高露潔 (CL) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Colgate-Palmolive Company second quarter 2009 earnings conference call.

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

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

At this time, for opening remarks, I'd like to turn the conference over to the Vice President of Investor Relations, Ms.

Bina Thompson.

Please go ahead, Ma'am.

Thank you, good morning.

Welcome to our second quarter earnings release conference call.

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

This conference call will include forward-looking statements and thee statements are made on the basis of our views and assumptions as of this time and are not guarantees of 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 Form 10-K filed with the Securities and Exchange Commission and available on our website including the information set forth under the captions, risk factors, and cautionary statement 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 statement and is posted on the investor relations page of our website at www.colgate.com.

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

We are pleased with our strong results in the second quarter.

Of particular note is our outstanding progress in gross margin, excellent bottom line performance and continued healthy organic sales growth.

As you know, building gross margin momentum is a critical part of our financial strategy as is having the appropriate balance between pricing and volume.

As you've seen, we have been able to successfully implement price increases through last year and into the first half of this year.

With the easing of raw material cost increases and what appears to be a stabilization of currency movement we feel pricing is where it should be and would expect to shift the focus back more to volume as we move through the rest of the year.

And you will hear as we go through the divisions about some specific initiatives we have in place to generate volume growth.

One important driver of volume is advertising.

As we stated on our previous call, advertising in the second quarter increased from first quarter levels and we expect that to continue in the third and fourth quarter as well.

And as we also have previously discussed, this will be a combination of media and our increasing focus on effective in store activities we plan to fund that advertising through gross margin increases and as you've seen, those things are happening and should continue to happen through the balance of the year.

Gross margin increases are expected to be at least at second quarter levels in the third and fourth quarter.

Now, it's important to note that our funding the growth program continues to deliver excellent savings and we expect to see similar benefits in the second half of the year.

This gives us further confidence in our ability to increase gross margin.

In short, our financial strategy which you know very well is working.

Our market shares in key countries around the world are increasing and our pipeline of innovation is as full as it has ever been, with value added offerings at every price point.

Now, I'd just like to spend a moment on volume.

As you saw in our geographic sales analysis attached to the press release, volume for our Colgate businesses was positive in the quarter.

Volume increases for our Colgate businesses should improve through the balance of the year and more importantly, we expect Hill volume to improve substantially and we'll review that in more detail when we discuss the Hills business.

Not only do we have strong profitability, our balance sheet is strong as well including our key financial ratios which are moving in the right direction.

The second quarter delivered another quarter of strong cash generation, our working capital declined year-over-year and our return on capital reached 36.5%, up from 32.7% in the first six months of 2008.

So let's turn to the divisions, starting with North America and we're delighted to see that the North American business is healthy with good volume growth.

Organic sales growth and market share growth.

In fact, in the US alone, volume increased 3.5%, with organic sales growing 4%.

Furthermore, in the US, consumption is strong up almost 5% on a volume basis.

Our growth is outpacing category growth which is reflected in good market share increases.

In the quarter, our shares were stable or up in 11 of 14 categories.

New products obviously are critical to our success.

One of our newest innovations, Colgate Wisp, as disposable mini brush is off to a good start with strong market shares as referenced in the press release.

Importantly, early trial and repeat numbers are ahead of the norm for the toothbrush category.

Early display support was excellent and consumer communication included a wide variety of touch points including terrific publicity with the product being featured on the Today Show and other television shows.

In the liquid hand soap category our first quarter launch of Softsoap Ensemble continues to contribute to share growth.

Our overall liquid hand soap market share in the second quarter as measured by Nielsen was up 2 full points year-over-year.

We have a number of additional new products scheduled for the second half of the year.

One is a new line of body wash called Softsoap Nutriserums.

In facial products, nourishing rich serums are known for effectively delivering soft, healthy looking skin.

Nutriserum is infused with softening serum pearls, Omega-3 and 6 and vitamin e, delivering serum benefits in a body wash.

In the toothpaste category we will be launching Colgate Total enamel strength.

As you know, Colgate Total is the number one recommended toothpaste by dentists and hygienests in the US.

And the only toothpaste approved by the FDA for fighting gingivitis.

Since its launch in 1997 with a steady stream of innovation Colgate Total now has about t15% of the market.

This latest variant capitalizes on the significant professional interest in enamel care as well as the threat to tooth enamel posed by acidic food and beverages in the diet.

Colgate Total enamel strength is formulated to strengthen tooth enamel and clean gently while providing all the benefits of Colgate total.

Shipments start next month.

All this activity bodes well for continued momentum in North America and looking ahead, volume in North America is expected to increase mid single digits for the third quarter and full year with organic sales growing at similar levels.

Operating profit is expected to increase double-digit for the third quarter and full year as well, up absolutely and as a percent to sales.

Turning then to Europe South Pacific, Europe remains the most challenging region from a macroeconomic perspective with GDP growth rates declining in most of Western Europe and relatively flat in the South Pacific.

Despite that our market shares are holding and new product activity is robust.

In toothpaste as in the US, we are following a strategy of building a family of variants under the Colgate Total franchise which continues to drive share.

