高露潔 (CL) 2008 Q1 法說會逐字稿

Welcome to today's Colgate-Palmolive Company first quarter 2008 earnings conference call.

This call is being recorded and is being simulcast live at www.colgate.com.

There may be a slight delay before the question-and-answer session begins due to the web simulcast.

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

Please go ahead.

Good morning, everybody, and welcome to our first 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 first quarter this morning, excluding charges relating to the 2004 restructuring program and certain other items in the first quarter for 2007.

The reported GAAP results with reconciliation to the results excluding the restructuring charges and other items in the first quarter of 2007 are included in the press release and the Company's 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.

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

We were very pleased with our first quarter results particularly given some of the external pressures that both we and our competition have been facing, the slowdown in the U.S.

economy and worldwide increases in raw material and commodity costs.

We continue to see that our global strategies, with which you are all familiar, are working.

Getting closer to the consumer, our customer, and the profession, effectiveness and efficiency in everything we do, innovation everywhere and a focus on developing our leaders of today and more importantly tomorrow.

We are delighted that a very strong top line has allowed us to continue to increase advertising by a meaningful amount, while at the same time delivering earnings per share ahead of our and your expectations.

Advertising was up both absolutely and as a percent of sales.

And that, along with our strong new product program, has resulted in increased market shares in many categories around the world.

As you would expect, the composition of our top line is consistent with our strategy of focus prioritization on high margin categories.

Oral care, personal care and pet nutrition volumes grew nicely, while our home care volume remained relatively flat.

So we expect volume and pricing increases to accelerate in coming quarters so we that we continue to feel comfortable with double digit EPS growth.

Clearly, the raw material and commodity cost environment is, as we said in our press release, unprecedented.

If you recall when we spoke to you in early February on our year end conference call, oil prices were than at about $90 a barrel.

We told you that although we budgeted $75, we had revisited our assumption and had a plan based on $90 which still allowed us to deliver gross profits within our targeted range.

Since then, oil prices have steadily and relentlessly climbed to the current level hovering near $120.

In addition, agricultural commodity costs in our Hill's business have increased over 30% on average from what we had projected year end 2007.

In fact, excluding the Hill's business, our gross margins were up 20 basis points for the quarter.

As you can see from our results, our ongoing Funding The Growth programs and other cost-saving initiatives are still strong and we have increased prices across our businesses to offset these increases.

Our implementation of Colgate business planning is continuing and is on track to deliver the $100 million savings we told you about on previous calls.

As with all areas of the P&L and the balance sheet we have a very disciplined process regarding pricing worldwide.

We have a very specific plan developed, the operating executive for each category worldwide works out a plan country by country and then makes sure that plan is implemented.

As a result, you see in the first quarter a price increase of 3%, the highest in a long time.

Importantly, despite this price increase, our volume worldwide increased solid mid single digits compared to the highest volume increase in 2007.

Some of our price increases have only been recently announced and will not take effect in the market for several months.

So while we expect gross margins to be relatively flat in the next quarter, we should see improvement in the back half 2008, and as Ian Cook mentioned in the press release, further improvement in 2009.

In addition to good results on the P&L, our after-tax operating cash flow is strong, up 17% year over year and our working capital has decreased to 0.8%.

That, coupled with excellent market shares around the world, gives us confidence that our businesses are really very healthy.

So let's turn to the divisions and look into that in a bit more detail.

Starting with North America, I know that there have been concerns regarding the health of the U.S.

economy, however, I am pleased to report our business grew nicely.

In fact, volume in the U.S.

alone increased almost 6% due to both good market share growth and category growth as well.

As previously noted, raw material cost increases affected our gross margins, however solid decreases in overhead expenses allowed us to increase advertising and still deliver an increased operating margin.

Market shares in the U.S.

are very healthy and as reported by ACNielsen, increased in eight out of 10 categories.

Our toothpaste share was up over 50 basis points year over year, with strong performance behind Colgate Total toothpaste as referenced in the press release.

Irish Spring bar soap reached its highest share ever at almost 12% and in the liquid hand soap category, our share reached its highest quarterly level in over a year-and-a-half behind successful new product introductions.

Our share performance in both African-American and Hispanic markets was good in the quarter as well.

For the Hispanic market, we've had for some time dedicated Hispanic TV, print and online creative with a famous Cuban-American journalist and TV show host as a spokesperson.

