高露潔 (CL) 2011 Q3 法說會逐字稿

Good day everyone, and welcome to today's Colgate-Palmolive Company third quarter 2011 earnings conference call.

Today's call is being recorded, and is also 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 and introductions, I would like to turn the call over to the Vice President of Investor Relations, Ms.

Bina Thompson.

Please go ahead.

Thank you, and good morning everybody, and welcome to our third quarter earnings release conference call.

With me this morning are Ian Cook, Chairman President and CEO, Dennis Hickey, CFO, Victoria Dolan, Corporate Controller, and Elaine Paik, Treasurer.

This conference call will include forward-looking statements, and the 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 most recent 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, excluding foreign exchange, acquisitions and divestitures.

We will also discuss gross profit margin, operating profit, net income, and earnings per share, excluding the impact of the 1-time items described in the press release.

A full reconciliation with the corresponding GAAP measures is included in the press release, and is posted on the Investor Relations section of our website at.

www.colgate.com.

Now, as Ian said in this morning's press release, we are indeed very pleased with our strong top line performance this quarter.

As you have seen, it has been accelerating consistently throughout the year.

Volume is growing nicely, and the pricing we have said we would begin to implement is contributing to sales as well.

Market shares are increasing in much of our business.

Globally our shares are up in toothpaste, manual toothbrushes, mouthwash, bar soaps, body wash, household cleaners, and fabric conditioners.

Category growth rates continue to be robust in the developing markets, and have stopped their decline in developed markets.

The even sales split between the fast-growing emerging markets and the more mature markets provides a good balance for our business.

So as you saw, our gross margin decreased and was down more than we had projected when we spoke to you last quarter, and this was due to 2 factors.

Number 1, as we told you we would, we were able to realize price increases, although due to competitive activity they were not as strong as we had forecast.

And secondly, at the same time, raw material cost increases were greater than we had forecast coming into the quarter.

While commodity prices in the market have come off their highs, there is a lag between market movement and the time when they flow through our income statements.

On the other hand, we've seen very good progress in reducing our overhead expenses.

This has been a renewed focus for us over the last year and it is beginning to pay off.

Encouragingly, with the gain from the sale of our laundry detergent business in Colombia, beginning this quarter, we have implemented and are continuing to implement a number of business realignments and other cost savings initiatives around the world, which should generate even further savings as we head into next year.

We expect this to continue to provide the funds to increase advertising behind our exciting new product launches, as well as our base business, and our balance sheet remains strong.

Return on capital increased to 36.8%, and as referenced in the press release, our working capital declined as percent to sales.

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

As we had told you, much of the new product activity here in the US is happening in the second half of this year.

We're very encouraged by the success of all these launches across categories, which is reflected in the good volume performance in the quarter.

In addition, we grew organic sales to the first time in 4 quarters.

First and foremost is our launch of Colgate Optic White toothpaste and toothbrush, which have met with great success.

As you know, Colgate Optic White toothpaste is a unique formula which provides whiter teeth in just 1 week.

The companion toothbrush has special whitening cups and polishing bristles.

Our year-to-date toothpaste share, referenced in the press release, is at 35.8%, which is the market's leading position, and their share for the month of September climbed to 38%.

In September, both the toothpaste and toothbrush were the Number 1-selling SKUs in their respective oral care categories.

We also launched Colgate Sensitive Pro-Relief toothpaste with a companion toothbrush, and they have met with success, as well.

In the personal care category, we told you last quarter about the introduction of Softsoap brand bar soap.

This new product has driven our bar soap share to a 12.6% in the latest period.

And we've been active in the home care category, as well, in terms of innovation.

Our new Ultra Palmolive Soft Touch dishwashing liquid is doing very well, driving incremental share.

On a year-to-date basis, our overall dish liquid share increased 50 basis points, and this month we shipped another variant in our Sensorial line, Ultra Palmolive Sensorials Pomegranate.

Since fragrance continues to be a key growth driver for home care products, this product builds on this insight by offering the fresh scent of pomegranate while providing powerful grease-cutting action.

So, we're very excited about all this activity, which will of course be supported by a full range of in and out of store activities.

Looking ahead, then, to the fourth quarter.

Volume in North America is expected to grow modestly, with organic sales growing at the same pace.

Operating profit is expected to be down double-digit, as we step up the pace of our advertising.

Turning to Europe, South Pacific.

This region of the world remains very challenging from a macroeconomic point of view.

However, we do see modest category growth in oral care, while the home care category remains more sluggish.

Our market shares are up in toothpaste and toothbrushes for both the Colgate and the GABA businesses.

Our overall toothpaste share is at 33.2% year-to-date, up 40 basis points, with our most recent share at 33.5%.

Our manual toothbrush share is at 21.2%, up 90 basis points, with the most recent share at 22%.

And our good share performance overall is in the face of continued heightened competitive activity.

In the UK, for instance, both our leading toothpaste and our leading toothbrush shares are up on a year-to-date basis.