Following the original Colgate Total and then Colgate Total plus whitening, earlier this year we launched Colgate Total Advanced Clean.

In the second quarter we launched Colgate Total advanced sensitive as a complementary offering to Colgate Total Advanced Clean.

In toothbrushes we launched Colgate max white starting late in the first quarter and it has now rolled out across the division with very good early results.

Activities in store which showcase the Colgate max range with both the toothbrush and toothpaste have been particularly successful in driving share.

Our new product pipeline for the second half of the year is even fuller than the first.

In fact, we expect sales from new products in the second half to be about double the sales of new products in the first half.

And we expect advertising spending to also increase in support of these launches.

This should help deliver improved volume.

So, looking ahead at the balance of the year, we expect volumes for the third quarter to be up modestly and down slightly for the full year with similar organic sales performance.

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

Turning then to Latin America, our business in Latin America continues to be strong with maintained double-digit organic sales, increased pricing and excellent profit growth.

Although Latin America is not completely immune from the global economic crisis, our strong market positions combined with a portfolio of products across all price points, have allowed this region to continue to deliver very good results.

And as referenced in the press release, our regional toothpaste market share continues to increase.

Interestingly enough, our premium priced value added Colgate Total gained 2 share points year-to-date with increases in virtually every market, a testament to the fact that even in the challenging economic times, the consumer is willing to pay for superior product performance.

Our toothpaste share in Mexico is at 85.4 year-to-date.

Even with the year ago high levels with the most recent read at 85.8.

Our year-to-date record toothbrush share in the region of 41.6% widened our lead to over 9 points.

In 2006 we were close to parity with our nearest competitor.

In Mexico our share increased almost 4 full points to over 40% on a year-to-date basis.

Enhanced in store activities with compelling merchandising helped to achieve these results.

In Colombia, increased focus on the pharmacy channel helped to increase our toothbrush share by 2.3 points to almost 45%.

As you know, we have been making renewed effort on mouthwash in markets outside North America.

Across Latin America we increased our market share almost 4 points versus year ago with gains in virtually every market.

Other categories where we increased our market share across the region include bar soap, shampoo, dish washing liquid and liquid cleaners.

Looking ahead, we expect volume in Latin America to grow mid single digit for the third quarter and full year with organic sales continuing to grow double-digit for both periods.

Operating profit is expected to grow at least high single digit for the third quarter and full year, up absolutely and as a percent to sales.

Turning to greater Asia, Africa.

The modest decline in volume in this region was largely due to weakening market conditions in South Africa, Russia and Ukraine.

South Africa was also impacted by a first quarter buy-in ahead of price increases implemented in the second quarter.

Greater Asia alone increased volume modestly.

And importantly, the renewed momentum in China we saw in the first quarter continued with volume increasing mid single digit in the second quarter.

India also continues to be strong with another quarter of double-digit volume growth.

As elsewhere, new products played a critical role in driving volume and market share across the region.

In toothpaste our leadership market share increased in 8 of 12 markets.

Our share in China increased to 31.6, up 110 basis points versus the prior year.

In India, our share increased 220 basis points to 50.3%.

In Russia, our share was up 80 basis points to 34.3%.

Premium price products such as Colgate Total and Colgate max fresh as well as value priced products such as Colgate white and Colgate triple action contributed to these impressive share gains.

We continue to enjoy leadership across the region in manual toothbrushes as well.

In India, our share was up 40 basis points to 37.6% driven by momentum in the base business as well as new products such as Colgate extra clean gum care.

And in Russia our share was up to another record of 51.8%, up 260 basis points from a year ago.

We told you last quarter about our successful launch of Colgate Plax mouthwash in Thailand.

Building on this success we've launched in on the markets including China, Russia, the Philippines and Malaysia and have built share in all these markets.

We're very encouraged by the resiliency of the consumer in countries such as India and China which is reflected in the health of these businesses.

In addition, macroeconomic factors in Russia seem to be improving which bodes well for the balance of the year.

So looking ahead, we expect volume in greater Asia, Africa to be up modestly for the third quarter and full year with organic sales growing high single to double-digit.

Operating profit is expected to grow double-digit for the third quarter and full year up absolute and as a percent to sales.

Finally, Hills.

Hills performance was somewhat weaker than expected on the top line.

But operating profit increased nicely due to higher pricing and our ongoing cost savings programs related to gross margin and overhead expenses.

As referenced in the press release, the volume decline was due primarily to forward buys in the prior year associated with July 1, 2008, price increases.

Importantly, our shares remain relatively table in the Science Diet business and are up year-to-date in May for the prescription diet business.

This is due in part to the continued, Get a better life weight loss challenge that continued in veterinary clinics for the second quarter.

In the feline category Hills also continued the urinary health symposium which targets educational and case management communication to practicing veterinarians in key cities.

A number of new products were referenced in our press release.

In the third quarter we will be launching a new line of treats available in seven varieties to address a wide range of special needs.

Oral care, mobility, bite, immunity, training and skin and coat in both biscuit and jerky form.

In addition, in the second half we will be implementing more value building in store activity as well as other pricing focus programs to drive volume.