Just recently we signed on Holly Robinson Peete, an actress, author and radio personality to do the same for the African-American market.

Looking ahead, we expect volume in North America to increase mid single digits in the second quarter and full year.

Operating profit is expected to increase mid single digits in the second quarter and full year as well.

Turning to Latin America, our Latin American business continues to be very solid.

We saw higher increases in both sales and volume in the first quarter than the fourth quarter of 2007, indicating the continued momentum in this region.

Volume in Mexico and Brazil increased high single digits.

Other countries had good growth as well.

Of particular note, is a robust volume growth even after price increases of 6%, up from 2.4% for full year 2007, were implemented across the region.

Our toothpaste business remains strong.

In Mexico, our 85.4% share referenced in the press release includes a 17.3% share of Colgate Total.

Colgate Total Professional Clean was an important growth driver, as that variant alone now has 3.2% share.

In Brazil, we achieved a new record share at almost 70%, and this is an increase of 3.3 points over the year-ago period.

Brazil toothbrush shares reached a record as well, increasing almost three points year over year.

We told you last quarter about our successful progress in the mouthwash category.

We had achieved volume leadership in Brazil and value leadership in Argentina.

This quarter we achieved value leadership in Brazil as well with almost 40% of the market.

Two years ago, we had a gap of 20 share points between Colgate and the previous number-one competitor.

In Argentina we consolidated our number one position with a 10-point share gain year over year, to well over 50% of the market.

Our personal care businesses across the region are doing well also.

In bar soap, new products in both the Palmolive and Protex equities are doing very well.

In April of last year, Palmolive became the number one brand in Mexico and we have steadily been widening the gap between our nearest competitor with each successive share reading.

And in the first quarter of this year we launched a new line of deodorant with new forms in the spray and roll on, supported by a very powerful integrated marketing campaign and early results are quite promising.

Looking ahead we expect volume growth in Latin America at the first quarter level or higher for the second quarter and full year, an indication again of continued strong momentum in the region.

Operating profit is expected to grow double digits in the second quarter and full year as well.

Europe.

As with the U.S.

there has been some concern regarding the health of the European economy and its effects on consumer buying behavior.

In fact both the oral and personal care categories overall have shown consistent growth, similar and even ahead of some recent years.

For Colgate specifically, both oral and personal care volume was good in the quarter and we saw share gains in toothpaste, toothbrushes, mouthwash, shower gel, bath foams and bar soaps.

New products as always have helped grow market share.

Our overall Europe/South Pacific share of toothpaste is up to 35.1%, up almost half a point in this highly competitive market.

And our toothbrush share is up over half a point to 20.5% with the most recent lead at 21.1.

In the South Pacific alone, we reached over 70% of the toothpaste market, a new record.

That region set a record in its manual toothbrush shares as well.

We have seen good momentum in our shower gel business, fueled in part by some of the new products referenced in the press release.

Our market share for the region is up to 12.1% on a year-to-date basis with the 12.5% lead in the most recent period.

In fact, with the launch of Tahiti Pearl, a shower gel with innovative new packaging and premium pricing, our share is up almost a full point year over year.

So looking forward, volume in Europe should increase mid single digits in the second quarter and full year, slightly ahead of the first quarter.

Operating profit is expected to increase high single to double digits for the second quarter and full year.

Greater Asia/Africa, results in this region really were excellent.

Our overall toothpaste share is up year over year.

In addition to the strong performance in China mentioned in the press release, our toothpaste share in India is up 20 basis points approaching 50%.

We entered 2008 with good momentum in this country and that has continued with strong advertising support behind products such as Colgate Active soap, Colgate Max Fresh and our lower price brand, Cibaca.

In Russia, where we've maintained the number one position in toothpaste for almost a year with a share just over 33%, we have just launched our GABA products in the pharmacy.

As you know, the GABA model is to secure a strong share and presence in this panel before we introduce the whole system, toothpaste, toothbrushes and mouthwash for the mass market.

In the toothbrush category our share in India reached a high of 37%, up 220 basis points versus a year ago.

We launched Colgate's Super Flexible in November of last year and on the ground support and excellent in store and professional activities have sustained the momentum in the business.

Our toothbrush share in Russia reached a record 49.2%, up 340 basis points versus a year ago.