GABA continues to perform well, and every year has delivered results ahead of the expectations we set out, as of the acquisition.

As you know, premium and relevant new product launches are critical in this environment.

We are very excited about our new toothpaste which is launching this and next quarter across the region, Colgate Total Pro Gum (technical difficulties) increasing number of consumers.

Studies in the UK showed that 3 out of 4 people may suffer from gum problems, but are not aware of the consequences or treatment.

So, our integrated marketing campaign behind the launch both educates the consumers and the profession on the problem, and provides the solution with Colgate Total Pro Gum Health.

In personal care, we are launching higher margin new projects as well.

The relaunch of Palmolive Experientials line of bath foams and shower gels in a new, higher impact packaging should command higher average selling prices and margins.

Although the line is just rolling out across the region, several countries are posting incremental share gains of between 1 and 2 points.

And we continue to be very pleased with our acquisition of the Sanex business.

We are working through the integration as we speak.

Overall market shares are solid, and they too, as you saw in the press release, have benefited from successful new product activity.

So, looking ahead to the fourth quarter, volume across Europe-South Pacific is expected to be at about third quarter levels, with organic sales flat versus the year ago quarter.

Operating profit is expected to be flat to up modestly.

Turning then to Latin America.

We are delighted with the continued excellent momentum in this region.

As stated in the press release, market shares are (technical difficulties) across the region remains favorable, despite some recent strengthening of the US dollar.

In toothpaste, our year-to-date market share is at 78.1%, with the most recent read at 78.5%.

And this strong performance is in the face of continued competitive activity.

In Mexico, our share remains above 80% year-to-date.

In Brazil, our share is at 70.4% year-to-date, with the most recent share at 70.8%.

And importantly in both of these key markets, we have seen very good results in the premium end of the business.

This should continue as we launch our premium priced Colgate Luminous Whitening Toothpaste in both markets.

The trade acceptance has been remarkable, and we have achieved distribution in record time.

In manual toothbrushes, our market share is at 40.8% year-to-date, up 1 full point, with the most recent read at 41.4%.

In Mexico, we gained 0.5 share point in the face of competition's heavy promotional activity, and similarly in Brazil, we have gained share and strengthened in our market leadership position.

Our mouthwash shares across the region are up 3.5 points to a record 33.4%, narrowing the gap between our closest competitor from over 20 points in 2008 to less than 10 points year-to-date in 2011.

Our strategy of premiumization and adding value for the consumer is working in our personal care business as well.

Protex Advanced Clean is helping to further consolidate our leading bar soap share across the region.

Capitalizing on our long history of partnering with the profession, we have showcased this premium price variant at dermatological and pharmacological congresses, gaining endorsement from both.

Our regional share is 29.6% on a year-to-date basis, up almost 1.5 points from the year ago period, with the most recent share at 30.3%.

So, looking ahead to the fourth quarter, volume in Latin America should grow low to mid single digit, with organic sales growing at least high single digits, and operating profit is expected to be up low to mid single digit.

Greater Asia-Africa.

As elsewhere in the world, new products have helped to deliver the solid volume and organic growth in greater Asia-Africa,

Toothpaste shares across the region are approaching 40%, and our manual toothbrush shares are close to 35%.

We have maintained leading toothpaste shares in the large markets of China, India, and Russia., and in Turkey, we achieved market leadership, a record share at 30% in the month of August, up almost a 1.5 points on a year-to-date basis.

In South Africa toothpaste share is almost 50%, and we have witnessed very strong growth behind Colgate Total, which is as you know, is priced at a premium.

In the toothbrush category, the launch of Colgate 360 Degree Surround has grown our share in Malaysia by 150 basis points, to 36.3%, and to a record 29.3% in Turkey in the latest period.

In South Africa, we continue to grow market share and expand our leadership on the back of strong growth, not only for our premium priced Colgate 360 Degree toothpaste, but also for our value Colgate Double Action toothbrush.

Mouthwash shares continue to grow in virtually every market, as we expand the Colgate Plax portfolio, Fresh Tea in China, Complete Care and Sensitive in India and Ice in other countries, supported by impactful advertising and in-store programs.

Across the region, our market share on a year-to-date basis is up 3 full points to 17.3%,with the most recent share at 18.3%.

So, looking ahead to the fourth quarter, volume in Greater Asia-Africa is expected to grow mid single digit in the quarter with organic sales growing modestly faster.

Operating profit is expected to decline modestly, as we step up advertising behind our new product launches.

And Hills.

While we are encouraged with the longer term prospect for Hills in terms of relevant new products, increasing market shares, and continued global expansion, results this quarter impacted by several factors unique to the current environment.

Specifically here in the US, the specialty category has been under some pressure, and most of the growth has been coming from the natural segment where we were underrepresented.

However, 1 of our latest new product launches, Ideal Balance, which focuses on proper nutrition in addition to natural ingredients, is gaining good and wide acceptance, but it is still in the early shipping status.