These will be funded by our increasing margin generated by both price increases already taken, as well as a more benign raw material cost environment and our ongoing funding the growth programs.

So looking ahead, volume at Hills is expected to increase low single digit in the third quarter and decrease modestly for the full year with organic sales increasing mid-to high single digits for the third quarter and full year.

Operating profit is expected to increase mid single digits for the third quarter and full year.

So in summary, a solid quarter, particularly given the challenging macroeconomic times we all face.

We're particularly encouraged by the excellent gross margin increase, strong bottom line and continued healthy organic sales growth.

And as we have said, we're encouraged by our prospects for the balance of the year, both in the developed and emerging markets.

Our focused financial strategy is working well and with a good lineup of innovative new products we expect to continue to deliver good results.

My apologies.

I have a frog in my throat.

And now I'd like to open it up for questions.

And I'm going to turn it over to you.

(Operator Instructions) We'll have our first question from Bill Chappell with SunTrust.

Good morning.

Good morning, Bill.

I guess if you could talk a little bit more about the gross margin trends as we look kind of on a go forward basis.

The 75 to 125 basis point guidance seems pretty conservative.

Is there any reason why margins should go down sequentially over the next two quarters?

Or is this something I'm missing?

Good question, Bill.

Let me just put it in a sort of slightly broader strategic context.

As you know, we have been saying for a while, we have been putting a great focus on trying to, A, offset the dollar impacts of commodity costs and transaction, and then B, move our gross margin back into positive territory year on year as a percentage to sales, because that provides the ability to invest in business growth going forward.

And obviously we're delighted with the gross margin increase in the second quarter, slightly ahead of our original expectations.

As we look at that gross margin going forward, our plan right now would see it holding at about the same level as the second quarter, still allowing us to increase advertising support behind a strong pipeline of new products, both at the higher priced end and entry price end over the back half of the year.

So for the balance of the year, an expectation that gross margin would be around the same level as the second quarter.

Great.

Thank you.

Sure.

We'll go next to Bill Schmitz with Deutsche Bank.

Good morning.

Good morning, Bill.

Hey, how do we think about pricing going forward?

I mean, I know a lot of it to offset some of the currency transaction hit in developing markets.

As the dollar softens will you give that pricing back right away and probably see the volume resume?

Or is there a little bit of a lag?

How does that work or how has that worked historically?

Back to the strategy of recovering gross margin as the fulcrum of the income statement, we have taken the pricing we believe we have needed to take.

Pricing, therefore, is at levels that we were targeting and we have in our plan no new pricing for the balance of the year and as I was saying in response to the earlier question, with our innovation stream skewed to the second half, our focus now is on increasing advertising support behind that innovation stream, advertising in the traditional areas and also, as we have been saying for a while, advertising that is in store, much of which is captured in the gross to net line, not in the traditional A to S line.

So I think what you're going to see going forward is pricing established, no new pricing, and an increase in marketing support to resume volume growth in the second half.

Okay.

So does that mean that the promotional will probably increase, like you said, maybe half of it's advertising, half of it's gross to net which obviously will impact -- is that on the pricing line for you guys or on volume mix?

It's on price, Bill.

It's on price.

Okay.

Got you.

Okay.

Perfect.

We'll go next to Ali Dibadj with Sanford Bernstein.

Hi.

Thanks.

Hey.

How are you?

Just wanted to get underneath a little bit of potentially disconnect.

It sounds like you say you're comfortable with roughly a 10% EPS growth, that's external.

However, it sounds like foreign exchange or certainly foreign exchange has gotten better, Russia, China is improving.

Gross margins were higher this year, this quarter and you expect that going forward.

So what's -- what were you surprised by?

Maybe if I can lead the answer potentially a little bit.

It sounds like the price elasticity perhaps was a little bit worse and so you have to spend more back on advertising and promotion.

Is that the surprise or is there something else?

I wouldn't caption it that way, Ali, but let me try and take the thrust of the question.

Again, as I said, we started the year with a prudent stance, given the world we were facing then and we put a focus on gross profit and by the way, I would add, and as you've seen in the release and heard in Bina's comments, while we have been recovering gross margin, the organic growth has been healthy and we have seen our market shares, in other words, the general health of our brands improve and the Colgate business, the traditional Colgate business has held flat volume-wise for those two quarters.

So for that business, a slight readjustment with a step up in traditional A and P behind innovation with in-store marketing activity that will include a component of price, but not a complete change in strategy.

The Hills business warrants a separate comment.

The Hills business, as you saw, posted double-digit volume decline in the second quarter, which was worse than our expectation.

And there's a few comments to make there.

You know the three price increases that we have taken over a period of about 15 months.

The year on year comparison with the July increase last year, but coming into the second quarter things were tracking pretty much as we had expected.

We always saw the off-take in that category go down for about a quarter when pricing was taken and as I commented on the last call, we expected competitors to take price towards the end of the second quarter as they had not followed our first quarter increase so quickly.

That didn't happen.

We saw people not taking pricing and we saw people taking pricing on parts rather than all of their business.