In the Philippines, our toothbrush share has increased every quarter for the past 11 quarters and this quarter reached almost 58%, up 780 basis points from the year-ago period.

In the shower gel segment, we've achieved shared leadership across the region.

In Russia, due to new products such as Palmolive Skin Essentials, we hold 29.4% of the market, up almost three full points from the prior year.

So looking ahead, we expect volume in Greater Asia/Africa to increase at first quarter levels for the second quarter and the full year.

Operating profits should increase double digits in the second quarter and full year.

And Hill's -- Hill's continued to grow consistently and solidly, even as we increased prices to offset rising commodity costs.

Operating profit grew strong double digits.

As you know, as with dental recommendations in oral care, veterinary recommendations are critical to the continued success of this business.

So to continue driving growth, Hill's announced in January 2008 a new partnership with the American Veterinary Medical Association.

This formed the Alliance for Healthier Pets, an obesity awareness and prevention program.

This program is a national campaign aimed at educating pet owners about the dangers of pet obesity and equipping veterinary health professionals with the tools necessary to facilitate successful weight loss programs for their pet patients.

This program has generated 112 million consumer impressions via community events, pet retailers, veterinary clinics, veterinary conferences and local or national media coverage.

The program's tool kits have been highly accepted and are being utilized at over 11,000 veterinary hospitals.

In addition, this February marks our 14th year of sponsoring our National Pet Dental Health Month program for the veterinary community.

This program encourages veterinary health care teams to talk with clients about scheduling regular dental appointments for their pets, while also increasing consumer awareness of the need for pet dental care.

Programs such as these help ensure that Hill's products are recommended seven-to-one over competing products.

Looking ahead, the volume at Hill's is expected to increase mid single digits for the second quarter and full year.

Operating profit is expected to increase double digits in the second quarter and full year as well.

So in summary, we are very pleased with the way 2008 has started.

Clearly, the momentum in our business which we enjoyed as we exited 2007 is continuing into this year.

Our strategies are working.

Ongoing Funding The Growth programs, our restructuring savings, as well as our worldwide program of selling price increases, are helping to offset significant worldwide raw material and commodity cost increases.

Our worldwide focus on increased advertising is resulting in excellent sales and volume growth.

Our market shares are indeed healthy and increasing around the world.

So we look forward to sharing our progress as we go through the remainder of the year.

Now, we would like to turn it over to questions.

The Q&A session will be conducted electronically.

(OPERATOR INSTRUCTIONS) We go first to John Faucher of JPMorgan.

You talked about the discrepancy of the gross margin performance of Hill's versus the rest of the company, two questions to follow up on that.

Is that the type of split we should expect going forward?

And can you highlight how things trended in the quarter?

Didn't seem as though you were as concerned about this level of cost pressure earlier in the quarter, thanks.

Good morning, it's Ian.

Thanks for the question.

Let me just say a couple things before I come directly to that two-part question.

First to underscore that we are actually very pleased with that performance in the first quarter, good sales growth, good profitability growth, good market share increases in major countries around the world, and as I say with that topline growth, 5.5% volume with 3% pricing on top.

Second thing to say, we continue to be very comfortable with the strategy that we have been deploying over the last four years now, focusing on building that connection with the consumer, supported by innovation with a continual focus on effectiveness and efficiency, and of course, developing the leadership of the Company.

Turning to the gross profit, let me talk first to the quarter and then to the year and give you some thoughts on 2009.

For the quarter, John, when we last spoke in February conference call or CAGNY, as I said at the time, we had gotten off to a strong start to the year from a sales point of view and we were comfortable we would be ahead of forecast.

The Colgate gross profit had expanded quite nicely.

The Hill's gross profit was modestly down but within our forecasted estimate.

Two things as the quarter unfolded hit us very hard.

Fats and oils prices grew very, very quickly on -- and impacted our soap business to the tune of about 500 basis points.

More importantly, as you said, the agro costs on our Hill's business grew significantly beyond what we had forecast by some 30% and we ended up with a drag on the gross profit at Hill's of over 400 basis points, between 400 and 500, which took the gross profit for that business down on the quarter by some 200 basis points.

With the Colgate, as Bina said, up some 20 basis points, largely impacted by those fats and oils.

When we forecast Hill's, we came into the year with good pricing already in place in the fourth quarter of last year, between 6 and 8%.

