高露潔 (CL) 2008 Q2 法說會逐字稿

Good day.

Welcome to the Colgate-Palmolive company second quarter 2008 earnings conference call.

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

Just a reminder, there may a slight delay before the question and answer session begins, due to the web simulcast.

I would like to turn the conference over to the Vice President of Investor Relations, Bina Thompson.

Please go ahead.

Thank you, Duane.

Good morning, everybody.

Welcome to our second quarter 2008 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 and the first half this morning, excluding charges relating to the 2004 restructuring program and certain other items in the first six months of 2007.

The reported GAAP results with reconciliation to the results, excluding the restructuring charges and other items in the second quarter 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 these 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 are very pleased with our second quarter results.

Sales, operating profits, advertising spends, net incomes, and EPS were all at record levels.

As Ian said in the press release, every region contributed to our solid performance.

The strong momentum we have seen in the fast growing areas of the world, Latin America and greater Asia/Africa, continues, and we see no signs of a significant slow down in either one.

Even in markets where the economic conditions are difficult, such as North America and western Europe, our categories are still growing, and in addition we are growing market share.

Worldwide, our market shares are up in toothpaste, toothbrushes, mouthwash, bar soap, shower gels, and dishwashing liquids.

As you know, the challenge for all consumer goods companies this year is the relentless and unprecedented rise in raw and packaging material costs.

We have, as have our competitors, been taking price increases to offset those cost increases.

In this quarter, worldwide, our pricing was up 4.5%, the highest in well over a decade.

It is therefore encouraging that we continue to deliver solid volume growth within our ongoing targeted range of 5% to 8%, with the expectation that such growth will continue for the balance of the year.

Gross margin in the quarter was slightly down.

In this current environment of pressure on gross margins, we have re-doubled our efforts to reduce our overhead expenses, in addition to our many ongoing savings programs and our restructuring savings.

This has indeed happened so that we were still able to increase advertising a healthy 18%, while delivering strong EPS growth, well ahead of expectation.

Cash flow and the balance sheet are strong as well, another good indicator of a healthy business.

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

Our performance in North America is particularly encouraging, given the current concerns about the economy and its related effects on consumer purchasing habits.

You read in the press release about a healthy amount of new product activity, which resulted in record shares for Colgate Total toothpaste, and our manual toothbrushes.

In fact, for the quarter, our national market shares in the U.S., as report by AC Neilson, increased year-over-year in toothpaste, manual and powered toothbrushes, liquid hand soap, body wash, dishwashing liquid, and fabric softener.

We are excited about more new products scheduled to launch in the third quarter.

The first is Colgate's Max Fresh with mouthwash beads.

This toothpaste offers innovation on three fronts.

It will be the first toothpaste with mouthwash beads; it will be the only toothpaste sold in a clear tube, and the carton will have a die-cut to showcase the product inside the clear tube.

This new product, along with a companion Max Fresh manual toothbrush, with the mint-scented brush handle and tongue freshener, will help to expand the Max Fresh portfolio in the important fresh breath segments.

In personal care, we will be launching Lady's Speed Stick Clinical Proof, a premium-priced, high efficacy deodorant, with clinically proven wetness protection, non-stop odor control technology, and skin conditioning system.

It is packaged in a high-impact carton, which conveys premium image.

In home care, shipping this week, will be Palmolive Pure and Clear dishwashing liquid.

It is biodegradable, with between 25% and 75% post-consumer recycled plastic, and it's endorsed by the EPA, with a Designed for the Environment seal on the back label.

In addition, it is in distinct, elegant packaging, which creates a unique and differentiating impression on the shelf.

All this new productivity will help us to deliver continued mid-single digit volume growth for the balance of the year, while we continue to take price increases where necessary.

Operating profit is expected to be up modestly for the third quarter and full year.

Europe.

The macroeconomic situation in western Europe continued to be very challenging, which resulted in the modest volume growth of the division as a whole.

You may recall as well, that volume was up 9.5% in Europe South Pacific in the year ago quarter.

GDP growth in western Europe is slowing, while inflation has been increasing.

France and Italy are two countries which are the most difficult at the moment for all companies in our industry.

Volume in central Europe was strong in the quarter, and volume also grew in the South Pacific region.

So overall, we still see category growth in western Europe, with both oral and personal care categories growing, and the home care category down slightly.

Category growth in eastern Europe is still quite robust.

We have been able to maintain our shares across the division which is encouraging, and as referenced in the press release, a number of premium-priced value added new products have contributed to this.

As in the US, we are continuing to build the Colgate Max toothpaste line with the launch of Colgate Max White, which compliments the already successful Max Fresh.

