the high-end pharmacy or department store type pricing.

But, yes.

Excellent.

And then just a curious question.

Did you notice as the quarter progressed, perhaps in June, kind of a flood of promotional activity in some of your key territories from the competition?

I can't say I did, Nik.

Okay.

Great.

Thank you very much.

Alice Longley, Buckingham.

Okay.

Alice, this is the last question.

Ian, could you comment on the climate for consumer spending on non-durables in Russia and China?

And I'm talking broadly in 2007 versus 2006, is consumer spending on non-durables growing faster, slower, or at about the same rate in your opinion?

I hate to be stumped by the last question, but I have to say I don't have an answer to that at the tip of my fingertips, and nobody else does.

I know that our categories have, and continue to grow in that high single-digit range, but I don't have the data to answer the question, Alice.

We'll have to do that off line.

Okay.

But for your categories, the rates of growth have been fairly stable, you would say?

Yes.

Okay.

Thank you very much.

Dennis, I think we're going to end here for today.

Thank you very much.

I mean Dustin, sorry.

Okay.

Thanks, everybody, for joining the call.

Talk to you next quarter.

Again, that does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.