You saw the 7.5% SPI gain on Hill's with good volume growth, notwithstanding that, and of course we have had to revisit that business in a very, very disciplined way for the balance of the year.

And since we last spoke, we now have in place a double digit price increase on that business, which will take effect at the very end of the second quarter, beginning of the third, and that will see improvement in the gross profit margin on Hill's for the balance of the year, should see us exiting the year flat.

Down on the full year, but exiting the year flat.

Turning to 2008, from a gross profit point of view in totality, obviously again since we last spoke, we now see oil at $120 and what we have done in a very disciplined way is address the impact of that on our business for the balance of the year.

Forecast what the commodity impact will be, what our savings programs will be, and what additional pricing we will need to take across the balance of this year to offset that, which we will finalize during our mid-year review process, which is just about now, to take place.

We have further spent time thinking about the cost profile for 2009 and have taken, I think, some conservative forecasting assumptions, specifically oil at around $130 a barrel which, as you know, is significantly beyond most, if not all, external forecasts, continuing cost headwinds.

And pricing, new pricing at about half the level we expect to put in place this year and we see ourselves substantially improving gross profit next year.

So to sort of step back, from an overall point of view, very comfortable with our efficiency strategy, we'll talk about that in more detail later, surprised in the first quarter, as it unfolded, largely (inaudible) to Hill's.

The plans in place for the balance of this year and preliminary planning in place for 2009.

We go to Wendy Nicholson of Citi Investment Research.

I guess I am just frankly in a state of shock that only three months have passed and yet the gross margin expansion target has changed so entirely.

My shock comes from the fact that, even when you guys have been in tough years like 2004, 2005, you still managed to expand your gross margin.

So I guess the forecast for flat gross margins this year just this doesn't sound right to me.

Do you think there was some problem internally where you were caught sort of flatfooted on your forecasting?

Do you think you have been too slow to figure out how much more pricing you need to take?

You have obviously taken a ton of pricing in Hill's but do you think, "Gosh, hey, we need to take it in the U.S.

but we just can't because the consumer is kind of weak"?

It strikes me as so not Colgate-like to see such a big miss relative to what you told us just three months ago.

And I guess then my second question is what you think is going to happen this year from an operating margin perspective, because if your volumes only continue to grow in the mid single digits and let's suppose currency doesn't continue to give you the same kind of benefit that you have, I don't know how you reach consensus estimates for 13% earnings growth.

Let's come back to the margin, Wendy, and where we sit on the businesses.

I think we took you through what we were estimating in terms of oil and the impact of oil on commodity pricing for the year.

We told you where we had started, with the 75.

We responded the last time to what we thought would be a 90 average, and now we are planning to a 120 average this year which is the elevated level that oil sits at today.

There is of course, as I just explained with Hill's and the agro prices, a lead lag in terms of your ability to take pricing and make it play in the marketplace.

In the case of Hill's we made estimates, we took pricing to respond to those estimates and the agro costs surprised us significantly in the first quarter, which we have responded to with pricing that will take place at the end of the second quarter.

Since we last spoke, importantly in the United States, we have announced a 9% price increase on our toothpaste business, which will reach the marketplace at the beginning of the third quarter.

Relative to the consumer, so far we are not seeing a slowdown in terms of the consumers purchasing of our products.

The category growth in the United States remains positive.

They may be down 50 points from historical highs but still running 2.5 to 3% across the board.

In Europe there running about 2 to 2.5% higher on personal care and oral care businesses.

So we think we have responded appropriately to unprecedented cost movements in the marketplace and have pricing in place now going forward that reflects that, accounts for that, and has not been tempered by any concern relative to the consumer, because we have not seen that elasticity in our categories.

I would add that as we have priced, we see private-label brands pricing as well.

We have not seen an increase in private label shares in our businesses, certainly not at our expense.

So I think that answers the pricing and the cost factors, Wendy.

I think we are moving speedily to address it, but some of the changes in the commodity pricing clearly have been extraordinary and unprecedented in the marketplace with many of the forward curves on these costs lower than the prices in effect in the market today and yet we are planning at those elevated prices.

Relative to the operating margin, we see the operating margin for the balance of the year at around the same level as prior year.

And we see from an exchange point of view, I think the first quarter was something like 7.5%, we have on the average for the year, about a 4% favorable exchange gain for the Company.