In the home care category, we are launching our newest fabric conditioner, Magic Moments, in France, Greece, and Belgium.

And, as you will hear shortly, this premium-priced innovative new product has been met with great success in Mexico.

Although it is still early days, results are encouraging, and we hope to build on our already strong shares in these markets, which range from 30% to 50%.

Volume in Europe South Pacific is expected to grow modestly in the third quarter and for the full year as well, and operating profit is expected to grow in the mid-singles - - mid to high-single digit range for the third quarter and full year.

Latin America.

We are delighted with the continued strong performance in Latin America.

Across the region our market shares have increased.

Toothpaste, toothbrushes, mouthwash, bar soaps, and dish liquid.

It is also encouraging that year to date we still see good category growth, with an acceleration from 2007 in countries such as Mexico and Brazil.

As referenced in the press release, our regional toothpaste share is up over two points from the prior year, with virtually every country contributing.

Colgate Total Professional Clean, launched in 2007, is benefiting from strong second year support and is adding share, which is almost entirely incremental.

More new product activity in both toothpaste and toothbrushes is planned for the second half, this includes Colgate Total Professional Sensitive toothpaste and Colgate 360 Deep Clean tooth brush.

In the mouthwash category, we continue to make excellent progress as well.

On a year-to-date basis our market share is up over five points, to 23.5% with the latest reading at 23.9%.

In bar soaps, we have re-gained market leadership in the most recent period.

We achieved our highest shares ever in Mexico, Venezuela, and the Dominican Republic.

And in liquid soaps, a small but fast-growing category, has already clearly established a leadership position, where we are over 20 points ahead of our nearest competitor.

In dishwashing liquid, our share is up slightly across the region, and in Mexico we have achieved market leadership in the most recent period.

On a year-to-date basis our share is up about 1.5 points.

I told you a moment ago about our recent launch of Magic Moments fabric conditioner in several European markets.

This new product was launched in Mexico in January of this year, with a premium price that helped boost sales results.

Recent share readings in self-service supermarkets show Magic Moments with an 8.3% share of the market, the majority of which is incremental to the business.

So looking ahead, we expect volume growth in Latin America to be at second quarter levels for the third quarter and full year.

Operating profit is expected to grow double digits for the third quarter and full year.

Greater Asia/Africa.

The momentum in this region continues with solid volume gains and market share gains, as well.

Second quarter records were set on every line of the CNL.

In greater Asia itself, volume increased in virtually every country.

Our overall toothpaste share for the region increased 20 basis points, to 38.8.

We maintain leadership positions in China, India, and Russia.

In Thailand our market share is up almost 50%, up 160 basis points versus the prior year.

Our toothbrush market share in India reached a high of 37.2%, up 250 basis points versus a year ago.

In Russia, our toothpaste share reached a record 49.2%, up 270 basis points versus a year ago.

Across greater Asia, toothbrush market shares were up in eight of 13 countries.

A new line of mouthwash developed for sales in the pharmacy has been launched in Thailand as a pilot test for the division, and early results are quite encouraging.

In addition, as referenced in the press release, we have just introduced our GABA products in Russia, where the profession is already endorsing these products.

In Eurasia, we continue to grow our priority category of shower liquids.

Our market share continues to climb, narrowing the gap with the market leader from 10 points in 2002, to about 4 points in 2008 year to date.

And we have launched a number of new products in this category, including Palmolive Amazonia, which was developed in Brazil, and has helped increase share in that market by 160 basis points year over year.

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

Operating profits is expected to increase double digits for the third quarter and full year, as well.

Finally Hills.

We are quite pleased with the volume growth at Hills, which was good both domestically and internationally.

Here in the U.S., consumption [of the large formats] at pet specialty retailers continues to be solid, which is very encouraging.

As you know, the challenge for all pet food manufacturers this year has been the very steep rise in commodity costs, and this continued in the second quarter, with the average increase in the U.S.

over the second quarter of 2007 at around 30%.

We have taken substantial price increases around the world to help offset these cost increases, as have our competitors.

Our ongoing new products program, as outlined in the press release, offers consumers a wide range of value-added products, which should result in continued growth at Hills.

In addition, programs such as our Alliance for Healthier Pets program, which we told you about last quarter, continue to generate awareness and support from the veterinary profession.

Our outlook for the balance of the year at Hills is for volume to increase low to mid-single digits, for the third quarter and the full year.

Operating profit is expected to be up double digits for the third quarter and the full year.

So in summary, we are delighted that the strong top and bottom-line momentum from the first quarter has continued into the second quarter of 2008.