Secondly, some of our customers have instituted inventory reduction programs, which have temporarily affected our shipments to them, and we expect these 2 factors to dissipate over the next few quarters.

We are excited about our new product pipeline, as well as new digital media program, which should drive growth.

As we launch new products, digital media has become an increasingly important part of the picture.

For example, as part of the Science Diet Ideal Balance K-9 launch, we partnered Pet MD to develop a unique tool to educate pet parents on the importance of proper nutrition through the creation of My Bowl.

Pet MD is the most consulted source for global pet health information.

When consumers visit My Bowl, they learn the essential features of well-balanced meals for dogs, and how they help ensure optimal health.

The goal is to show dog owners what makes up properly balanced nutrition and help them better understand a dog food label, and of course properly balanced attrition is the selling proposition behind Hills Science Diet Ideal Balance.

Again, while it is early days, Ideal Balance is off to a good start.

Distribution is ahead of forecast consumption is growing and building momentum, and most importantly, the product is bringing new households into the Science Diet brand.

Another new program about which we are very excited is a partnership with Trupanion Pet Insurance Company to co-market the first pet insurance which provides coverage and discounts for feeding therapeutic and preventative nutrition.

Coverage will be provided it for all therapeutic foods featuring Prescription Diet, which is the market leader in this category, and as well, premium discounts will be given for feeding Science Diet Healthy Advantage, a wellness food sold exclusively through the veterinary channel.

This partnership should help increase pet owner traffic to the vet clinics, and grow the category.

So, looking ahead, Hills volume in the fourth quarter is expected to be about even with the year ago quarter, with organic sales growing modestly.

Operating profit should be flat to slightly up.

So, in summary, we are pleased with the accelerating momentum in our top line and with the excellent share results we have seen around the world.

This is particularly encouraging in the challenging macroeconomic environment in the developed parts of the world, coupled with continued worldwide competitive activity.

Our ability to take pricing has not affected our volume growth, and our broad portfolio product offerings at all price points has served us well in both developed and developing markets.

We look forward to sharing our results for the balance of the year.

And now, Ann, I would like to turn it over to Q&A.

Thank you very much.

Today's question-and-answer session will the conducted electronically for the telephone audience.

(Operator Instructions)

We will take our first question from Ali Dibadj from Bernstein.

Hey guys, how are you.

Want to ask you a little bit about the gross margin movement that we saw on the quarter and now your guidance.

Negative 264, I think on a recurring basis, is at least for as, the worst we have seen going back to the '90s, and so want to understand how what that means.

Does that shift the way we should be about your Company, because it seems like you are much more linked to commodities now than we have seen before, and some of that seems to be tied to the inability, at least at this point, to be able to take as much pricing to offset it.

So as we go forward, how should we think about it, because it is not the Colgate that we know seeing such gross margin degradation as we've seen this quarter.

Okay, Ali.

Well, thanks.

Thanks for the question.

Let me do what we customarily do here, which is to give you the role forward so you can understand how the quarter played out, and then let me talk more broadly about what we plan and expect going forward.

So to go back to the prior year, prior year gross profit was 59.4.

We got benefit from pricing in this third quarter off some 80 basis points, funding the growth, which is the Colgate you know, continued at our historical rate, with a benefit of 2.1 points, 210 basis points, but we were hit in the third quarter with material prices to the negative of 530 basis points, 5.3 points, and then a minor 0.2 in the others leads you to the 260 basis points reduction, clearly more than we had expected.

At the heart of it was the sharper run-up in material prices, and as we all know, from looking at the spots and the market environment, those prices for certain key materials seem to be tapering off, and as we enter the fourth quarter and 2012, understanding we have not completed our 2012 budgeting process, initial indications are that the pressures from commodities will abate.

On pricing, we thought that the 2% pricing that we took was reasonable in the quarter.

We had to adjust for some competitive activity, but we expect that pricing to continue in the fourth quarter at a slightly higher level, and in fact, in the fourth quarter expect and forecast to fully offset the dollar impact, not the ratio impact, but the dollar impact, of the cost headwinds that we face.

We have not seen consumer resistance to the pricing we have taken.

In fact, if I were to tell you about the Optic White toothpaste in the United States, which is at a 40% premium to the leading whitening toothpaste in the market today, that has not hindered that brand getting to almost a 5 share in the first 4 months.

So if you get the value proposition right, the consumers will take the pricing.

So it really was in this quarter the sharper than expected run-up in material prices, and you are right, we have often said that you can't fully offset that from a pricing point of view in the quarter because there is a lead lag.

The other thing I would comment on is something I think we have been talking about for a while, and certainly Bina mentioned in her remarks, and that is we have been looking at ways to streamline our cost structure and get our overheads down -- A, for efficiency in its own right, and, B, a recognition of the, what has been, somewhat volatile commodity market this year.