You know well that we tend to take a conservative view on exchange as we have done here.

So we feel, with our top line growth, very comfortable with the double digit earnings per share increase on the year.

Next we go to Bill Pecoriello of Morgan Stanley.

Good morning, Ian.

If you could give us the gross margin walk-through in the quarter.

And then, in terms of components as the year goes on, is the main difference going to be whatever that pricing contribution is obviously going to go up based on what you are saying?

Any other major changes in the contribution on commodity impact, restructuring Funding The Growth, et cetera, once you give us that walk through in Q1?

Let me do that.

Obviously prior year gross profit was 54.7%.

We had material -- 57.3%, sorry, we had a pricing headwind of some 320 basis points, materials cost increases of some 320 basis points, that offset by Funding The Growth savings around 90 basis points, restructuring benefits of 80 basis points, the balance in price and mix getting you to the 57.3, down the 10 basis points year-on-year.

As we looked forward for the rest of this year, you see a greater pickup indeed due to pricing that is forecast, both with the material price headwind as I said, being held at the current level and our Funding The Growth savings and restructuring offsetting the balance.

Thank you.

We go to Ali Dibadj with Sanford Bernstein.

A couple questions.

One question, please, Ali.

Sure.

I will try to tie it into one big one.

Around margins, just trying to get more of a clarification on the lag effect on pricing, and if that modifies in any way, your -- it was kind of seemingly to most people, an unstoppable march to 50% by 2010.

And then on the operating margins part of that, what is your confidence in keeping operating margins safe?

I am just looking at one of your star regions, obviously Latin America here.

With great pricing growth, you are still down on your operating margin there.

How does that build confidence for the rest of the business having to take pricing and not getting ahead on operating margins?

So the first question relative to gross profit, as I said at the beginning, we are very comfortable with the overall strategy we have in place, in terms of effectiveness and efficiency.

Obviously, we focus on many things, we focus on our Colgate business planning which is on track, and we're still looking to get $100 million from Colgate business planning this year.

We focus on providing value-added offerings to the consumer, the consumer is prepared even in this environment, to pay a premium price.

Of course, we continue to be focused on advancing the higher gross profit oral care and personal care businesses, which handily led the pack in this quarter.

And then on top, we are, of course, taking pricing.

We are still focused in 2009 and going forward, against the targets we have from a gross profit point of view, north of 75 basis points.

And as we have done some of our preliminary thinking in 2009, I think I've already said, we have confidence that we will be substantially up, even with some fairly conservative assumptions built into that.

But I think it is fair to say, Ali, that in terms of delivering 50%, you said 50%, it was actually 60% by 2010, we may miss that by a quarter or two, given this unprecedented cost profile that we are meeting and overcoming in 2008.

That is the answer on the gross profit - good confidence going forward, and I think in terms of the prevailing cost environment, we are assuming that or worse and dealing with that.

Secondly, back to Latin America, I think we had this discussion on the call the last time, Ali, relative to Latin America.

This is a terrific business, we've got volume growth in Latin America of around 7.5%, and we have seen our advertising investment in that division up meaningfully year-on-year, and still we have a profit increase of plus 14%.

So we like the profile of that business and we are making a choice to drive our brand growth and penetration and trial and market share in a favorable environment.

I repeat, volume growth about 7.4%, and as Bina said, shares in some of our key markets in Latin America at all time highs with an opportunity to drive them further and maintain that top line volume growth in the high single digit area as we discussed before.

We go to Alice Longley of Buckingham Research.

Hi.

I just wanted to check one statement you said earlier.

Did you say you assumed operating margins for the year would be flat?

Essentially flat with prior year.

Yes.

And that is true for the year overall.

You gave us some projections you are assuming for some of the variables, like FX, what is the assumption we should use for pricing for the year overall?

You have 3% in the first quarter.

I think we will see pricing for the year overall in the 3.5 to 4.5 range.

We go to Filippe Goossens of Credit Suisse.

Good morning.

My question is on the emerging markets in general and Brazil specifically and maybe first the Brazilian component.

Obviously, another great performance [by Pida], particularly on the mouthwash side, I was hoping you could give us a little bit more color in terms of how you are looking at the new value added tax that was implemented February 1 in the state of Sao Paolo, how that is impacting your business, and if there's any initial read on whether other states may follow the lead of Sao Paolo.