Our solid second quarter results reflect the ongoing success of our four strategic initiatives, getting closure to the consumer, the customer and 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.

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

And now, Duane, I would like to turn it over to the q-and-a portion of the call, with a reminder to everyone that we would like you to start with one question.

Should you have a follow-up, you can get back into the queue for that.

So Duane, we're ready to start.

(OPERATOR INSTRUCTIONS) Our first question will come from Bill Pecoriello with Morgan Stanley.

Good morning, everybody.

Ian, could you go through the gross margin walk-through for the quarter, but then also comment on how you expect the components to change in the second half as more pricing moves to the P&L, but you still expect the gross margin down modestly?

Yes, Bill.

Good morning, thanks for a customary question.

I would just echo Bina's point in terms of the approach to the business overall, and say we are indeed quite pleased that our focus on the strategic initiatives is allowing us to grow our brands, build market shares in growing categories, generate the funds to increase our advertising support, and still deliver strong double-digit EPS growth.

But turning to the gross profit walk through in specific for the second quarter of 2008, Bill.

You take the prior year of gross profit of 57.1%.

Favorable is pricing in the second quarter at 1.7%, 170 basis points, a 40 basis points pick up from restructuring, 160 from our funding the growth savings projects, with continued focus there, and then material prices at 430 basis points negative, leading to a negative 230 with the pricing at the 170, with mix, et cetera adding another 30 basis points which gets you to the 56.8, which is the 30 basis points down on the year.

So that's the composition of the walk-through of the gross profit for the quarter.

As we look to the balance of the year, and as you saw in our external release, we have not only looked at the balance of this year, but also at 2009 as well.

We have maintained commodity costs at the current high levels, and we have assumed oil for the balance of this year at around $130.00 for the second half, and obviously we have pricing, most of which has been announced, built into the back half of the year, which will see our total year price up something between 4.5% and 5%.

And the combination of those assumptions and the pricing, we will see the gross profit for the balance of the year down around the same as we saw for the second quarter of this year, and we feel quite comfortable about the assumptions and that projection, Bill.

So it is more into the early part of 2009 when you will see the sequential growth in gross margin, not into Q4 as the pricing moves through.

Correct.

I mean, we will have both the rollover effect of the pricing and then, of course, the actions we have planned for next year, because in our assumptions we see oil - - we project oil to move up to around 140, and all of that is built into the assumptions for next year which will see gross profit begin to increase again.

Thank you.

Our next question is from Nik Modi, with UBS.

Good morning.

Ian, clearly consumption remains healthy in Latin America and central-eastern Europe.

Just curious on your thoughts on trade-up and the dynamics there, and if you are seeing any slowdown in consumer uptaking, some of the premium-priced innovations?

I think the answer is so far no, Nik.

We are continuing to see premium offerings regardless of geography, like Colgate Total continue to grow.

I would make it very clear, as I have said before, that part of our strategy in emerging markets is to make sure we have offerings in all of the price segments that consumers shop in, whether that is a sachet in a [thari thari] or a [comado] store in the rural areas, all the way up to large-sized tubes, and also products that are in different price segments of the category, super-premium, premium, mass market price, and entry level pricing.

So we aren't seeing any slow down in the consumer's interest in the higher value offerings, but we are well covered in terms of the portfolio we offer by segment in the marketplace.

And of course, we are staying very close to the consumer's behavior in that area.

Our next question then is from Ali Dibadj.

Just one moment.

I'll have his line open.

Yes, Ali, please go ahead.

Hi, guys.

How are you?

Hi, Ali.

Good morning.

One real question and then just a quick clarification, if I may.

One is, I found it interesting that you mentioned 2009 just a second ago and also obviously in the release.

Since you have - - you talk about one assumption you made obviously about oil, but the other two I think that I would love to hear about how you're thinking around are foreign exchange for the first part, which has clearly helped over the past little while here, and secondly, elasticity on the pricing you're taking, particularly as we are starting to see some elasticity pain here in some of the categories out here taking pricing.

You could even argue in parenthesis that some of the volume sustainability here is some of the retailers buying ahead.

So I want to get understanding of foreign exchange [inaudible].

The quick clarification question is, you mentioned gross margins being down another 30 basis points here for the year.

Can you give us a sense again about operating margin guidance like you did last quarter?

Do you still expect it to be flat or not?

Thanks very much.

Well, more than one question, Ali, but I will try and take them on.

In focusing a little bit ahead to 2009 and foreign exchange, we have as you would assume for the back half of this year and into 2009, assumed a declining benefit from foreign exchange.

