高露潔 (CL) 2009 Q1 法說會逐字稿

Good day and welcome to today's Colgate-Palmolive company first quarter 2009 earnings conference call.

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

Just a reminder, 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, Ms.

Bina Thompson.

Please go ahead.

Thank you, Dahlia.

Good morning, everybody, and welcome to our first quarter 2009 earnings release conference call.

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

This conference call will include forward-looking statements.

These statements are made on the basis of our views and assumptions as of this time and are not guaranteed to future performance.

Actual events or results may differ materially from these statements.

For information about certain factors that could cause such differences, investors should consult our annual report on 10-K filed with the Securities and Exchange Commission and available on our website, including the information set forth under the caption Risk Factors and Cautionary Statements on forward-looking statements.

We will discuss organic sales growth, which is sales excluding the impact of foreign exchange, acquisitions and divestitures and we will also discuss our results and expectations, excluding charges relating to the 2004 restructuring program which was completed last year.

A full reconciliation of these measures with their corresponding GAAP measures is included in the press release and the company's financial statements, and is posted on the investor relations page of our website at www.colgate.com.

We will be glad to answer any questions you may have including or excluding these items as you wish.

We are very pleased to have begun this year continuing the momentum with which we exited 2008, particularly in the current global environment.

Organic sales growth again increased high single digits, and as expected, foreign currency was a significant headwind.

As we told you we would, we took price increases in overseas markets to offset transaction losses, which resulted in less volume growth than previously anticipated.

This volume decline was more notable in our Hill's business, to cover ongoing commodity cost pressures.

There is, of course, a delicate balance between volume and price.

As you will hear when we review the divisions, we expect volume in all divisions to rebound somewhat as we go through the year.

Gross margin increased 20 basis points, which was very encouraging.

As we told you last quarter and as we mentioned in the press release, we expect the increases to build as we go through the year.

While we have come to the end of our four-year restructuring and business building program, our ongoing funding and growth programs continue to deliver meaningful savings throughout the P&L.

Our advertising was down on a dollar and percent to sales basis due to a number of factors.

Overall media rates have declined in many markets, and in certain instances, competitor spending has been reduced.

This has allowed us to remain competitive in our spending as witnessed by solid market shares around the world.

In addition, in certain key markets, we have shifted away from media to more in-store activities where appropriate, as the consumer is more conscious of value in this current environment, in-store activity communicating our value proposition is even more important than ever.

You may recall that in the fourth quarter, our overhead expenses were down as a percent of sales an indication of our ongoing focus of becoming more efficient.

As you know, in the first quarter, due to market conditions, our pension costs increased as did those of our competition.

Excluding the increased pension costs, our overhead expenses were down 50 basis points from the prior year.

And of course, diluted EPS increased 8% in line with expectations.

Importantly, in these very challenging macroeconomic times, we are staying even closer to consumers to understand how they are reacting to a changing environment.

In addition, we are conducting more in-home visits, learning from online communities and conducting consumer surveys and we found that while shopping behaviors may be changing, buying smaller sizes more frequently, for example, trading down by consumers has not had a significant impact on our business.

Likewise, private label is still not a significant factor in most of our categories.

In fact, excluding Europe, where private label has always had more of a presence, private label is under 5% in every category but mouthwash and liquid soap.

Worldwide private label market share in toothpaste including Europe is about 1.5%, down 10 basis points from the year-ago period.

As you know, we have a portfolio value added products with offerings at every price point, which allows us to remain competitive in both developed and high growth markets.

The new product innovations which have fueled our growth and market shares this quarter follow that portfolio strategy.

Our balance sheet and liquidity are solid and as you read in our press release, cash from operations was up a strong 21%.

So let's look, then specifically at the divisions.

North America had a solid quarter with volume up 2% and organic growth up 5%.

New product activity contributed to the good results along with growth in our base business, supported by both advertising and in-store activity.

As referenced in the press release, our market shares are very healthy with increases in the majority of our categories.

Importantly, overall, our categories are growing and consumption has been increasing with particularly strong performance in March.

The two new products we told you about last quarter, Colgate Wisp and SoftSoap Ensemble are meeting with good early success.

As you may recall, Wisp is a disposable mini toothbrush with a breath freshening bead to make cleaning teeth on the go convenient and refreshing.

Distribution has built very quickly.

The first shipment in March generated almost one full toothbrush market share point, with a share in the last week of the month reaching over 3% and the first week of April over 7%.

Advertising began in April, along with other awareness and trial building activities both in and out of the store.

We have an online contest launching on May 1st called the Face of Wisp in which Wisp fans will post their photos to an online site for national voting for the face that best represents this fresh and appealing innovation.

Of course repeat purchase will be the ultimate indicator of ongoing product success and we will be monitoring that closely.

SoftSoap Ensemble has been steadily building distribution and has been doing particularly well in the food and drug channels.