The broader emerging markets question has to do obviously with rising food inflation in many emerging markets.

Your initial read - any impact on your volumes or people's willingness to also pay higher prices, as you adjust accordingly.

Thank you very much.

Thank you.

Good question.

Let me take the second one first.

We are keeping a very close eye on food items in emerging markets and down-trade distribution particularly cooking oil, which is obviously a very important family purchase.

The answer would be no.

We have not seen an impact on our purchases.

And I think -- to go back a little bit to the strategy that we deploy with our businesses, that is for those emerging markets, we have packaging forms, mainly sachets and small tubes which permit us to bring our products into those channels of distribution at a very affordable cash outlay price for that consumer that is buying on a daily basis.

We make sure from a distribution point of view, obviously, that we are very strongly represented in those channels and, as I say, affordable from a cash outlay point of view.

So no impact but we are keeping a very close eye both on our businesses and lead indicator foodstuffs, as I say, like cooking oil.

Turning to your first question, the [AP] tax change did not have an impact on us in the quarter, because we managed complex negotiations in the implementation with the government, with the industry association, with early communication and therefore avoided any disruption in the first quarter.

We do not have any information that would suggest this could expand elsewhere.

But were it to do so, we would obviously manage it with the same attention and discipline to avoid the disruption as we did in Sao Paolo.

We go to Chris Ferrara of Merrill Lynch.

I just wanted to get to the advertising line.

Last quarter, I guess you said seemingly with some conviction, that you would get to 12% of sales on advertising for this year.

Unless I mis-heard you earlier, you said you expect it to be flat year over year.

Is that right?

And why?

I guess, where is the advertising coming from versus what you previously expected if there was a change?

If I did say that, Chris, I apologize.

I don't think I did.

We are actually very pleased that our advertising on this first quarter is up double digits year-on-year and the ratio is up year-on-year.

And I think we said that our aspiration and our goal was to get to a 12% advertising to sales ratio by the end of 2008 and that very much remains our goal and our forecast.

We are committed to appropriate advertising behind our business to build trials for the brands that we have.

We'll go to Bill Chappell with SunTrust Robinson Humphrey.

Good morning.

You have not talked about corn and soybeans.

I assume that was as big of a surprise over the past few months for the Hill's business, can you give us any idea, is there any change to your hedging policies on a go forward basis and what you are expecting for prices of those products going into '09 for your pricing?

Yes, Bill, it's Ian.

You okay?

Water went down the wrong way.

To respond, we -- on our Hill's business, we hedge about a third of it, and that would include the corn.

And I -- in terms of -- I don't have soybean specifically on this list, I am sorry.

Somebody has it around the room?

Bill, I think we're going to have to get back to you after the call.

I'm sorry, let me correct that, I can say soybeans for us, in terms of our assumptions this year, is up between 40% and 45% and corn is because of the hedge basically contained.

But the soybean is up and we will, as we look forward, be hedging those light materials in 2009.

We go to Bill Schmitz with Deutsche Bank.

Good morning.

A couple things.

The SG&A costs in the quarter seemed like they come down pretty considerably which is impressive obviously, and that's even with the shipping and handling costs in the SG&A line.

So what happened in the quarter?

Did you adjust spending or change some things given the input cost environment?

Good question.

The SG&A indeed, from our point of view essentially overhead came down and was offset by advertising going up.

It's that simple.

That is still with in that overhead line, us putting investment behind our go to market capability in terms of professional selling organizations and on the ground merchandising and sales capability.

The overhead costs came down on a ratio basis offset by advertising going up.

We go to Lauren Lieberman of Lehman Brothers.

Good morning.

Good morning.

I have a question about Funding The Growth.

My understanding is that one of the buckets of cost savings within Funding The Growth is purchasing related.

And I was wondering if -- first off, you mentioned that Funding The Growth was only about 90 basis points this quarter, if the lower rate of savings this quarter, and maybe what is a lower rate of savings expected through the year is because you are less able to get purchasing type savings in this commodity cost environment?

The answer to your question is we are forecasting at the first quarter rate going forward for precisely the reason you say.

We go next to Connie Maneaty of BMO Capital Markets.

Good morning.

I understand the sensitivity of the Hill's business to agricultural commodities and I understand the top down was right around 120.

But I really don't understand the sensitivity of toothpaste to commodities.