And as you might assume from us, you could say we have been potentially conservative in that regard, but nonetheless we have assumed a declining ForEx capability in the go-forward.

Relative to pricing and the consumer's reaction to pricing and elasticities, as we think about pricing in the market, and as you know we have taken 3% in the first quarter over 4% in the second quarter, with second half pricing now just beginning to hit the marketplace, so far we continue to see our shares grow.

So far, at least in the categories that we do business, we have seen those categories continue to grow on a dollar basis.

Maybe 3 to 3.5 growth is now 3% growth at the lower end and the higher end, but nonetheless, pretty good growth.

And with the assumptions we have with the rollover benefits of pricing from this year into next, we see us as having to take substantially less pricing next year than we had this.

So the new pricing that will impact consumers will be substantially lower, about one quarter of pricing that we had to take this year.

And as we look at the back half of this year from our point of view, as we said, we continue to guide the earnings per share in that mid-teens level, and that's with the gross margin you see there.

That is with healthy levels of advertising expense, and that will see us delivering double-digit EPS.

Our next question will be from Wendy Nicholson with City Investment Research.

Hi, two questions if I can.

First of all, can you talk about Latin America and the margins there.

They just kind of continue to drift down, and I just wondered whether that is a mix issue or whether you are spending more?

Whatever it is, market shares look great, but just wondering where those margins start to flatten out.

And then, can you just remind us, what is the percentage breakdown, eastern Europe versus western Europe, because it sounds like eastern Europe is really carrying the day, and I'm just trying to get a feel for just how bad western Europe is in terms of top line growth.

I think, Wendy, relative to Latin America as we have said, the profitability return from Latin America is extraordinarily positive from a percent growth in EBIT, largely driven by a top-line growth and a little bit of gross profit.

From an EBIT point of view we have taken the view, as I have said before, to continue to invest in those terrific share growth positions on top of market growth, and delivering a very healthy EBIT.

And we don't comment on EBIT for the year in general, but EBIT for the year will be higher than the second quarter.

So that's Latin America, which we are very, very pleased about because the growth is, across the board, and the quality of the growth is very high.

For example, just to follow-up on that.

But no reason, for example, I mean 27.6 is the lowest margin you've seen in that region for a while, but no reason to believe that the margin won't continue to drift down, do you think it stays north of 28 on a full year basis for as far as we can see?

There is nothing changing in the market dynamically.

There is nothing structurally, Wendy, other than our choice, and for the year I see it north of 28.

Got it.

Thank you.

So it is a choice.

It is nothing structural.

Okay.

And relative to the European environment, we see western Europe flat to modestly down, and eastern Europe up high single digits, and we are quite comfortable with that.

As Bina said in her comments, western Europe traces largely to Italy and France, which have structural category issues that we and others are working through.

And we see for the second half of the year for Europe in entirety, a 1.5% to 2% volume growth for the balance of the year.

And I would, of course, remind you that the second quarter comes up against the highest comp of last year, which was nearly a 10% of volume growth.

Definitely.

Then just the split, is western Europe, in dollar terms, three times as big as eastern Europe, how you think about it?

Western Europe is bigger, Wendy, but eastern Europe is growing fast.

I've got it.

Thank you, thank you.

Our next question is from Filippe Goossens with Credit Suisse.

Yes, good morning, Ian and Bina.

Great, great, great results obviously.

If I may, a two-part question on Brazil.

Ian, as you know, there have been a few data sources out there indicating a slow down in category growth in that country.

On one hand, you could argue that it could be a result of the introduction of the value-added tax, which is something that L'oreal during a most recent trading update again referenced to.

Just kind of wanting to hear what you see as the impact of the value-added tax on that category slow down?

Secondly, was wondering, our economists in Brazil have pointed out a growing concern with regard to food inflation, which is running right now around 17%, 18% in Brazil.

Any take from your end, Ian, in terms of whether food inflation, if sustained at current levels, eventually could start having a negative impact on the purchasing power of consumers, perhaps not only in Brazil but in other parts of the world?

Thank you so much, Ian.

Thanks Filippe.

Yes, the Brazil VAT matter, you have been both diligent and consistent on.

So let me comment on that first, and then let me come back to the categories through that.

As most people I am sure know, this is a VAT tax that is now being collected by the manufacturers, as opposed to as historically by the retailers, implemented on the personal care business in the first quarter, at home care business in the second quarter, and it will be on the food business in the third quarter, although of course we don't have food.

It has really not impacted our business.

We have clearly been very, very focused on it.

And I would say there have been three reasons.