The integrated marketing campaign to support this launch will include both national TV and print advertising with a message focused on affordable style for every sink.

March share was already at 2.4% driving an increase in overall liquid hand soap share from 39.9% to 40.2%, and this is particularly encouraging as liquid hand soap is more susceptible to private label.

More new product activity for the balance of the year is planned in this category, providing more value added innovation to the consumer.

So looking ahead, volume in North America for the second quarter is expected to grow modestly and should be at mid-single-digit for the full year.

Organic sales are expected to increase mid-single-digit for the second quarter and full year, and operating profit should increase double digit for the second quarter and full year, up absolutely and as a percent to sales.

Turning then to Latin America, organic sales in this region continued to grow strong double digits.

As elsewhere in the world, there is a delicate balance between pricing and volume.

Importantly, our categories are still showing solid growth and market shares are very healthy.

Regional market shares are up in toothpaste, toothbrushes, mouth wash, soaps, liquid cleaners and dish washing liquid.

As you would expect, the spillover effect of a weak economy is present in countries closer to the US.

In Brazil, for instance, Brazil remains quite solid in terms of the macro economic situation with double-digit growth in a number of categories.

Our regional toothpaste share year over year is up 1.5 points to 78.1%.

Nine countries in the region now have market shares greater than 80% and importantly, premium priced offerings such as Colgate Total continued to grow as the consumer continues to purchase products which can deliver added value.

In toothbrushes, we have increased our leadership position as referenced in the release, our share in Mexico is up five points year over year.

Our mouthwash business also continues to grow very nicely.

Our year to date regional share is up over four points and in Brazil, our biggest mouthwash market, we achieved leadership in a November, December time frame and have further extended that leadership in 2009.

We lead our nearest competitor by over four points and are approaching a 40% share of the market.

In Mexico, our mouthwash share is up over three points on a year-to-date basis.

Looking ahead, volume in Latin America for the second quarter is expected to grow modestly, and should be up mid single digits for the full year.

Organic sales are expected to increase mid double digit for the second quarter and full year.

And operating profits should increase high single digits for the second quarter and full year, up absolutely and as a percent to sales.

Turning then to Europe South Pacific.

Challenging macro economic conditions persist in western Europe, with negative GDP and a consumer confidence index at record low levels.

In addition, countries in both western and eastern Europe have experienced considerable weakening of their currencies, adding further pressure to our dollar P&L.

We have been able to offset some of the currency headwinds with increased pricing, the third consecutive quarter of price increases in the region.

As referenced in the press release, market shares are stable, and we have continued to launch new products for the full pipeline for the remainder of the year.

One encouraging sign is a strengthening in our German business, one of the largest subsidiaries in the region.

Our toothpaste market share is up 50 basis points year over year to 37.2%, with the most recent reading at 38.2%.

Our dish washing liquid share there is up almost a full point to 17.4%, with the most recent reading at 20.3%.

And in fabric softeners, our share is up almost 4.5 points with good momentum in the recent period.

Our GABA business is also doing well, both in the established countries and the newer expansion countries in eastern Europe, both toothpaste and toothbrush shares are up with particularly good performance in Germany and in Italy, which is a newer market where we have recently entered the mass retail channel.

Looking ahead, volume in Europe South Pacific for the second quarter is expected to grow modestly and somebody up modestly for the full year.

Organic sales are expected to increase modestly for the second quarter and full year.

Operating profit is expected to be down double digit for the second quarter and to be down mid-single-digit for the full year, but is expected to be up as a percent of sales for both -- for the second quarter and the full year.

Turning to greater Asia Africa, as in Latin America, this fast growing region also continued to enjoy double-digit organic growth.

Our categories continue to grow, many at a double-digit rate.

While shopping behaviors may have changed, we see no reduction in consumption and so far no trading down.

In some markets the consumer is opting to buy bigger sizes of the same product and others the consumer is buying smaller sizes more frequently.

Our toothpaste share increased in virtually all markets on a region-wide basis, reaching 39.7%, up 50 basis points from the year-ago period.

In India, where our share reached 50%, we have seen growth both from the premium and lower price segments of the business, supported with new advertising and other consumer engagement programs.

As you would imagine, growth on the premium side has been in the urban markets.

Our deep distribution in rural markets has allowed us to grow our business in the value segment as we bring new users into the franchise.

In both Thailand and the Philippines, where our toothpaste shares are up over 50%, Colgate Total has contributed to that growth.

In Russia, we have seen an increase in both our Colgate and L Max toothpaste shares.

As you may recall, L Max is the GABA brand which we introduced into Russia last fall and it's doing very well.

Our Russian toothbrush business is strong as well, with shares up 270 basis points year over year to 51.2%.

Looking ahead, volume in greater Asia Africa for the second quarter is expected to grow mid to high single digits, and should be up mid single digits for the full year.