And we saw our overheads down by some 60 basis points this quarter on a percent to sales basis, and we have used the gain from the Colombian detergent sale to fund additional organizational and realignment activities, which we expect to benefit 2012.

Same kind of ratios we have had historically, 30 % to 40% rates of return, and we think that is a positive aspect looking forward into 2012, beyond what we expect to recover on the gross margin.

1 of the differences, I guess, this time around versus last time around is this pricing line, and last time around, I mean 2008, you took 250 or 300 basis points worth of pricing in the last 2 quarters of that year where you are facing similar commodity costs.

So I guess the core longer-term question I'm asking is, does the competitive environment that you are now facing limit your ability to offset commodities as you have done in the past?

And so you are more of a commodity levered company than you used to be in the past, given that dynamic?

The answer is no, we are not, but it is all down to a question of pacing, and we have very much looked this year to balance the pacing of our pricing with the growth in the top line, and we think with the 5% volume growth that we got that, that was a relatively good balance.

The pricing will continue, and we will step up in the fourth quarter and we will see what happens next year.

So it is pacing and balance, not an inability to take pricing through, and, frankly, the third quarter material prices ran up ahead of forecast, and you simply cannot, in the quarter in question, take pricing that quickly, but the answer to your question is no.

So even in North America, in terms of pricing where we have seen 9 consecutive quarters looks like, 9 or 10 consecutive quarters of negative pricing, do you think the pricing gets even better there?

And I'm not talking about Optic White, obviously, because I think that will show up in volume for you.

Do you think the pacing of pricing gets better there too?

I know where it falls.

I was using the pricing more to make the point of no consumer resistance if you get the value proposition right.

In North America, we said that the first off half of this year had been, by nature of the category more in store and therefore price-related and that we would shift to an innovation led growth in the second half, and whilst the pricing was negative in North America, it was substantially less negative, as you know, than the prior 2 quarters, and we are forecasting further improvement as we go forward with the innovations stream now behind the business.

Thanks very much.

Sure.

And we will go next to Alice Longley from Buckingham Research Brokers.

Hi.

A couple questions.

Did you intend pricing to be better in North America in the quarter?

Your guidance for the next quarter indicates no pricing as well, and I think when you gave guidance a quarter ago you suggested positive pricing for North America for the second half.

The pricing in North America is improved in third quarter, and as I just said in answer to Ali, we expect further improvement in the pricing in the fourth quarter as reported.

We have taken list price increases in North America.

Indeed we have taken list price increases around the world, and frankly all of the pricing that we have planned for 2011 is now announced, and either at retail or on its way to retail.

The last time we spoke, we said that was more in the 80% to 85% range, so all of our pricing is now out.

I think your guidance for the fourth quarter for North America is volume up modestly and sales also up modestly?

So I guess my point is, are you offsetting the price increases with incremental promotional spending, or why aren't the price increases showing up in these numbers?

In the launch period with new products, with all of the in-store trial generating programs you have, that shows up in pricing.

So if you take the analogy of good cholesterol/bad cholesterol, the pricing-related activity in the third quarter is related to trial building measures behind an innovation stream, and that is what will continue.

Okay.

Then my other question is about Latin America.

Could you just tell us what you are hearing down there in Brazil in terms the [potential] wages This is a macro question.

I am just wondering if you are hearing that wages are in fact going to be going up in January, in line with government sort of fiat, or whether there is any backing away from that?

And whether you are expecting that to create even better growth for you there next year than this year?

Don't have any conclusive position on that, Alice.

We obviously are aware of the discussions that are underway, and clearly we can manage it either way.

Okay.

Thank you.

We will go next to Joe Lachky with Wells Fargo.

Yes, thanks.

I just want to get back to the gross margin thing really quick.

Regarding the commodity pressure that you saw in this quarter, I am a little bit surprised why you didn't see it coming to an extent, given the lag in commodity prices from when the prices change and when it flows through the income statement.

So I'm just wondering if you could maybe explain what changed between your last guidance and the quarter you just reported?

Frankly, some of the commodities ran up quicker than we had been supposing.

There were indications that some would tail off and they did not, and it really is that simple, Joe.

And should that 6-month lag be compressed, in our minds, as far as the time period it takes for commodities to flow through?

And then just final question, as far as hedging.

Would there be any consideration of expanding hedging outside of pet nutrition to maybe offset some of the volatility?

The answer on hedging, Joe, is no.

There are no real hedging markets, so you are essentially buying long, and we don't choose to speculate in that regard.

And I think it is fair to say, looking forward, that while, of course, material cost will continue to be up year-on-year, that the rate of growth we now see is clearly abating, and that is what we, I think with much more solid data to hand, that is what we now expect going forward.

Okay.

Thanks.

We will go next to Wendy Nicholson with Citi Investment Research.

Hi, Good morning.

Hello, Wendy.