Number one, very early on, and before entering this year, we have developed an internal training program in terms of how to implement and collect the tax with the retailers that we deal with, right down to the price point impact by region of the country.

Secondly, we had no business interruption, because we were able to invoice through SAP, which included the VA tax directly on the invoice.

So it was a seamless conversion for us.

And thirdly, as we reach many of these small retailers by middlemen, we extended the training program to the middlemen so that they too knew how to execute the VAT tax at retail level.

Perhaps the most important point in all of that is not the internal preparedness, but rather, the reaction in terms of the category consumption, which for the second quarter on the personal care business, consumption of our products was up some 9% and on the home care business, some 8%, and the toothpaste remained at 9%.

So leading that then on to your second question.

I guess in life you can never say never, but I must say so far, we are seeing category growth rates that are in fact outpacing prior years on our business, and no immediate signs of consumers trading away from or down from our products because of food inflation.

Great.

Thank you so much, Ian.

Our next question is from Bill Chappell with SunTrust Robinson Humphrey.

Good morning.

Hi, Bill.

Just a simple question on pricing.

I think you said that pricing helped 4.5% for the quarter, and it should help 4.5% to 5% the full quarter.

Can you just give us a gauge of what percentage of the business has now benefited pricing in this quarter?

Was it 25%, was it 50%, versus the full-year pricing you're going to put in place?

Bill, I don't have a distilled summary number on that.

We literally have lists and lists by category, by geography, where we have taken pricing, where we have announced pricing, but I don't have a distillation.

We have taken pricing, I would say, quite broadly both geographically and across categories that have been impacted by costs, both in the year to date, and announced and planned in the year to go.

We could take that offline and go through, literally, geography by geography but I don't have a distillation.

I guess, do you have a majority of the price increases done by July 1 or is it still more to go?

It is balanced.

We have had our pricing in the first half and pricing in the second half.

I would say that the majority of pricing in the second half has been announced, and some significant increases, toothpaste here in the U.S., nutrition here in the U.S., for example, have been accepted at retail and are in the process of being implemented as we speak.

So the majority of this is not on the come it is announced and being implemented.

Great.

Thanks so much.

Sure.

Our next question is from Chris Ferrara with Merrill Lynch.

Hey, guys, I just wanted to try to get a feel for the dynamic between market share gains and category growth.

I know, Ian, you have been saying Mexico and Brazil accelerated in category growth.

Are you seeing that across the company, or has your share gain picked up speed in order to support your acceleration in top line, and also what do you think is driving category growth acceleration in Mexico an Brazil?

Is that just trading up in your products because you guys are such a large part of the market?

Thanks.

Pleasingly, as we have said before, we do continue to see good category growth.

I think in the case of some of the emerging markets, and Bina had mentioned Brazil and Mexico specifically, I think that has to do with trading up and pricing in our business, and the consumers staying with our categories.

We have in some markets around the world, as I said, seen modest slow downs, versus historical levels.

but still very, very good low single digit growth rates, particularly in oral care and personal care, which as you know, is the primary focus of our business.

So the share gains are being delivered on top of still, so far, healthy category growth rates around the world.

Our next question then is from Bill Schmitz with Deutsche Bank.

Good morning, Ian.

The question is, really the pricing elasticity again, and I'm sorry to beat this one to death.

But, given your big price increase, we saw in the earlier scan of data, so it's only 15 days in July, but it looks like in U.S.

toothpaste as an example, your price increase was 2X realized what the competitors were.

So is there a risk that people aren't going to follow these increases or actually drive their feet on them, since you you are sort of the category leader.

There is always that risk in life, Bill.

As I mentioned the last time, you will remember, there even was some debate whether or not in the United States another major manufacturer was or would take pricing, and subsequently it was confirmed that they would and were, because I made the comment that the cost impact was industry wide.

So ultimately, I think economic reality will see a need to take pricing in the marketplace, and see it implemented in a world where retailers are accepting of the cost-driven nature of the price increases.

And may there be a 15 to 30-day lag between manufacturers in terms of effecting the price increase, that may indeed be so, but I think on these things you need to be patient and make sure you execute what you plan execute.

I can tell you that the sales progress at the beginning of this quarter is very solid around the world, and so we are still quite comfortable with the balanced approach we are taking.

Great.

Thank you.

Our next question is from Alice Longley with Buckingham Research.

Good morning.

You said that the gross margin for the second half might be down about as much as it was in the second quarter.

Is it fair to assume it might be down more in the third quarter and less in the fourth quarter, owning to the timing of pricing?

That would be fair.

Our estimating is more balanced than that, but that would be fair, Alice.

Okay.