Organic sales are expected to increase double digit for the second quarter and full year, and operating profit should increase double digit for the second quarter and full year, up absolutely and as a percent of sales.

And finally, Hill's.

While organic sales at Hill's increased nicely, volume declined.

This was due in part to a buy-in in the fourth quarter in anticipation of our significant first quarter price increases.

Commodity prices at Hill's are still up year over year, however, our strong pricing along with ongoing savings programs allowed us to increase both our gross and operating margins.

In the US, our Science Diet business continues to be resilient, and we are seeing more category growth in the specialty market where we compete as compared to the grocery and mass markets.

In February, we launched Culinary Creations which is gravy based canned foods for cats, the fastest growing segment in the wet category.

Early results show great promise, and in addition we continue to communicate our value messaging in terms of daily cost of feed with effective in-store activities.

Also in the US, in the prescription diet business, our most recent share was up almost two points year over year to almost 70%.

We launched a Get a Better Life Weight Loss Challenge in veterinary clinics in January, and the program has received great feedback from our veterinarian community.

Additionally, we expanded the urinary health symposium which targets educational and case management communication to practicing veterinarians in key cities.

Feedback from attending veterinarians has been so positive that an additional symposia are being added to the schedule.

Looking forward, Hill's volume is expected to be down modestly for the second quarter and full year.

Organic sales are expected to be up double digit for the second quarter and full year, and operating profit is expected to grow double digit for the second quarter and full year, up absolutely and as a percent of sales.

So in summary, we are pleased with how we have started off the year.

Our organic sales continue to be strong and our market shares are healthy around the world.

So while we are mindful of difficult economies in many countries, we think we have the right strategies in place, coupled with the strict financial discipline to continue to deliver solid results as we go through the year, and now I'd like to turn it over for questions, Dahlia, if you'd like to open it up, please.

Absolutely.

(Operator instructions).

Once again, we are pausing for just a moment to assemble our roster.

We are going to Bill Pecoriello with Consumer Edge Research.

Good morning.

Ian, my question is if you could help us understand is your organic sales growth remains quite robust, and you're gaining market share in just about every country.

Are your market share means accelerating.

What are you seeing with the underlying categories if you look at Oral Care versus personal care, pet, household, is your pace of growth, the gap widening in terms of how fast you're outgrowing your categories?

Well, it depends, Bill.

That's a very broad ranging question.

I think if you sort of break it down into component elements, first of all, we continue to see growth in our categories around the world.

Indeed, if you take the Hill's business with its limited distribution channels, the channels that we distribute to also continue to grow by which I mean the PetCos, PetSmarts, the neighborhood pet and the vets.

So, yes, we are continuing to see growth very much along the lines that I talked about with the fourth quarter call, with Europe being the weakest, North America stronger and then of course the emerging markets stronger still.

We continue to see private label contained at the levels that I have talked about before.

We have categories that while no category is immune to private label, ours certainly seem to be resistant and we are not seeing a growth in private label and we continue to see a tradeup to premium offerings in our categories even in the emerging market.

So, all of that continues to move as it has done in the past as we strive to put the right value equation in front of the consumer, which as I have said before is not necessarily price, and so we are seeing growth in certain countries in market shares.

We are certainly holding our market shares elsewhere as we take, as you say, fairly significant pricing, which underpins the strong organic growth.

And then just one follow-up on -- and is destocking impacting any of your categories in a notable way in the quarter?

Always an interesting question.

Again, Bill, when we think about inventory, I guess we think about it three ways.

Number one is the consumer's pantry because everything starts with the consumer and there, I think as I have said before, we do in -- particularly in the developed markets but we do see consumers work down their pantry inventory before they come back to a category.

So that's certainly a factor.

Trade destocking, I must say, not to any significant degree.

There is no question that all retailers are focused on becoming more efficient and reducing their inventory to get better turns and we partner with them to do that.

The only relationships where we have choicefully made moves would be with distributors in some parts of the world where if we have a liquidity concern, we have changed our go-to-market channels of distribution and therefore, if you will, already created our own destocking by transferring the business elsewhere.

And finally, I guess inventory plays into assortment and shelf space with retailers which also is always under review and in the main with the resets this year, we have either held our position or increased position at the shelf.

So the headline answer would be no.

Thank you very much.

Thank you.

Let's move onto our next question coming from Ali Dibadj with Bernstein.

Hey, guys.

Wondering whether you could talk a little bit about your philosophy around the elasticity because it does look like broadly your aptitude getting worse and worse going forward.

I wanted to see how you thought about that and particularly drilling down perhaps as an example into Hill's, as if you look at what you had suggested was going to if you look at what you had suggested was going to be the Hill's numbers for this quarter, you kind of missed on every single one of those metrics, even with sell-in because even going forward you're assuming volume is going to be negative.

So what were you surprised by there?

What should we watch out for?