In the short term, my question centers on sort of this strategy about delivering double digit EPS growth in 2012, given the currency swing, and I'm wondering if you look back at the price you are paying now in 2011, with only mid-single digit earnings growth.

Some would say that, that is because you pushed too hard to meet your target for double-digit earnings growth back in 2009, when currencies were working the wrong way.

So I am just wondering, are you thinking about sort of your long term earnings goal and your strategy towards meeting that target with respect to currency, and how you look at 2012?

Yes.

Obviously, we look at it quite broadly, and as we said in the release, we have not by any means completed our budgeting process.

But what we have preliminarily seen is a few things, that I think give comfort.

Number 1, from a commodities point of view, there does seem to be a real tapering off, which means that the commodity headwind one faces will be lesser than we have seen in the past.

That is a good thing.

2, from a top line point of view, we like where we are from a growth point of view, both volume and organic, in other words, with the pricing.

And of course, the pricing we have begun to take this year, without regard to anything we may choose to do next year, will roll over and provide a very solid benefit in 2012.

And I think very importantly, and central to the way we have been thinking about it in terms of sustainability for the longer term, is this whole area of cost structure where we saw the 60 basis points this quarter, and you are going to see more of that, as we are doing with the Colombian HDD divestment, to continue to lower our overhead as a percentage of sales, as an additional aid to lowering costs, not just continued expansion in gross margin.

And foreign exchange, as you know, has bounced around a little bit.

Where it sits today doesn't give cause for concern in 2012.

Okay.

That is fair, but I just want to push back just a teeny bit, because when I think back, and this is sort of a longer term thing, but over the last 5 or 6 years the way Colgate has been able to put up double-digit earnings growth so consistently, by my math, is that you have had a real structural change in your EBIT margin, and have gone from 20 to almost up to 25.

That is a humongous change, and when you look at specific regions, Asia, Africa EBIT margin doubled during that timeframe.

The US went from 21 to 29.

Those are structural changes.

I knew you had your restructuring program, there was some product mix issues, divestitures, and all that kind of good stuff, but I can't believe you are assuming top line growth is really going to accelerate, relative to the level you have put up over the last 5 years.

And so in the absence, if you will, of putting up another 500 basis points of operating margin expansion, in other words going from kind of 23, 24 up to nearly 30, I just don't see how you can argue that you can put up double-digit earnings growth over the next 5 years.

Maybe you can as a recovery off of an investment spending heavy 2011, so maybe there is a snap back on some of your profit margins, but long term, do you see a 28%, 29% type EBIT margins for Colgate 5 years out?

Okay.

Well, we started with 2012 and we are now at 2015.

But I am just sort of saying long term.

So 2012, okay, I will give you all the cost savings and the recovery and the snap back and the great market shares, and that is awesome, but still, when people think about the long term outlook, do we really think you are still a long term double-digit earnings growth story?

We do, and we see it still in 2 areas, and we believe in them.

The first is gross margin expansion, which, again, as we look at 2012 and beyond, we see ourselves continuing to deliver, and the additional benefit on a continuing basis of reducing the overheads as a percentage to sales, allowing us to invest responsibly behind the business and deliver responsibly and sustainably double-digit EPS growth.

Okay.

Our most recent strategic plans, even in the environment we are in, would support that.

Okay.

Thank you very much.

And we will go next to Bill Chappell with SunTrust.

Good morning.

Hey, Bill.

I will try not to belabor the pricing thing too much, but just wanted to focus more on Hills.

I think if you go back a couple years ago, Hills and the whole pet category started to price the consumer out of the market, and it really hurt volumes.

And I'm trying to figure out, are we seeing that again, and with some of the key commodities in pet food coming down, is there an opportunity to roll some of that back over the next few quarters to avoid that happening again?

Don't see it, Bill, this time.

Don't see it.

The pricing that the whole industry has taken, and as you know, we were the last to take this year, has been much more modest than the sharp run-up we had in the 8, 9 period.

Our market shares in the vet channel, which is the recommender who most resists pricing because it makes them nervous about recommending, continues to strengthen, and our recommendation levels continue to be very high.

Basically, for Hills this quarter was about the 2 things Bina raised.

We have not been competing effectively in what had been be the fast growing natural segment.

We now have entered with an Ideal Balance product that marries nutrition with naturals, and it is starting well.

In fact, our market share in the premium segment, excluding the naturals, has continued to increase.

So we don't believe in the specialist channel, with the professional recommendation, that we have hit a ceiling on pricing with pet nutrition, and that is not what our analysis shows for this quarter.

Okay.

So there's actually some room to continue to take some pricing as needed?

As needed.

Perfect.

Thanks so much.

Sure.

We will take our next question from Javier Escalante with Consumer Edge Research.

Good morning everyone.

Ian, hello.

Coming back to the gross margin question, and the savings part.

Based on your margin walk, it seems like funding the growth, at least on the growth margin side, is trending at about $300 million per year, which is the low end of your long-term target.

You mentioned you could do $300 million to $600 million.