And then on to the topic about the consumer possibly shifting away from the high end.

I guess you haven't seen any shifting within Colgate from your value added, more expensive paste, to less value added, more basic versions of Colgate.

Do your assumptions and your guidance assume that the value added high end continued to gain share over the next six to nine months?

Our assumptions, Alice, assume balanced growth across all of our segments.

So there is not an overarching assumption in terms of premium leading the day.

We believe that at the higher priced offerings, we deliver value that, so far, the consumer is prepared to pay for.

We see little progress of private label, and where we have seen it, we see our shares continuing to grow notwithstanding that.

But we are very focused, as I said earlier, on making sure that we are offering the right value in all of the segments that we operate in, in categories from entry price points to the higher priced value offerings.

Thank you.

And then my last question is housekeeping.

What was your shares outstanding at the end of the quarter?

One second.

506 million.

Thanks.

Our next question is from Joe Altobello, with Oppenheimer.

Good morning.

In terms of pricing and commodity costs, this is probably a good problem to have, and probably a question that would have sounded crazy about a month ago.

But if oil continues to fall, what happens to that windfall?

Do you guys keep it, does it get spent, and what happens to the price increases you've already implemented this year?

If we were to 90 for example next year, and not 140.

Joe, given the year we have been living through, why don't we have that discussion next year.

I would say as an aside comment, that I told you that our assumption was the 130 and then 140 next year.

My sense would be that from a list pricing point of view, there would not be a give back.

I think we would have to work our way through exactly what was the oil price level, what was the scale of the so-called benefit, and how that might impact the marketplace.

I really - - in the world we are living in - - prefer, at least for planning purposes, to keep a more bearish view right now.

Fair enough.

Thank you.

Our next question is from Andrew Sawyer with Goldman Sachs.

Just quickly, I wanted to ask you quickly about the overhead expense control that you eluded to.

I just wondered if you could maybe walk us through what types of things you are doing, and I guess to what extent they are sustainable, whether we are talking about pairing back hiring, or if these are more sustainable types of actions?

Thank you.

Andrew, it is a focal area.

It is something that we began when we announced our restructuring.

We said at the time that we had two thoughts in our mind.

One was efficiency, and the other was to strengthen our in-market capability.

So in strengthening our in-market capability we have seen fix cost investment, overhead investment in our selling and marketing capability, and with the consolidations that we have been putting in place from a sourcing point of view and other organizational point of view, an offsetting benefit in the second quarter from savings elsewhere.

So the approach is structural, and we are looking to have those benefits for the medium term.

Thanks.

Our next question then is from Lauren Lieberman with Lehman Brothers.

Thank you.

I'm going to actually follow-up on that.

Since everyone is asking two questions, I feel like I will, too.

On the overhead expense control, is the idea then, Ian, that some of the investments that you have been making, that you described, that the rate of increase in those investments is now slowing, so we are starting to see the efficiency benefits show through, that you've already been generating for a year or two?

I would say, Lauren, and I must say we are seeing the same inflation in the questions being asked as we are seeing in the business, I guess.

But I would say, yes, we put a very disciplined focus on making sure that whether it was selling capability, merchandising capability, detailing capability, that we had those resources on the ground, and that is now well positioned, we believe, around the world.

And secondly, we are stepping up our focus from an overhead point of view in the area of indirect expenditure, everything from computers to telephones, which has become a very sharp area of focus for us now and going forward.

But, yes, the investment commitment is pretty much in place.

Okay.

Great.

And then on funding the growth, one housekeeping question that is out there, that there was a big jump up in other expense.

And just if you can tell us what that was, and how we should think about that going forward.

And then my real value added question would be about funding the growth, that the savings this quarter were much more than they were last quarter and actually quite a bit higher than we discussed after last call, or last quarter, what changed that you were able to reaccelerate that program?

Because, as I recall last quarter, we talked a little bit about it being that it was tougher to get procurement-based savings in this environment, and that's been a key component of funding the growth.

Let me answer both questions, Lauren.

First on the other expense, we have, as you noted, taken some contingency charges for potential legal and environmental matters in different countries and, secondly, have a higher minority interest income, as the few minority interest businesses we have have also been doing rather well, and I would say that is not to continue in the future.

So that would be that.

Relative to funding the growth savings, all I can say is, it is an area, as you know, of intense focus in the company, and we have redoubled our focus on that area starting since before we came into this year, and I would say as we are going forward, I think on the last call I said that I figured holding it at around the 90 basis points we saw in the first quarter might be a conservative position to take.

I would venture to say, in terms of some of the areas we are now focusing on, our current forward projection would see us somewhere between the two.