And then I have a follow-up on that one.

Yes.

Well, Ali, let me -- you know, let me talk about pricing in general.

What we watch is the consumer, obviously, and as I have said, they do work down their pantry, but our market shares continue to either hold or increase and the trading up we see with consumers continues.

As you look at the balance of this year, new pricing that will be taken, obviously, eases, and we have a rich portfolio of innovation which brings value to consumers to come.

In the first quarter, as we had to step up in the fourth quarter, we took meaningful pricing, because of the transaction impact and our general philosophy is to take that pricing quickly, to implement it at the shelf in parts of the world that are very accustomed to devaluation impacts on pricing, and then move on with our traditional marketing programs and recover accordingly.

So we are quite comfortable with that.

Hill's is a slightly different situation this time.

We told you about the pricing that we had already taken or announced at the first part of this year, which played into the volume shift last year, and as we have said before, you tend to see a quarterly dip in both the Hill's consumption and the category consumption on the basis that most other competitors price at the same time.

That did not happen this time.

So the Hill's pricing in the first quarter, we elected to maintain and we now understand that competitive pricing has been announced that will take place late in the second quarter this year.

So what is unusual about Hill's in this particular case is that the industry did not move within the same time period and therefore it's going to take a couple of quarters before the Hills business comes back, and indeed the second quarter is up against a record quarter for last year, and we see the business positive on a volume basis in the second half of the year.

So a slightly longer lag because of the decoupling of when our pricing was affected that shelf, and when competitors price time, which is different than prior.

That makes sense and a follow-up in terms of a benefit obviously you get from taking pricing is margin expansion and focusing in on SG&A in particular, can you break that out a little bit sort of like you do with gross margins in terms of the puts and takes so obviously negative 210 basis points on advertising, you clearly added, you had a positive basis points from funding the gross, funding the growth, there is some volume deleverage, obviously pension expense in there and currency.

Can you give us just a sense of some of those drivers or maybe there's some that I'm missing as well.

Well, probably not, I guess.

We have gone through those component elements.

Perhaps the only one I would comment on is the advertising to perhaps put that in an appropriate context.

We are actually very happy with where our advertising is both in this quarter, and where we expect it to be for the year, and there are several reasons for that.

Some of them I talked about on the fourth quarter call.

We are seeing the costs per unit of media coming down.

We are seeing that between five and 25%, depending on which country of the 80 we advertise it in is.

We are seeing in some key markets competitive spending coming down meaningfully in some core categories, and we have continued, as Bina commented, with our shift to do more communication and connection with consumers at the retail level, when value decisions are ultimately being made.

We had in fact set for ourselves a goal this year to gain 10% of saving in terms of cost per advertising unit.

We did slightly better than that in the first quarter, and look to maintain that over the year, such that although our absolute dollar spending will be down on prior year, we think that our impressions will be up.

So we think we have entered the year prudently, and our advertising increases over the balance of the year.

But I guess that's the only ratio I would add additional comment on.

Okay.

Thanks.

Our next call comes from Bill Chappell, SunTrust.

Good morning.

Hey, Bill.

Just wanted to follow up on the Hill's pricing question.

I imagine by now that the commodity costs for that business have come down or should come down pretty dramatically, so why wouldn't you look to roll back some of the price increases you took last year or step up the couponing and promotional efforts on that business?

Pricing actually has come down in some but in others has continued to go up.

Indeed in the aggregate, in terms of the key raw materials, they were up between 18 and 20% in the first quarter.

So some of these agromaterials we use, some of them quite specialized haven't actually yet started to come down.

Now, there's no question, Bill, that over the balance of the year pricing becomes less of a factor for the Hill's business because we do expect those prices to come down in the second half, and of course we will continue with our marketing activities as we continue to manage this balance as flexibly and agilely as we can.

We always start with the consumer in mind and in this case I guess it's two consumers, the owner and the pet themselves, and very much structure our programs accordingly.

So half on half, you are right, you will see that switch but the material prices haven't gone down as quickly in this business as some others.

And just a follow-up question.

I know this only happens once a decade or so, but as we look out at the market and you have a strong balance sheet and there seem to be some other distressed properties out there do you look at acquisitions any more aggressively or are you pretty comfortable with your portfolio as is?

I would say certainly in terms of a notion of would we wish to expand categories, we are very comfortable with our portfolio the way it is.

We are always very focused on the opportunity for the right acquisition.

In our language, that starts with category strategy and what that property could add to advancing our strategy like Tom's has, and GABA has in recent years, and to be sure, if an appropriate property became available at perhaps a more advantageous price in this environment, we would be keen as we have in the past and our approach hasn't really changed, only time will tell whether opportunities present themselves.

Great.

Thank you.

Let's move on to Andrew Sawyer with Goldman Sachs.

Hey, guys.

I wonder if you could address a little bit the pricing dynamics in Latin America.