So I wonder to what extent the missing part here was that the savings are not coming in as fast as you guys expected, and how does it look, that pipeline of savings, going into 2012, and whether the other savings programs, the synchronization of demand and supply, is already played and it is already generating savings?

Thank you.

Sure.

I guess 2 ways to answer.

Number 1, the funding the growth program is as vibrant and rich as it has always been, even preceding the synchronization benefits that we will start to see in 2012.

Indeed, the funding the growth benefit in the third quarter to 210 basis points was as strong as we delivered last year, and I think we have said fairly consistently that our funding the growth benefit on the margin line tends to build across the year, and that is what we are continuing to see in 2011 as we saw in 2010.

So still a rich area, still one we can mine, and on top of that, the synchronization benefits to come, which are not necessarily only related to gross margin, but will be additive.

And then the other thing we keep trying to make the point on, is this focus we have had now for over a year on the overhead side of the equation, finding ways to get more efficient structurally, so we can lower overhead as a percentage to sales, and that relates to some of the restructuring activities that we are taking from the 1-time gains we have.

And also we have a very big focus with funding the growth on so-called indirect spend, which is about half of what we spend, which is often captured in the overhead line.

So I think you have to think about it in 2 ways.

1, a continued rich pipeline of opportunity with funding the growth and synchronicity on top, and 2, a continued focus, as we saw with the 60 basis points this quarter, on streamlining and making more efficient our operating structure so we can continue to lower overhead as a percentage to sales and from both efforts, therefore, generate the funding for growth investment and earnings return.

We will take our next question from Joe Altobello with Oppenheimer.

Thanks.

Good morning.

Hi, Joe.

Hi.

Just 2 quick questions, both sort of related.

First, the margin compression we saw in greater Asia-Africa and Europe-South Pacific, was that all commodity related or were there other FX issues that were involved there?

And then, secondly, given the recent move in FX, what is the likelihood and timing of additional pricing internationally to offset that?

Thanks.

It was commodity pricing.

The transaction effect [of it] was negligible in the quarter.

So it was commodity pricing, and as I said in response to an earlier question, we expect our pricing to continue to increase in the fourth quarter, and relative to foreign exchange impact from a transaction point of view, as we customarily have, you would expect us to take pricing in those developing and emerging markets to offset that.

Okay that's helpful, and just 1 last one.

On the overhead, it looks like the 60 bips was pretty impressive this quarter.

It sounds like that is sustainable.

Should we expect another 60 bips of this year, or is it an opportunity to actually accelerate that next year?

Well, I guess the way I would phrase it at this stage.

Joe, is that we took that 135 after-tax gain and put it into initiatives that we are in the process of implementing, and will pick up about a 30% to 40% rate of return into 2012.

Okay thank you.

We will go next to Chris Ferrera from Bank of America.

Good morning.

Hello, Chris.

Obviously over time, you guys have been 1 of the best at slowly and deliberately shifting resources toward your more attractive businesses in the portfolio.

But given what looked like divergent trends between oral care and non-oral care, or more specifically household, and particularly in developed markets, how much thought do you give to any acceleration of that portfolio migration, or is that too short term a view?

That may be, with respect, too short term a view.

If you, and this is what I was talking to Ali about earlier, in terms of balancing pricing with volume and the overall growth of the company.

If you look at the third quarter, we have now, I think, accelerated the top line growth of the company, and if you break it down by categories, we are growing oral care organically high-single digits, and we are growing personal and home care mid-single digits.

So you are seeing a shift towards the oral care business, but we are getting good growth in those developed markets on our personal care businesses and home care businesses as well, and they remain important parts of the portfolio, but we are outpacing on oral care, as you would expect.

And just on an unrelated note, are you taking FX-related pricing yet in your emerging markets, or is it too early for that?

It is too early, but as I said in response to an earlier question, from a transaction point of view, as opposed to translation, you know well Chris, this is something we do, we do quite regularly, and I think we do quite well.

Thank you.

We will go next to Jason Gere from RBC Capital Markets.

Good morning.

Hey, Jason.

I guess I just wanted to talk about these destocking.

I know you mentioned a little of that in the Hills business, but can you just talk, maybe, about the POS sell-in versus sell-through in the US, in Europe.

And maybe kind of putting into context of some of the categories that are growing a bit softer, such as home care.

So where are retailers maybe managing inventories a little bit tougher these days?

Yes.

I think in the Hills case, frankly, it was relative to a buy-in ahead of price increase, and simply inventory adjustment at the end of the quarter.

I don't think it was more than that.

If you look at our categories on a local currency value basis, as we have said before, you are seeing the North Americas and the Europes of this world growing at a 1% to 2% level, and that compares with the high-single digits we are seeing in the emerging markets.

And that has been true for a reasonable time, and I think is what we are likely to see going forward.

If you dig into categories in specific, the growth of private label is way off what it had been in the 2008, 2009 year, and we are seeing private label share overall come down.