Okay.

Great.

Thank you.

Sure.

Our next question is from Alec Patterson with RCM.

Hi.

Yes, good morning.

Good morning.

Just one question.

Cut me off if I ask a second question.

Just curious, not much mention of CVP lately, and to the degree that played a role in the pricing you achieved the way you reported in the second quarter results, or how it may affect the pricing of 4.5 to 5 for the year, could you talk about CVP as an impact on that?

I'm glad you raised it, because far from being a low-key area it is an area that is, we believe, picking up steam in the company.

We have now moved it around the world.

We will have over 70% of our business operating with Colgate business planning by the end of this year.

We will deliver the 100 million that we had talked about, in terms of savings, with Colgate business planning.

But I think more importantly to your point, it is become a facilitating tool in terms of how we not only implement list price increases, but more importantly, how we increase average selling prices by more efficient promotional activity, and we continue to have many, many examples by the new geographies in terms of changing promotional techniques, changing the time line of promotions being run.

And so it is very much vibrantly alive and playing a very important role in pricing strategy that we see today and that we plan for tomorrow.

Ian, I'm just trying to understand if there is a differentiation between taking pricing to offset cost of goods inflation and pricing that is coming through because of the CVP program, is it an evenly split result, or are we currently experiencing predominantly pricing to offset commodity inflation?

There is clearly a significant increase in list prices being taken to offset commodity inflation.

There is also a focus on Colgate business planning, which if I take you back, we have said not only affects price, not only affects therefore gross profit, but can also affect volume, in terms of the way you manage your promotional trade spending, because it is an ROI model, not an absolute savings model.

So as we have said before, Colgate business planning is in fact influencing different lines of the P&L, and I wouldn't be able to unbundle between the two of them in the price line, but it is fair to say that certainly in the current quarter and the next quarter that there is list price increases being taken to offset commodity inflation.

Okay.

Thank you.

Our next question is from Connie Maneaty with BMO Capital.

Good morning.

I'm wondering that, as list prices increases go into effect, if there will be some change in your marketing mix away from direct to the consumer advertising, and more to the trade.

Well, I'm not sure they are mutually exclusive things, Connie, and I'm not sure that pricing, at least the way we think about it as a matter of strategy, would lead you one way or the other.

I think we believe that there is power in traditional to consumer advertising, and the question is, what is the best way by brand, by consumer segment, to reach that consumer.

And I think it fair to say, regardless of pricing activity, that the store, as we have said before, the dental and veterinary professionals, these are important influence points in the consumer's brand choice.

So we are constantly re-assessing and re-allocating our investment across all of those touch points, but I don't think the fact that we are taking pricing is changing the way we would connect with consumers.

I think in today's world we are always thinking about what is the best mix of our investment to reach and connect with them.

Great.

Thanks.

Our next question is from Jason Gere with Wachovia Capital Markets.

Good morning, thanks, and kind of following up on Connie's question.

I guess the first question is, can you talk about the AMP target?

Hopefully you haven't mentioned this earlier, but the 12% as a percentage of sales, the advertising, certainly you're getting pretty good lift off the top line, so it might come in a little bit shy of that.

That's the first part.

Second, can you talk about that balance between advertising and maybe the promotional or in-store merchandising, and more the categories affected by private label and more value brands such as home care.

Thanks.

Jason, two things.

You will recall that when we talked about this 12%, we created it as an aspirational goal, and it remains that, and we said very much that the way we got to our advertising investment was on a bottoms-up basis, market by market, trying to keep our share of voice, which, as if you will, the share of spending that goes to consumers at competitive levels, depending on what we were doing in each market and what our competitors were doing.

And in this quarter we are at about 11.7% in terms of that advertising level, and based on what we see in the market, I would say that we will finish this year around that level, with the top line growth that we have and the market needs we foresee.

And we will continue to aspirationally move ourselves towards the 12%, but we are very happy with the balance we are getting between investment, new products, pricing, and volume, as evidenced in this quarter.

Now, when you talk about how you spend that money, frankly, it varies by brand, it varies by consumer, and it varies by the objectives you have at any point in time.

Macro, I would say you are seeing more digital, because digital is proving to be a very efficient way of targeting and engaging with consumers.

And you're seeing more at retail, because that is a terrific touch point to reach the consumer at the moment, or just prior to the moment of purchase.

But each of these decisions is made by marketing plans developed for brands on a country basis.

So it will be different market by market, and it will be different brand by brand, but if there is an underlying suggestion that some of the traditional media, like television advertising and magazines, as was kind of raised three or four years ago is going away, that is absolutely not the case.