I know your pricing in front of the valuation but from our perspective also seems like you're pricing a bit ahead of CTI and how consumers react to it and I know you talked positively about Colgate Total continuing gain in Brazil.

Can you talk about how the consumer is reacting and maybe compare and contrast the differences between a Mexico and Brazil in a category like toothpaste?

Thankfully the consumer seems to be reacting the same way.

As Bina said, our Mexico share year on year is up five points.

Our Brazil share I think we showed in the release is just about at 70% and the consumer continues to buy our products, our categories and thankfully our brands.

So I must say we continue to see the consumer staying with the category and in Latin America for all those markets, new pricing is over the balance of the year our innovation increases and as I have said earlier in response to a question, our advertising increases over the balance of the year.

So we think this quarter in all geographies but particularly Latin America was a prudent way to start the year and as Bina said, we have put in place many new techniques on top of all the techniques we use to get us very close to consumers on a weekly, monthly basis in their homes with them in stores to watch exactly how they are shopping and how their behaviors may be changing and so far they continue to stay with us.

Thank you very much, guys.

And next up with Citi Investment Research, we have Wendy Nicholson.

Hi.

My question goes back to the advertising and the promotion trade-off that you're doing and I just want to understand whether this is sort of a byproduct of some of the CBP stuff that you did and understanding the value of different types of promotion or how much of this is driven just by the macro environment right now, you know, in other words, philosophically, do you think that the advertising level as a percentage of sales which I think the target had been 12% back when you had the last restructuring program, you were kind of creeping up to that, is that off the table because of your analytics or just because of the market we are in right now?

Very good question, Wendy.

I think it's a combination of factors.

If you take the store, you know, as real estate to connect with the consumer, you're absolutely spot on.

CBP has been educating us that this is a great place to connect and communicate with folk before they buy and that communication can be a lot deeper and richer than just pure price.

So from our CBP commitment, we were already strategically shifting funds to the retail environment.

There is a piece that is related to the environment we are in like the Hill's, Feeding Is Believing campaign where the value of a quality pet nutrition product is conveyed, unlikely we would have done that in a flatter environment, and frankly, on the ad spend side, you've got this enormous buyer's market opportunity to get great quality media at lower costs and remain extremely competitive in a marketplace with the same, if not more impressions on a local currency basis and it seems prudent as business people that we would take advantage of that while continuing to build our brand.

So the store piece of it definitely has both components in it, but if you -- if you get behind it strategically, we were moving that way more, and of course that spend is captured in gross to net, not in the traditional advertising.

And I don't know enough about media companies to know this, but how far out can you lock in those lower rates?

I mean in a market like Brazil, can you lock in two years worth of advertising at lower rates or how does that work?

Again, it depends.

Advertising, as I say, is in 80 countries, each one is local negotiation, some of them are still ongoing, so one doesn't want to talk too much, and, again, the question of locking in, it's a bit like oil, I guess.

When would you have wanted to lock in and when not as some are finding out, but I would say you can lock in advertise -- you can buy scatter, which is basically any forward buy on a weekly or monthly basis, or you can negotiate out a year, roughly, depending on the market situation.

Okay.

That's helpful.

And if I can ask just one quick question on Hill's.

Your understanding, or your sense of the volume declines, these sound like more actual destocking issues or category issues, but your sense is not that consumers are making the deliberate choice to trade down to a cheaper type of dog food?

Because I would worry in that category, that if you trade down to, Dog Chow or whatever it is, that it's hard to get a consumer to trade back up to buying the product through the vet or what not, but it doesn't sound like that's happening or can you clarify that for me?

I can clarify it, Wendy.

Clearly the impact is two things.

It's the pantry, if you will, destocking before they go back to buy, and we have seen category consumption slow after we take a price increase, but interestingly, the channels through which we sell, which tend to carry the premium products, continue to grow, frankly, while mass and grocery in that segment are declining.

So people are not switching out of, if you will, a pet nutrition product into a basic product at another channel.

They are staying with that behavior to give their pet the benefit that they believe the pet deserves.

Terrific.

Thank you very much.

Moving on now to Chris Ferrara with Merrill Lynch.

Hey, guys I just wanted to ask about elasticity and I guess to the extent, like in a place like Latin America that the elasticity doesn't seem to be one for one, in other words you don't seem to lose a full point of volume over any longer period of time for every point in pricing that you take, I mean, when that price lapsed and I guess you logically expect a similar dynamic that I guess the definition of organic growth probably comes off as pricing comes off?

Does that make sense?

I'm not sure I fully understood the question, Chris.

I mean, organic growth remains the same definition, but the ratio between price and volume would shift, yes.

Right.

I guess what I'm saying is I guess the first question is have you -- do you think you've lost a point in a volume for every point of pricing you've taken in most of these markets?

It certainly is not that precise, so, no.