And as the second quarter unfolded, we began to take pricing adjustment on the Hills business for the second half because our pricing versus other premium products that historically followed was becoming uncompetitive.

Interestingly, the category stayed solid and we found ourselves losing to other premium products.

It wasn't that that segment was shifting to other channels.

So on the Hills business, what we see is very similar to the Colgate business, an innovation stream, an increase in advertising in general, certainly no pricing planned for the second half.

But here, more selectively pricing adjustment over the back half of the year, in order to make sure that we realize our pricing strategy against competitors, which we overshot a bit in the second quarter of this year.

All of this, I would add, with a gross margin that has increased year on year and even with that increase, pricing activity and promotion activity in the back half will continue to be up year on year.

So a sharper definition on Hills, Ali.

That's a very helpful answer.

Are you seeing any of the competitive activity in Hills in the other businesses at all or not really?

It wasn't competitive reaction.

It was more--.

Inaction, I said.

I'm sorry?

Competitive inaction.

Yes.

By separating the businesses the response is we have seen our competitive pricing strategy been maintained on the other businesses.

Hills was the only call-out.

Thank you.

We'll go next to Wendy Nicholson with Citi.

My first question had to do with Russia.

I know you said your market shares were still strong but you called that out as a particularly weak area.

Is that do you think inventory adjustment at retail or something just wrong with the consumer.

I would love to categorize it as something wrong with the consumer.

I think, Wendy, in answer to the question, you may recall on the last call we had together, we talked about the incredible currency slides in the Eastern European markets which Russia had experienced before in the '90s but many of the other European markets not.

So we found our self in a situation where in key Eastern European markets like Ukraine and indeed Russia again, we took significant pricing in the second quarter, over 20%, and we got the customary consumer reaction which is they deload pantry while that pricing goes through and we fully expect that to come back in the third quarter.

I guess the one editorial comment I would make, and I made it on the last call, is that the Eastern European consumer doesn't adjust quite as readily to Latin American price increases as the Latin consumer does given their education over time.

But we don't see any major dislocation.

It's certainly not destocking beyond some distributor adjustments we have made which again I mentioned in the last call.

I think it's more the lead lag between significant pricing increase and the consumer coming back to the market.

Okay.

And the reason I ask on Russia is P&G has talked a lot about increasing their emphasis and investments in emerging markets and I would assume Russia is one of their key areas of priority and I know you hate answering the question about P&G but so far, anyway, you haven't seen anything from a competitive perspective?

I mean, it sounds like your shares are up and you've gotten by with not a lot more spending so so far you don't see anything from a destabilizing just sort of category health or crazy level of competitive promotion or anything like that?

Let me just answer in the general rather than the specific.

In many of the key emerging markets, I think Brazil, I think China, and I think Russia, to your point, we are in fact and have seen so far this year some of our principal competitors in fact pull back spending in our key categories, so our impression weight or share of voice as we call it has in fact increased.

Terrific.

Congratulations.

Next to Chris Ferrara with Merrill Lynch.

Hey, thanks.

Ian, can you talk a little bit about -- I know this is sort of a tired question but as retailers try to consolidate shelves and we know it's happening, consolidate SKUs, what are you seeing in the US in oral care and specifically toothpaste, I guess if anything?

As you relate to two different things.

You guys and Crest have a lot of different SKUs across toothpaste and there's also a fair amount of sort of tertiary brands that seem like they would potentially be at risk.

Are you seeing anything?

Are you seeing any progress on shelves there with respect to even weeding out some of your slower moving SKUs or again, some of those tertiary brands that aren't owned by you or Proctor?

Chris, good question.

Frankly, although more accentuated these days, not a new subject.

We call SKUs year on year, every time we go through a planogram reset with any key retailer, trying to make sure we have the right SKUs, power SKUs we call them with the right velocity at the shelf.

There's no question over the last year and-a-half, the intensity in that space has increased.

I will tell you that our relative shelf and assortment position in the US toothpaste business continues to be very, very strong and as I say, we often delete SKUs ourselves as we try and make sure we have the greatest velocity.

So not seeing any significant impact in the US, but you're right, it's a very -- an area of great attention from retailers these days, but one we're accustomed to discussing and dealing with.

Great.

Thank you.

Sure.

We'll go next to Joe Altobello with Oppenheimer.

Thanks, good morning.

Just two quick questions.

First, going back to Hills for a second, you've obviously taken a lot of pricing there.

You mentioned it.

Have you guys lost distribution at all particularly in North America and by that I mean have you essentially priced yourself out of certain smaller retailers who just don't want to pay that or whose consumers can't afford that?

And then secondly, on the marketing side, you mentioned you expect marketing spend, both advertising and gross to net to increase in the second half.

Any particular geographies where that will be focused or primarily in areas where you've taken pricing over the past year?

Good questions, Joe.

On the Hills business, we have not lost distribution.

You will remember that our strategy on Hills is you might say a limited distribution strategy.

Our go to market is very much to provide products that we label pet nutrition, not pet food, to provide a clinically proven benefit to the pets of the consumers that buy the product.

And in order to do that, in an educated way, we provide those products through neighborhood pet stores, vets themselves, and the retailers who provide education in this space, given their nature, like the pet super stores.