And I think when you look at our inventory position in terms of balancing the sell-in with the sell-out, we are in a well balanced position.

Aggregate US consumption is ahead of category growth so far this year.

So we don't see any particular category focus inventory-wise by retailers, other than that adjustment at the end of quarters, which given different financial years, tends to happen at different times.

And we will go to Bill Schmitz with Deutsche Bank.

Good morning.

Hello, Bill.

Do you see any pullback in the promotional intensity, especially in oral care, given some of the rises in commodity cost?

Depends.

Some places, yes, other places, no, and I wouldn't contain the point to oral care.

I was just down in Mexico, and you look at the marketplace, and some competitors have stepped up promotionally significantly across categories, while reducing media, and you see that in certain markets around the world.

In other markets (technical difficulty) limit that comment to oral care.

Yes, I would not limit that comment to oral care.

Okay, and is there any difference in behavior between the guys who are reporting it euros versus the guys who are reporting in dollars in terms of competitive intensity, because obviously in the last month or so, the euro is probably going to help them a little bit more than the dollar is going to help the other folks?

Not in any way that we have seen significantly, Bill.

I guess we will get closer to that as we go through our budgeting process in November, but certainly no alerts through our alert system that would suggest a change of behavior versus history.

No.

Okay, and then when you look at some of the volume deceleration, is there any way to kind of figure out what (technical difficulties) of the volume?

Are people just buying and using less?

Because it looks like private label shares have been pretty flat.

I know it does not exist in oral care, but in even some of the European home care categories.

Yes.

The fact of the matter is in these markets, which is why I think it will stay at this level now, people have used it up pantry inventory and they are making the bottle and the tube and the package, I am now talking Europe and the US, a little bit longer.

You can see it in the usage, yes.

Okay, and then in the UK obviously P&G took a ton of share, but my data is right, your market share was up a little bit also.

How do you think that market plays out?

And what happens to the profitability there?

Well, as you saw, our growth in the UK was of the lead contributors.

Yes, you are right.

Our share is up, approaching 48% on a year-to-date basis, actually ahead of that in the most recent period.

The competitor that you referenced, their share is about 4 on a year-to-date basis and has trended down for the last 3 months, and is now sitting at about an 8 share.

So we're happy with the growth.

We are happy with the performance of our UK business.

We do not see it as a BRIC country, so we are talking about 66 million consumers here, but we're happy with that performance in market.

Okay, got it, and then just for the plan for next year.

I know that is a very profitable business for you, even if profits or margins do come down a little bit.

I am guessing there is enough cushion in the business model to keep going with that double-digit EPS growth trajectory.

I think maybe we should take sort of a little bit of a walk around in the oral care business.

just to try and set the platform for next year.

If you take the BRICs, China, we have been up for the last 3 quarters, we are now approaching 33, and the principal competitor has been down the last 3 quarters, now sitting at a 22.

In Russia, we continue to lead with about a 32 share, and the competitor is sitting at a 16, having lost 9 share points over the last 5 years.

In Brazil, we are up to 71.

They are indeed at a 5, but the lead brand, the [Brosode], is only half of that market share.

Mexico, we are back up to approaching an 82 share, and they are holding at about a 12.

(technical difficulty) lower priced complete businesses, and all of these businesses highly promoted.

What is driving our growth are increasingly premium products like Total, like our Luminous Whitening just launched in Latin America.

So we think, in terms of the shape of our business and where we are focusing our investments, there is comfort, I guess, in continuing to advance the businesses and the company of that double digit rate.

Great.

Thanks very much.

Sure.

We will go next to Lauren Lieberman with Barclays Capital.

Thanks good morning.

Hello, Lauren.

Hello.

I just wanted to ask about advertising spending, because I know, like you talked about, heavy new product launch activity in the second half of the year, but advertising was down again as a percentage of sales.

So as we look at the balance of the year, will advertising be up as a percentage of sales, which was part of your budget and kind of the thought process around mid-single digit earnings growth this year, was a big reinvestment year?

Does not really look like it is happening.

The direct answer to your question is yes, and obviously as we move our way into 2012, the thinking would be to continue that.

And when you talk about the total pie here, obviously, and we have said this before, an awfully large part of connection with consumers these days is at retail.

These are often constructed programs that have brand building engagement aspects to them, but they come in price, or they come in the difference between the gross sale and the net sales, and we have seen that aspect of commercial investment go up this year, to the benefit of brands, we think.

But yes, with the innovation out there, both absolutely and as a percent to sales, we expect the advertising to be up in the fourth quarter, and clearly we will be looking to continue that in 2012.

Okay, and Ian, just to clarify.

Does the advertising as percentage of sales, is it going to be up on a full year basis or just in the fourth quarter at this point?

On a full year basis it will be in line with sales growth, more or less.

Okay.

Thanks, And then the other thing was just, if I kind of went through, just in my head, what Bina had shared, for the outlook by divisions.