Right.

Then I guess the follow onto that would be as pricing eventually anniversaries and goes back down, you also wouldn't expect a full point of volume recovery for every point of pricing that ends up eroding off because of a lapping is that also right?

Yes, to the same math that that's right.

The honest answer is you simply can't be that precise from a modeling point of view.

The operating reality will be we think that as the pricing eases with innovation, the fact that we are taking our advertising up over the balance of the year, we will see volume rebound.

That's the way I see it from an operating point of view.

That's great.

That helps.

Thanks.

And can I just ask you to give that gross margin walk?

I'm just wondering how commodities paced in the quarter.

Sure.

Okay.

So Chris, if we take the prior year gross profit, which was 57.3, right?

Chris?

Yes.

Okay.

Just wanted to make sure I hadn't put you to sleep.

The pricing was a positive 300 basis points.

Got it.

Restructuring negligible 10 basis points as you would expect, funding the growth, 80 basis points in line with the first quarter last year, material prices, negative 350 basis points, again, about the same as the first quarter last year down on the fourth quarter and just over half of that was foreign exchange related, all other changes negative 20 and then the current year gross profit, the 57.5 so I think that tracks through it.

That's perfect.

And does the FX portions as -- that 350 raw math piece, I'm sure the commodities piece keeps going down as you move on, but FX, the portion of that, the transaction part, does that get worse the next quarter?

We think it will be slightly worse in the second quarter on a comparative basis, and then start to ease off across the back half of the year.

Great.

Thanks a lot.

I appreciate it.

Sure.

(Operator instructions).

Now let's move on to Alice Longley with Buckingham Research.

Hi.

Actually, I have one housekeeping and then another.

Just the corporate, which is up because of the pension costs, could you just give us a guidance for that for the year?

Yep.

Hold on a sec .

And on that also, on -- I'm assuming you're amortizing the increased pension funding needs so that I shouldn't expect that need to go down in 2010, it will stay elevated for a while?

Yes, that's right.

The pension is about $0.10 on the year between the US and Hill's, evenly spread across the quarters, obviously.

So I think that answers the pension question.

Yeah, I can back that out.

Yeah.

Okay.

And then my other question is drilling back down into Hill's where the volume was down and I'm interested in the category and you said from your data shows you the consumer is still shifting to the specialty channels.

Can you tell us --

I didn't say shifting.

I said going, yes.

Well anyway, the consumer spending on dog food in specialty channels, can you give us the growth rate in volume and then the data that you have for mass channels, can you give us that too and tell us whether to include Walmart and price clubs?

And my point is I'm wondering if your data shows better growth in specialty channels in part because often your data for mass excludes Walmart and Costco and maybe consumers are going to those channels more?

But we don't -- we don't measure on a regular basis Walmart and grocery because we don't -- we don't distribute there, so the only data we look at is the Nielsen all outlet panel data and the Nielsen track data which as you say doesn't include Walmart and some other retailers.

So I'm only reacting to publicly available data on the other channels as we are with the pet nutrition channels as well.

So I don't have that detail here with me, Alice, but it is -- we can let you have it subsequently.

It's just publicly available data.

I'm just wondering if the consumer maybe is shifting from specialty channels to Walmart and the Price Clubs and you just aren't seeing the data but that could be going on.

No.

I mean, that I can answer pretty categorically.

The shopping consumer, based on the data we are seeing is staying in our segment, I hasten to add, not a general pet food buyer, I'm talking about a specialist pet food buyer is staying with those outlets because the volume and value is up.

Okay.

And maybe Bina will call me later with that data.

Thank you.

Our next question now comes from Bill Schmitz with Deutsche Bank.

Good morning.

Hey, Bill.

Can you just talk about the gross margin percentage guidance for the year?

Because I think now you said it was going to be towards the high end of that 75 to 125 basis points and I think last time you said it was going to be above that 125 so was that an intentional change or it was just semantics in the press release?

It was an intentional semantic change in the press release, Bill.

We said at least up to the 125 basis points as I think I commented on the last call, our current estimates indeed would show it north of that.

In other words, higher.

So you think it's going to be higher now than last time?

No.

Higher than the 125.

Oh, okay, got you.

Because reading the press release it sounds like it was toward the high end of the 125 so I misread it.

It said that at least in our current estimate shows it higher than the 125 basis points.

Okay.

Great.

And then can I just ask one more question on China?

I know it's not a huge market for you but it seems like a lot of the local players now and including the brand that Unilever bought are starting to really entrench their market share.

Is there a plan to attack that?

Because it seems like your shares are also in toothpaste and toothbrushes are waning a little bit there so what's the dynamic playing out and how do you kind of combat that?

Shares actually up in China.

I must have bad Nielsen data, then or maybe it's old.

Yes.

I've said before, yeah, it's up just over 20 basis points but who's looking?