So that's our area of focus and those retail channels are quite loyal and supportive of the Hills business.

As I was saying earlier to in response to the question about Hills pricing, what actually happened was that premium pricing, that segment, we saw with the pricing we took in the first quarter a gap beginning to appear against other premium competitors who did not follow the pricing we took in the first quarter.

And so as a matter of operations, we've had to adjust and we have adjusted here in the US and in key markets around the world in order to make sure we are on pricing strategy and that is what we are seeking to return to.

So it's a global initiative.

And it is selective where we find ourselves outpriced, no loss in distribution and as I mentioned in response to the earlier question, all with gross margin up year on year and projected to be up year on year for the full year as well.

Okay.

And then in terms of the marketing spend from a geographic perspective?

Selective globally.

It's a global initiative against select premium global competitors to make sure that we are achieving our pricing strategy on the business.

So global.

Okay.

And then one last one, if I could sneak it in.

Back to Hills, obviously one month has passed now since the end of the quarter.

Are you seeing any pickup or improvement sequentially in volumes?

Very good question.

In fact, the answer is yes.

Specifically on the Hills business, in fact, across the entire Colgate business the volume pace so far in the quarter sees us with the fastest start in the first month of a quarter for two quarters.

So faster than the first quarter and faster than the second quarter and that absolutely applies to the Hills business.

So off to a good start.

That's great.

Thank you.

We'll go next to Andrew Sawyer with Goldman Sachs.

Yes, thanks, guys.

I was wondering if you could talk a little bit more on the A&P side and perhaps maybe give some context about your share of voice.

In the US, it looked like at least in the measured media channels we can see that your share of voice is still up slightly.

I was wondering if you could talk to where your share of voice levels are in some of your other large markets outside of the United States.

Yes, I think obviously for competitive reasons, Andrew, I would prefer not to get into a market by market dialogue because we're very specific about where we put our emphasis.

To repeat comments made before, there are various issues at play here.

You've got the real reduction in cost of media, which as I've said before, we are seeing around the world between 5 and 25%, that's giving us impressions, increased impressions for less money.

We are seeing competitors pulling back in some key markets which is providing opportunity.

And we, particularly at this time, are finding ways like the seeing is believing campaign with Hills of communicating directly with consumers at retail and that spend, a large part of it comes out of the gross to net line and you don't see in the traditional A&P.

I think the ultimate distillation of it is the kind of market share movements that you are seeing on our toothpaste business, many of which we described in the release or been commented on.

Just a quick follow-up if I could.

I know entering the year in Latin America you talked about launching a portfolio that skewed pretty heavily to premium price products.

Bina in her prepared remarks mentioned that you've seen market share gains from Total.

Have you seen the trading up phenomenon from some of your other categories whether it's liquid soap, toothbrushes, et cetera?

What's that meant as far as a mix contribution to your unit volume figures in Latin American region?

The mix is a factor of gross margin growth for us and dollar weighted volume growth.

We are continuing to see the consumer paying for value.

I wouldn't over-stress that point.

We have consistently said that we have a broad portfolio of products and variants and sizes to reach all different retail environments, priced accordingly and we innovate across that portfolio.

The consumer chooses to continue to buy at an increasing rate.

The premium end of the portfolio, because of the perceived benefit.

Thanks a lot.

We'll go next to John Faucher with JPMorgan.

Yes.

Good morning.

The concern I'm getting played back from investors today is the ramp down in advertising and ye, it's going to shift a little bit more favorably in the back half of the year but you combine that with disappointing volumes.

So I guess are you seeing any correlation whatsoever in terms of the pullback in ad spending and sort of the disappointment in volumes and to get more specific on that, can you talk about the pullback in ad spending in Hills relative to what you're seeing across the rest of the portfolio?

First, the answer is no.

The answer is absolutely, categorically no, John.

I think the strongest correlation we're seeing and it traces specifically to Hills is in pricing, period.

Advertising, a percent to sales ratio is an interesting ratio and the conventional wisdom is that it should always go up.

But as I have said before, with kind of the rate reductions we're getting, we're seeing, the competitive pullback we're seeing and our own choice to shift into the in-store activity, I don't see that as a concern.

We are increasing our advertising in the second half.

We did say we were going to be prudent coming into the year, until we recovered gross margin.

So I think we're poised quite well now to step up the A&P behind an innovation stream so that there is news and we have corrected the pricing imbalance on Hills.

Hills specifically on advertising actually year on year on a ratio basis will be up but again, one has to be careful because the Hills model is so different in terms of that vet recommendation driving the purchase of the product and that vet recommendation continues to be at all time high leadership levels.

And that's what we focus on with Hills, because it's their belief in the clinicals behind the nutritional efficacy of the product that creates the consumer conversion.

Okay.

And then geographically -- thanks for that.

And then geographically, again, it seems as though the correlation between the volume disappointment is probably more related to pricing than advertising, but if you could provide a little more color on that?

Well, again, the Colgate business held flat overall from a volume point of view with the pricing that we have taken in order to offset transaction and commodity and recover gross margin.