It sounds like you are guiding to operating profit being like flattish to down in all divisions in the fourth quarter, with the exception of Latin America.

So as we look into '12, you talked about pricing starting to catch up, but it just still feels like the outlook for fourth quarter isn't all that great.

So is it a mid of 2012 that things start to accelerate?

Because it would be a really big swing for you to have that kind of performance in fourth quarter, and then things to kind of be off to the races as we get into the first quarter.

Well, we still, as we said, expect mid-single digits for this year.

What is changing, I guess, the 3 things I mentioned before.

Pricing is changing, and will accelerate through the fourth quarter and into next year.

Commodities are really flattening, and in many material cases starting to decline.

So the unfavorability in the fourth will be lesser than the third, and that will continue to improve in 2012.

And we are getting the benefit from the restructurings that we are doing, which are lowering overhead and will continue to do that in 2012.

And many of those things will literally be with us as we enter 2012, because we will already be seeing them in the fourth quarter.

Okay great, thank you.

We will go next to Connie Maneaty with BMO Capital

My questions have all been asked, thanks, asked and answered.

Thank you.

We will go next to Caroline Levy with CLSA.

Good morning, almost afternoon.

Thank you.

Quick questions.

Just an update on interest expense, which looked low in the quarter.

And similarly on corporate expenses, and then just finally, could you elaborate a little bit on what is going on in China and Greater Asia in terms of your growth?

Okay.

Well, there is nothing unusual in the interest expense.

It is basically running at the level it has been running at, and as we look forward, we would expect it to be the same.

(technical difficulties) so the only real shift there was a benefit we got last year from the sale of some [PDVSA], as they are called, bonds in Venezuela, which is not recurring this year, so you get a bit of a pickup.

And when you turn to Asia, the countries that you would expect in Greater Asia region growing high-single digits.

Greater China growing at high-single digits, and India growing double digits.

The only slight depressing factor we had on Asia and Greater Asia, which includes Africa, on the quarter was, you may have read about it, an unforecast 4-week strike, national strike, in South Africa, which probably impacted volume around 0.5% in the quarter.

But other than that, things, I think, as you would expect them to be in that part of the world.

Thank you so much.

We will go next to Dara Mohsenian with Morgan Stanley.

Good morning.

Hello, Dara.

So, Ian, you got it to return to double digit earnings growth next year, which comes despite the difficult consumer spending environment on top of a likely hit from FX.

So I just want to get some more granularity on what you think gives you visibility, that you could actually hit your long term goals next year, even in the face of a tough industry environment?

Yes.

Well, let me take it sort of from the top to the bottom.

The way we see our categories operating in the world we're in today, is that we expect the categories in Europe and North America, the so-called developed world, to grow between 1% and 2% local currency.

We expect the categories in the emerging markets, which is just over 50% of our business, to grow high-single digits, which they have been doing historically.

So I think the growth trajectory is relatively clear, and we are very pleased with the growth we posted this quarter leading us into 2012.

Second, on the gross margin, we expect to offset the dollar impact of the commodity costs this fourth-quarter and move into rebuilding the ratio in 2012, because of the rollover benefit of pricing that we will have taken, and the known reduction in the headwinds we will face from commodity costs.

And very importantly, and part of our thinking and model, is this continued focus on reducing overhead as a percentage of sales, which we are seeing play out this year.

And with the utilization of the one-time gains (technical difficulties) expect to continue in 2012.

And I guess, on top of that, the general strength, as I have tried to demonstrate, from the brief walk around the world, the general strength of our market shares, which we continue (technical difficulties) Dara?

Thanks.

That is helpful.

And we will take our final question from Jon Anderson with William Blair.

Good morning everybody, thanks.

Hello, Jon.

I assume that you are typically leading when you take price increases, at least in your larger markets, categories, and countries.

Ian, you mentioned some adjustments to price were made to respond to competitive activity in the quarter, and I guess I am just wondering, is this the normal part of the lag process, or are you seeing something else there, and what have you been seeing more recently with respect to competitor pricing?

Well, we lead where we believe we have the right to lead, which is where we have category strength or country strength.

So you are right.

We also, as I mentioned earlier, with the Optic in the US, we will adjust our pricing for in-store trial generating devices where we think that is right, to build a trial for a product that we think can have significant market share.

And we will, on a selected basis by category, offset the pricing that we take with promotional activity if we think that is appropriate.

All of that is entirely consistent with history.

None of that is new in our thinking.

So there is no structural change in what we are seeing or how we are reacting.

The only reason we made the comment is that it was a contributory factor against what we had been forecasting on the gross margin.

That was the only reason we referenced it, but the way we think about it from an executional point of view has not changed.

Thanks a lot.

Okay.

Well, thanks to all of you for your questions, and thanks to the Colgate folk that get it all done, and we look forward to catching up with you in the new year.

And this does conclude today's conference.

We thank you for your participation.