I think I've said before, Bill, the challenge of winning share in China is very much about taking consumers away from the local brand, because if you take away the international players there, as you rightly say, about half the market is still the local brands and it's not that these brands are cheapies.

They cover the waterfront in terms of price point and positioning with some fairly unique flavors.

So the simple way of answering the question is we have an R&D capability in China, we have a flavor capability in China, we have a very rich innovation center with consumer insight capability in China, and as we look at our innovation flow, we are connecting more closely than ever with Chinese tastes and communication desires to engage more aggressively, I would say with the local consumer to win their loyalty away from the local brands.

Okay.

Great.

Thanks very much.

Moving on now to John Faucher with JPMorgan.

Yes.

Thank you very much.

I realize given the volatility in 2009 it's difficult to ask about 2010, but, you know, as we look out and try to figure out where margins can go going forward I guess there is some concern in terms of across the entire universe how much of the raw material favorable you're going to capture in '09 and drop to the bottom line and same thing with the advertising spend so realizing you're not going to comment about numbers or anything like that, can you talk with us philosophically about how much of the benefit in those two areas, raw materials and advertising, you're going to store up and save for next year in case we start to see some of these factors moving in the opposite direction?

Thanks.

Yeah, John, as usual, an extremely profound question, but very, very difficult to answer even in the abstract, given the volatility swirling around us.

So I don't think I'll even try, frankly, if you don't mind.

It's very difficult to predict.

If you take the macro view on the advertising side, some of the big players that are coming out of the marketplace, you have to ask yourself the question will they be coming back in in 2010 because that obviously will set a train work for how the marketplace might look in some of the key geographies and we haven't even begun to take a stab at materials for the coming year.

Well, I guess maybe to sort of just make it a little bit less broad then, do you feel like you're leaving yourself enough cushion, then, in terms of not dropping all of it to the bottom line, or do you feel like you're giving yourself some flexibility, because you're obviously putting up good reported numbers, you're eating a pretty big piece of the translational currency impact.

I think the market wants to make sure there's something there in case things move in the opposite direction.

Well, I think in terms of the way we have approached it, we have been prudent in terms of our approach to the first quarter.

We have taken the pricing necessary to begin to solidify the gross profit.

We are taking advantage on the media side and we think there is more to come across the balance of the year and, of course, as we discussed briefly on the call the last time, the organizational and therefore overhead benefit of the changes we have been working towards over the last four years will continue to play out.

On top of that, we have the Colgate business planning, which we are continuing to use to find more efficiency in the spending.

So I do think between all of those areas that we have, we are providing ourselves enough runway or agility to manage the company going forward.

Okay.

Thank you.

Okay.

And next from Caris, we have Linda Bolton-Weiser.

Thank you.

Can you just kind of clarify because maybe I kind of missed the concept here of why you're confident that overall volume will be up in the second quarter, even though you're saying that the Hill's volume won't rebound really at all until the second half?

Is it just the new product you have planned or what gives you confidence?

Well, it is a combination of things, Linda, first and I haven't sort of talked about the strategy much so far this morning, but we continue to believe that the four prong strategic initiatives we have been deploying for the last five years are still spot on, which is this focus on the consumer, the profession and the customer, innovation, efficiency and of course the Colgate leaders that make it happen, and in terms of what they are making happen as we move forward in the year, number 1, our innovation stream gets stronger.

Number 2, new pricing eases over the balance of the year.

So there's less new price entering the marketplace, and, 3, our advertising investment increases on a ratio basis as we go forward, lifting impressions in the local marketplace.

So it is those three factors, I guess, driven by the strategy that give us the planning confidence going forward.

Okay.

And then just let me ask it because there's a lot of speculation about what's going on in Mexico.

Is there any impact at all on your business because of the swine flu situation there in Mexico?

Not really.

We obviously are watching it very, very closely.

We are keeping our people out of harm's way and taking all the right hygiene actions, but we haven't seen an impact on the business.

Our facilities, we view as being strategically important in terms of people washing, and washing their bodies, et cetera so we are keeping our facilities open, but we are just keeping a very close eye on it.

Has retail store traffic been impacted a lot?

We have actually seen at least in the beginning a little bit of an uptick as consumers bought a little bit more perhaps with some of the, I guess tomorrow will be a vacation day there in terms of May Day as people have bought for volume but it is too early to start to make, you know, statements about what's going to happen at retail.

Thank you.

Next up from Barclays we have Lauren Lieberman.

Thanks.

Good morning.

Hi, Lauren.

Hello.

I just wanted to ask a bit about western Europe.

So just in the press release it was, I think you said that volume in the UK was down but market shares were up and knowing how big a market that is, I was wondering if you could comment about if it was trends at retail, new pricing that went in in the quarter, sort of the dynamic there and then France and Italy where it seems that both shares and volumes are down, what's going on from a competitive standpoint?