No new pricing across the balance of the year and the call-outs were Hills, which we've discussed, and as I mentioned in the greater Asia region, the significant pricing we had to take in South Africa, Russia and Ukraine, which affected the quarter but which we expect to bounce back in the second half of the year.

Got it.

But again, sort of no atypical variances from an advertising standpoint in those markets relative to what you were seeing globally?

And all projected to continue up on the balance of the year.

Okay.

Thanks.

Thanks, John.

We'll go next to Lauren Lieberman with Barclays.

Thanks.

Since no one else has asked, could you give us the breakdown of gross margin in the quarter?

No.

Please?

Yes, yes, yes.

Thank you.

The prior year gross profit, second quarter, was 56.8.

The pricing contribution, very similar to the first quarter this year, was 3.1%, 310.

Nothing from restructuring, as you would expect.

Funding the growth came back very nicely in the second quarter at 1.8.

The material prices were negative at 2.9.

And that as you can see, if you track it back, is an easing and net-net, that delivers the 200 basis points increase year on year to the 58.8.

Okay.

Great.

I just wanted to follow up.

I know someone asked this earlier but I just wasn't quite clear on the answer.

I know there's no new pricing coming, but as currency eases or is it just that we're not yet confident where currency is today is where it will stick so you don't want to move that quickly on pricing?

I would have thought there would be a little bit of pullback on pricing where you've taken it to cover translation and transaction rather than letting it ride.

I mean, is the decision to let it stick because you're comfortable with where volumes are in those markets?

I mean, the pricing we have taken on the Colgate business, we're comfortable with where it is and expect it to stick because in the main competitors have followed and the investment goes behind more traditional marketing techniques, which includes promotion, to be sure, but not a rollback of pricing.

But of course, sequentially, quarter on quarter, the benefit impact of pricing will ease as you are taking new pricing and you're lapping year on year.

Okay.

And then just the other thing was on North America, because I know at least to the degree the Nielsen data is useful and certainly what you guys have been saying Wisp -- is doing fantastically well and I would think is actually given its market share of the toothbrush category is certainly big enough to be mattering in the quarterly results.

So how does the rest of the oral care business volume-wise look in the US right now?

One second.

Sure.

The oral care business, I don't have the US number here.

I have a North American number, which for the quarter would show organic growth about between 2 and 3%.

That's a North America number.

Okay.

So volume -- and that includes Wisp of course, right.

That includes Wisp.

So volume ex-Wisp is probably down?

No, no, no.

Wisp is not that significant, Lauren.

Not that significant.

Okay.

I mean, it's exciting.

It's encouraging.

We still have to wait for the repeats to play out over the back half of the year.

It's accretive from a gross margin point of view but it's not -- it's not that significant a factor.

Okay.

Great.

Thank you.

Thanks.

We'll go next to Jason Gere with RBC Capital Markets.

Good morning.

Good morning, Jason.

Hi.

And I guess kind of adding on to Lauren's question, could you talk about maybe the oral care category in North America?

I mean, going through or seeing different channels and different geographies, bit surprised by the magnitude of deep promotions that are out there on the super premium category.

I can understand more on the basic lines but this is what we've been seeing maybe for the last few weeks.

I was just wondering, is this more retailer driven to just move inventory or is there some sort of shift going on and kind of talking into where the volumes are as they played out last quarter?

Our data, I mean, I don't know what channel you may be looking at, I guess the sort of headlines on the US would be our data doesn't show anything of a significant change compared to traditional promotional activity.

It does show the category posting good value growth, low single digits, healthy in this environment.

It shows a channel shift more to mass the club stores and the dollar stores.

They are the ones outpacing which I think is data well-known to people.

And quite pleasingly for our US business, we have seen the consumption of our aggregate categories outpace category consumption on a volume basis for each of the months of this year and that accelerating actually in the second quarter.

So we're quite pleased with our performance and we don't see anything untoward or unusual thus far in category activity and our share is up quite nicely.

And then I'm not sure if you clarified this.

In terms of those categories, I think you said your share was flat or up in 11 of the 14.

Did you call out the three that were down and is this where we're going to see a bit more in-store merchandising?

Is there innovation behind those three?

There's innovation behind all of them.

If there is corrective action required, it will be taken.

We're getting into too much US detail, frankly, but bars would be one which is a declining category in favor of body washes.

Body wash would be a second but I'm not sure I would call point one significant and the serums relaunch that Bina mentioned is coming and a modest decline on underarm with activity coming as well.

So, we were just being thorough in terms of what was down but we're not talking about meaningful declines and we have innovation streams behind those three segments to rebound in the second half.

Okay.

Great.

And then just a last question.

I was just wondering, I mean, this has been the year that we incurred, sales productivity, just wondering if you can give us kind of an update on the effectiveness on some the measures you've taken there, which regions maybe you're seeing the most effectiveness from a sales productivity standpoint?

Well, I guess we would caption our productivity program in the sales area excluding the fixed costs would be governed by Colgate business planning, which is that SAP driven technique we've been deploying for the last four years, which focuses on increasing our return on investment in terms of each of our sales activities and sharing those learnings around the world and I know we have spoken in several meetings about the kinds of techniques.