Where is the link between toothpaste and this 9% price increase you are taking?

What justifies the price increase of that nature?

Is that price increase worldwide?

And have your major competitors followed you on at?

It is cost justified in the United States, a combination of raw and packing materials.

And yes, my understanding is that the principal competitors in the United States have both announced price increases on those businesses.

We go to Alec Patterson of RCM.

Good morning.

Good morning, Alec.

I just want to get a feel for the margin algorithms, as you are taking pricing out to, you said a 3.5, 4.5% level and how that is going to impact the way we should look at gross margin.

I presume it's about a 200 basis points positive impact and things like advertising, the sales ratio mentioned before, obviously you've taking pricing up, are you trying to match that with an advertising lift?

I am trying to get a sense of how pricing is affecting the way the margin structure plays out.

I would say, as I mentioned in going through the gross profits for the first quarter, that about 130 of the gross profit or the offset to material prices was in pricing.

I expect that, given that the rate of pricing increases on the balance of the year, to increase somewhat in that 150 to 200 range for the balance of the year to offset the prevailing 300 odd basis points of material price lift and see that start to rebuild gross profit over the balance of the year.

And the advertising falls out of that in our planning.

We go to Andrew Sawyer with Goldman Sachs.

Two quick ones.

First, I was just wondering if you could kind of help us why you're looking for an acceleration in volume growth in Latin American region for the balance of the year?

And second, building on Alec's question, I guess if I add it all up and look at gross margins, instead of looking at a percentage basis, I look at it in dollars, it seems to me you're still -- with foreign exchange the way it is, you're looking at maybe low double digits to low teens for gross profit in dollars and, first of all, is that correct?

And second, I guess with that level of funding, how should we think about operating leverage against that kind of dollar growth in gross profit?

Let me talk about Latin America first, Andrew.

If you profile 2008, probably the easiest comparisons -- the toughest comparison, I'm sorry, of the year, quarter to quarter, first quarter of 2007 was approaching about 14%, obviously the very healthy 7.5% in 2008 was terrific on top of that.

The range of increase we are looking at in Latin America for the year in that 7 to 8.5 volume range is activity driven and comparison against prior-year quarters.

So we feel very comfortable about that.

Turning to your question on gross margin --

We will take the final question from Jason Gere with Wachovia Capital Markets.

Good morning.

Sorry that you got cut off there.

I was wondering if you could provide a little more color on Hill's, the volumes in the U.S., some of the specialty channels were very aggressively promotional during the period.

I am just wondering if you could talk a little bit about what they're doing during this time when you are taking pricing and obviously you're facing a lot of cost inflation and the impact on the consumer?

Good question.

We -- interestingly, we saw, as you saw, a very good volume from Hill's in that 3% to 4% range and we saw that in the United States and that was with 7.5% pricing.

I think when we talked the last time, I had mentioned that when we took pricing in the fourth quarter of last year, we saw a slight slowdown in terms of the offtake in the speciality channel, when the pricing was initially introduced, and that we had seen that come back towards the end of the year and that has continued into the first quarter of this year.

We are seeing, from a dollar point of view, in the speciality channel, growth rate around 4.5 to 5.5% through the first two months of this year.

And I would just comment generally, not related to Hill's, but the overall business sales growth has started this quarter quite strongly as well.

So we see the consumer buying and the kind of initiative, remember, we're focused on with Hill's is building loyalty and use because of a clinical benefit with professional recommendations.

It is not a price sensitive business.

So, so far, the consumer is staying with us.

Hello?

And advertising, obviously looking to be stepped up in the year and operating margins looking to be flat, can you -- are you just quantifying the SG&A, you're going to see a continuation of the improvements that we saw during the year?

Because we haven't seen this type of improvements probably in the last two years.

As we look at the year, we're going to see SG&A overall basically flat, which will see a further reduction in overhead and an increase in advertising for the year.

I think I said the last time when we were on the call, we had put some good capability in place as we had gone through the restructuring, so we are getting benefit in terms of our overhead cost structure and we were reinvesting some of that.

And I think I said that we expected that to start to tail off towards the end of 2008 on the overhead line and that is what we're planning.

That was the final question.

Thanks very much for joining the call.

We thank you for your support and we look forward to catching up again at the end of the second quarter.

That does conclude today's call.

Again, thank you for your participation.

Have a good day.