Yeah, honestly Lauren, we don't normally get into a country by country, but let talk Europe generally.

One sec.

We have in the -- if you take the western Europe, western European market now, we have seen some category contractions in France and in Italy, I don't think that is particularly new news.

We have obviously taken pricing in Europe which may not be at the levels it is in other geographies but nonetheless is a factor in the -- in the European market, and in the UK the slowdown we are seeing there traces I think to the timing of promotional activity with a slow start to the year.

I think the more underlying condition is more on the western European mainland.

Okay.

And then was volume down significantly in eastern Europe?

Like how -- how big, I guess, is the gap between western and then central and eastern?

The volume was down much less in central and eastern Europe than in western Europe and indeed if you take that whole, you know, sort of eastern Europe, Russia, Middle East sort of aggregate group of countries, the volume was actually up.

Okay.

Great.

Thank you so much.

Let's move on now, taking a question from Alec Patterson, RCM.

Yes.

Good morning.

Hey, Alec.

Hi.

Funding the growth, generally I think you talk about it as over time generating north of 100 basis points of gross margin in increment and for whatever reason the first quarter always seems to come up shy and did again this quarter.

Can you speak to what you're expecting from the program this year and what its ongoing contribution could be?

One second, Alec.

Yeah, we are -- if you look -- if you look going forward, you're right, we do always tend to phase a little bit lighter at the beginning of the year.

As we look going forward, our current estimate would be broadly in line with prior year full year.

So the same kind of progression that we have seen in previous years.

Okay.

That's helpful.

And just to clarify, in answer to a question before, you were talking about the advertising spend increasing through the rest of the year, and I'm trying to understand that.

Was that increasing from the rate at which it came in in Q1 or increasing year over year going forward?

I'm sorry.

Just clarify that.

Yeah, indeed, Alec.

It was increasing from the first quarter rate of advertising across the balance of the year.

So you mean like as a percent of sales it would be higher?

Is that what you're --

Exactly so, yes.

Okay.

Great.

Thank you.

Sure.

Our next question comes from Connie Maneaty with BMO Capital Markets.

Hi.

I also have a question about swine flu but mostly since we all worried years ago about bird flu and SARS, have you changed the way you managed event risk and if the world's health organization, you know, moves up from level 5 to level 6, which some news reports say it's going to do, does it change in any way the way you do business?

And then finally in Mexico, apparently things are going to close for five days, not just for May Day.

Can you give us an estimate of how that would affect your business there?

Yeah.

Connie, a good question on a very topical subject.

First of all, we have a very well established risk management procedure as it relates to such health matters, of course, very well developed at the time of the Avian flu in Asia so, yes, we do have it, we have deployed it before, and we stand ready to deploy it again, at the most basic level, obviously the first thing one manages is the travel of the executives both in country and around the world, but we do have a very well established plan.

Secondly, no, I'm very well aware that there is a closedown in Mexico until May the 5th.

We have not -- we have not closed down as I tried to suggest on the earlier answer, we are keeping our facilities open because the personal care products we provide, we view as providing the everyday hygiene benefit that the World Health Organization and others are suggesting that consumers avail of.

I think in terms of any retail impact on the business, we will all have to take stock of where the marketplace is after May the 5th.

Just a follow-up, do you make any hand sanitizers or disinfectants?

We do not make disinfectant.

We make obviously body and hand cleaning products and regular washing of hands is, of course, one of the key practices.

Okay.

Thanks.

Ladies and gentlemen, we have time for one final question and that will come from Jason Gere with RBC Capital Markets.

Good morning or good afternoon.

Just a quick one Ian, I was wondering if could you talk about your strategy of kind of managing profitability versus volume growth and share and some of the non-Oral Care categories specifically home care when you are soon to be anniversarying some of these higher cost inflation that we saw last year.

Thanks.

Yeah.

We -- you know, we have a very vibrant home care business.

It is of course more regional than our Oral Care business.

As we look at it from an organic growth point of view, interestingly, our home care business is up about 7%, our personal care business up about the same, 7%, and the Oral Care business up north of 9%.

So where we have our home care business, we apply the same strategies that we apply to our other strategic businesses.

We bring innovation, we have indeed offset costs in these businesses but we continue to manage them for organic and market share growth.

So we don't think about them differently from a strategic point of view.

Okay.

And actually could I just ask one more?

As we are talking about Mexico and I know after May 5th is when we will probably get more clarity, if there are impacts, would you treat this, I assume you would, as a one-time item in the second quarter or strip it out for us on the next conference call?

Let's see where this goes yet, Jason.

It's -- I think it's too early to call.

Let's see where it goes.

Okay.

Thanks.

Okay.

Well, thanks, everyone, for calling in.

Thank you to all of the Colgate people around the world who make all of this happen, and look forward to catching up with you on the next call.

That does conclude today's conference call.

Thank you for your participation.