We said this year that we were goaling a pretax savings of around $150 million thus and far this year we're on track to deliver that and we will have CBP, SAP driven in place on about three-quarters of our trade spending, three-quarters of our global trade spending by the end of this year.

So we're seeing improvement.

Great.

Thank you very much.

Thanks, Jason.

We'll go next to Linda Bolton Weiser with Caris.

First, I was just curious on the materials costs.

I was projecting them to be down in the third quarter.

Is that the case or will it not be until the fourth quarter?

Well, we're seeing some materials costs off already year-to-date.

I guess the way I would answer that is to say that the primary benefit would be in the fourth quarter.

Okay.

And just kind of a longer term question about innovation.

I know when you started your multi-year restructuring a few years ago, you put some investment or partnership with some medical institutions or something that focused on oral care.

Are there any big-time innovations that you're expecting to come from that, because it has been a while since we've seen major innovation.

Well, we quite like Wisp.

I guess, Linda, you're right in your recollection.

We stepped up the resources we had in our shorter term innovation groups, the so-called centers of innovation, focusing on products that we could bring to the market in a three-year window.

Then we established three years ago -- two years ago, in fact, some long-term innovation centers which are focused on three and five year plus innovation and then we have several of these external partnerships that you mentioned.

The one you are probably remembering is the Forsythe Institute up in Boston that we have talked about before.

And I guess all I would say is, these are much longer term innovation streams and we have indeed some interesting leads, more than that, I would not say.

Okay.

Thanks a lot.

We'll go next to Alec Patterson with RCM.

Good morning.

Hey, Alec.

Hi.

I just wanted to maybe get a better handle on the raw material trend, the gross margin trend, from two angles.

One, you did break down packaging raw material impact by region and I guess it was surprising to see where it was a benefit in North America and Asia/Africa but I guess not called out in Europe and Latin America but overall, it was still quite negative.

So should one draw the conclusion that it was predominantly a Hills factor in terms of the negative raw material impact?

What data are you looking at, Alec?

You just cited I believe a 290 basis point impact to gross margins from raw materials and in the release you cite lower raw and packing material costs in Asia, Africa and North America with no comment whatsoever on Latin America and Europe.

So I'm just trying to zero in on the cause of the raw material hit.

Well, you've got the foreign exchange piece I guess in the Latin countries.

But remember, that is a -- what I was calling out is a roll forward of the gross profit.

So last year, for example, in the second quarter material prices negatively affected the gross profit by 430 basis points.

This year, the impact was 290.

So a lessening impact on the gross margin.

If we -- I don't have the data in front of me to break down that by division.

We'll have to talk that offline, Alec.

Okay.

Well, maybe just a different tack then on the Hills business.

The price gap you talked about having widened and became a competitive issue and you're looking to close those price gaps.

Do you have a sense to whether your position in terms of your raw material costs in that business tend to be more locked in, more supply contract constraining such that it's more of a lag for your business to benefit from a lower raw material environment than from a private label manufacturer or some your other competition?

No, I wouldn't say that.

The over-arching comment balances the pricing action that we have already started to take on the Hills business, and what we see in terms of the material cost environment again on that Hills business sees the gross margin up year on year for the full year and the balance of the year.

Okay.

All right.

Thanks.

Okay.

Sure.

We'll go next to Connie Maneaty with BMO Capital Markets.

Hi, just two questions.

What is the order of magnitude of price rollbacks at Hills?

We're not rolling back pricing, Connie.

We're adjusting it promotionally and it varies.

Okay.

So but to the consumer, it will seem more affordable?

The pricing will -- yes, is the answer.

The pricing will be more in line with our other premium competitors, yes.

Okay.

Because they did not follow in the main, the pricing we took in the first quarter, we had not been the case with the last two price increases.

Okay.

And then secondly, one final question on advertising.

I mean, I understand that the dollar spend would go down because rates have come down and there will be more in-store activity but I was kind of puzzled by the comment about competitive activity.

So I'm wondering what difference does it make what competitors are doing?

I mean, why wouldn't you have stepped up advertising in the quarter to more fully take advantage of the expanding gross margin and really solidify the shares?

The timing doesn't work quite sometimes as precisely as that, Connie.

We had said we wanted to be prudent.

We had said we wanted to recoup gross margin.

We exceeded our expectations on gross margin in the second quarter.

It is very relevant, I think, in terms of what competitors are doing on a market to market basis.

In some of these emerging markets, the GRP weights, the actual number of spots we are running are extraordinarily high in terms of reaching the consumer.

You're talking about four, five, six spots a day, which is a very elevated level.

So if a competitor is not spending, it may be much wiser to adjust your advertising spend, still dominate share of voice but in a more economic fashion on top of the market cost reduction and the proof of the pudding in the end is what happens to market share.

And again, what we have seen is our market share in key markets continuing to increase.

So that's the balance you're revisiting all the time, Connie.

Okay.

That's very helpful.

Thanks.

We'll go next to Nik Modi with UBS.

Yes, I'll make this quick.

Good morning.