And may I just add a housekeeping question on the interest expense at $25 million?

I know there were some refinancing out there.

There is a pretty big discrepancy between last quarter, this quarter and certainly, you did buy back stock in the period.

Just wondering how we should think about that going forward?

Thanks.

Sure.

I was just taking out the exact numbers.

It is the change in commercial paper cost, simple terms.

Rates are down from mid-single digits to very low-single digits, and that's the benefit we are getting.

I think we may have mentioned this previously on a call, but that is where we are, and that's what we see for the balance of the year.

Okay.

Thanks.

Our next question is from Linda Bolton Weiser with Caris.

Thank you.

It was interesting the comments you were making, Ian, about Latin America and thinking about EBIT growth and EBIT margins, and certainly you're getting really good return on investment, on your marketing spending.

I'm curious as to whether we should think about that concept for Colgate as an entire company?

Maybe very modest, if maybe even no EBIT margin growth, going forward, but very robust top line and EBIT profit growth?

Can you comment on that?

I can, but I shall not.

I think where we would focus, Linda, would be to say that in these unprecedented times we are, I think, in a very focused disciplined way, through cost savings, pricing, mix, Colgate business planning, working our way back to increasing our gross profit,,t which we expect to do in 2009, continue the focus we have on the overhead part of SG&A, and to your question, that will give us the option as to how we construct the rest of the income statement, while delivering the solid double digit EPS growth next year.

And we haven't begun our budgeting process yet for 2009, and I think we will be addressing those issues as we go through that.

So no philosophical change at this time.

Understand the question, our focus is on gross profit to decide how we best plan the business, going forward in 2009, to deliver that solid double digit EPS growth.

That sounds good.

And can I just ask about inventory?

It was up 18% year over year.

Can we expect that to remain high for the rest of the year, or is there anything going on there?

It is up year on year.

It is down quarter on quarter, and it relates to some of the sourcing transitions we are going through.

And in this particular quarter it relates to new product launches, actually in Latin America, that required pre-build of inventory, and that was approaching one day, and our call on the year is to see that inventory flat for the year at this quarter's level.

So no increment.

Thank you very much.

We do have a follow-up from Ali Dibadj with Sanford Bernstein.

Thank you for taking a follow-up.

Wanted to ask about, I understand you don't want to touch operating profit for a company, but you do talk operating profit, for example, for North America, and I was struck by the fact last quarter it was supposed to be operating profit dollar up mid to single digits, now it is operating profit dollar up modestly for the year.

If you back out what you've done over the first couple quarters, that's operating profit dollar potentially even down for the back half of this year, and I'm trying to understand what is driving that?

Is it the advertising spend being 12%, and kind of ramping up for innovation?

Is it maybe Colgate business planning is going up against its comps?

Is it forward buying by the retailers so you expect volumes to be down?

Is it some sort of restructuring to go after overhead?

I know it's a long list, but I guess my question is, very shortly, why?

The answer is, if you go back to 2007, the first comment to be made is that the operating profit in the third and fourth quarters was, you may recall, very high double digit.

Secondly, the operating profit for the balance of the year is not negative in the United States.

It is positive.

And that relates to a combination of gross margin pressure and the investment that we choose to make in the business.

We do have a follow-up then as well from Chris Ferrara with Merrill Lynch.

Hi, Chris.

Thanks for taking the question.

Just real quickly on the advertising spending, and I know you said that you would be, you think, at around 11.7% by the end of the year.

Just to clarify, do you mean that the year 2008 will see advertising at 11.7% of sales, or do you mean Q4 levels will be around there?

Good question, Chris.

I would say that for the full year of 2008, we will see advertising around the same level as this quarter for the full year.

Great.

Thanks a lot.

Sure.

We have another follow-up from Alec Patterson, RCM.

Just in the area of the commodities, I believe in past years hedging has been fairly limited, mostly in relation to corn, or Hills related.

Has that policy changed as you are looking forward here?

You seem rather secure there on your commodity outlook into 2009 in terms of margins, so I'm just wondering if the hedging policy has changed?

The hedging policy has not changed, Alec, and you're correct, we are well hedged and locked in on prices for Hills.

We tend to take a one-year view on these things and manage the rest with our long-term strategic relationships and through the income statement ,so there has been no philosophical change in hedging.

Okay.

Thanks.

This does conclude today's question-and-answer session.

I would like to turn the call now to Bina Thompson for closing comments.

Actually this is Ian.

I'll take that.

Thank you for being on the call, and the questions, and we look forward to updating you again on the business after the first quarter.

Thanks very much.