Hey, Nik.

Just a couple questions.

Ian, if you could just go around quickly and globetrot and tell us your perspective on the consumer just given we're six months into the year or seven months and are you seeing any stabilization out there or do you continue to think it will get worse?

The second question is the emerging markets as you took pricing late in the first quarter, did you see the local competitors follow as you had expected?

Thanks.

Yes, globetrotting, I guess like everyone else, the consumer's looking for green shoots.

But they are seeing -- continuing to see value in our categories and they are continuing to -- they're continuing with the behaviors.

So once they buy into health and wellness behavior, they don't drift out.

They continue to put a disproportionate loyalty to a brand because a brand is good, provides a level of confidence and trust, pleasingly as you've seen in the shares, they continue to provide a loyalty to our brands.

Now, we continue to see them shift in terms of channel.

We continue to see them look for value, but we haven't seen any disconnect from language that I have used before in terms of the consumer's behavior in the world today.

So we continue to feel quite comfortable.

We're seeing the categories growing and they're growing in the kind of sequencing you would expect.

Faster in the emerging, slower in the developed.

So I guess that would be the summary there.

And your second question, Nik, again, sorry?

On the emerging markets, how the competitors and local competitors follow the price increase?

It depends.

In the main, everyone is faced with the same cost increases, particularly in those emerging markets, if the materials are dollar-denominated.

So in the main, we see both private label and local brands come with the pricing.

It may be later.

It oftentimes is later.

But ultimately, the same economic reality hits so they have to accommodate and adjust for it.

Excellent.

Thank you very much.

Sure.

We'll go next to Victoria Collin with Atlantic Equities.

I just want to talk to you a little bit more and I'll be brief about Europe and the South Pacific volumes.

You're guiding to modestly up for Q3 and I'm just wondering what strategies you're undertaking to get that swing in the volume to positive territory, given you're still facing a relatively tough comp?

Kinds of the same question would probably apply to the greater Africa, Asia region as well.

It's separate answers I would say.

Europe, South Pacific is largely -- same as most places.

No new pricing, increased advertising, and increased innovation stream.

In fact, in the second half in Europe, our innovation stream in terms of sales impact is twice what it was in the first half of the year.

Okay.

So that's really the answer for Europe and South Pacific.

Asia is a little different.

I mean, the same general principles apply.

The big drag this quarter as I mentioned was the pricing we had to take in South Africa, Ukraine and Russia, over 20%, to offset the significant currency devaluation and as I had said before consumer tends to work down pantry for a quarter before coming back to the category.

So the same applies.

No new pricing, increased advertising, increased innovation stream but also the rebound of the consumer after some significant pricing in some major markets.

Okay.

Great.

Thank you.

If I could just speak in a tiny follow-up question.

Are you seeing much end demand for trading down on more value oriented products in Europe and would that support the volumes as people move a little bit away from the more premium priced items?

We are seeing in some categories in Europe contraction.

We are seeing private label at a higher level in Europe than we see in other parts of the world.

But in the end, the consumer's looking for value and as a branded goods manufacturer, if you deliver that value, the same principle applies that the consumer will choose the value and value isn't necessarily just price.

And as I've said before, the kinds of businesses we're in, particularly oral care and personal care, tend to have a greater emotional loyalty than some of the other more functional businesses because of who you use them on and which parts of your body you put them on.

But yes, private label is definitely more developed in Europe than other parts of the world, Victoria.

That's very helpful.

Thanks.

If I could just ask where the private label is growing or where you've seen it sort of increase slightly?

What categories?

Usually where we have seen it increase is in the functional categories, categories like bleach, categories like detergents, categories like household cleaners, to a degree, garbage disposal bags, these are the categories we have seen the greatest increases in private label.

Thanks very much.

We'll have our final question from Alice Longley with Buckingham Research.

Good afternoon.

Your volume in Latin America was up 2%.

In what countries was it more than that and what less than that, please?

I'm not sure we're going to go through a run-through of countries, Alice.

But it was led this time by Brazil and Venezuela.

Okay.

That's great.

My second one was you said the dog food category was just fine or stable.

Was volume for dog food in specialty channels flat in the quarter?

Again--?

Roughly?

One second.

First of all, I challenge your definition of we view it as pet nutrition.

But that said, and when we talk about the category, we talk about the -- what I would call the speciality category as you say, which would be the PetCo's, PetsMart, the neighborhood pet and the vet outlets.

And overall, the speciality channel as you asked was indeed positive, is positive year-to-date and was positive for the months in the second quarter that we have data.

In value terms or you unit terms?

In unit terms.

Volume terms.

Okay.

Perfect.

And then my last question is if you had to guess how much ad rates are running down, what would that be?

Yes, the answer Alice would be it depends, without ducking it.

We advertise in 80 countries and the ad rates are down anywhere from 5 to 25%, depending on the country.

Thank you very much.

Okay.

Well, thanks very much for joining us.

Thank you, very much, for all of of your questions and interest in the Company.

And a special thanks to all the Colgate people around the world who make all of this happen.

Talk to you next time.

That concludes today's conference.

Thank you for your participation.