高露潔 (CL) 2012 Q3 法說會逐字稿

Good day and welcome to today's Colgate-Palmolive Company third quarter 2012 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 would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Bina Thompson.

Please go ahead, ma'am.

Thanks, Brian.

Let me add my 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 these statements are made on the basis and views of 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 Statements on forward-looking statements.

This conference call will also include a discussion of non-GAAP financial measures which differ from our results prepared in accordance with GAAP.

We will discuss organic sales growth, excluding foreign exchange, acquisitions and divestitures.

We will also discuss gross profit, gross profit margin, operating profit, net income and earnings per share excluding the impact of the one-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.ColgatePalmolive.com.

So, we're very pleased with the continued strong momentum in our business in the third quarter.

Good organic sales growth coupled with an excellent increase in gross margins have allowed us to increase investment behind our business as well as to grow our bottom line.

Market shares are strong around the world.

On a year-to-date basis we are up to toothpaste, manual toothbrushes, mouthwash, bar soaps, body wash, deodorant, and fabric conditioner.

Our pipeline of new products is as full as it has ever been which bodes well for continued share gains.

Our balance sheet is solid and cash generation is strong.

We continue to successfully implement the strategies with which you are all familiar, engaging to build our brands, innovation for growth, effectiveness and efficiency, and leading to win.

And we believe our tight focus on a limited number of categories continues to be the right approach for Colgate.

This has allowed us to deliver consistent results.

Now, while our strategies have not changed, the external environment is increasingly changing and at a fast pace.

To help ensure continued strong results, today we announced a four-year global growth and efficiency program.

And this is truly a global program affecting all areas of the business which is expected to help us deliver sustained, profitable growth over the long term.

We believe that these changes will help ensure the long-term success of our business in today's fast-changing global market place.

We've chosen to undertake them at a time when the business is strong to leverage our growth momentum so we continue to deliver on both our near- and long-term targets while increasing investment to strengthen our market-leading positions and commercial capabilities on the ground.

As a reminder, our key areas of focus are not new to us but rather a continuation of what we've done successfully in the past.

The global growth and efficiency program represents a truly global effort to expand upon successful initiatives previously implemented in select regions focusing on the areas of commercial hubs, shared services, and global supply chain and facilities optimization.

Reflecting on 2012, when we initially gave constant dollar guidance, we were experiencing and projecting extremely volatile foreign exchange markets.

That has proven to be the case throughout 2012 in all regions of the world.

By managing the business on the constant currency basis, we ensure that commercial funds stayed invested in the local businesses.

So, as we look ahead we see the exchange markets being somewhat less volatile and more in line with historic patterns.

So, while our global budget process is still in the initial stages, as Ian said in the press release, we expect to return to double-digit earnings per share growth on a dollar basis in 2013 in the 10% to 11% range.

Our target for organic sales growth for 2013 remains 6% to 7%, and we expect to see increases both in gross profit and advertising.

So, let me now briefly share some third quarter highlights from the division, starting with North America.

We're particularly pleased with our North American results.

Despite a deceleration in category growth throughout the year, we achieved positive volume and pricing in the third quarter.

The volume growth was also notable as compared to the strong year-ago quarter in which we launched Colgate Optic White toothpaste.

As referenced in the press release, our oral care shares are strong.

The launch of Colgate Optic White enamel toothpaste in the US has helped to increase the share of the Colgate Optic White franchise with a share of over 6% in the most recent period.

Now, we told you last quarter about the launch of Colgate Optic White mouthwash which complements the toothpaste and toothbrush and offers a full whitening regimen.

The launch is doing well and the mouthwash has over 2% share.

Increased investment behind our Colgate Total franchise along with a very successful Seeing is Believing marketing campaign also contributed to our success.

And we have some very exciting new products along with some new marketing campaigns slated for the first quarter which you will hear about at a later date.

So let's turn to Latin America.

Very good market share progress drove our strong results in Latin America.

Year-to-date market shares are up in toothpaste, manual toothbrushes, mouthwash, bar soaps, fabric conditioners, dish washing liquid, and liquid cleaners.

As referenced in the press release, we reached another record share in toothpaste, 79.3%, up 120 basis points from a year ago.

Now, this increase was achieved in spite of competitive launches in a number of counties.

Colgate Luminous White toothpaste, which was launched a year ago in Mexico and Brazil, is now selling across the division and accounts for almost 4 points of our overall toothpaste share.

Our leading toothbrush share is at 42.5% year-to-date, up almost 2 full points from the year-ago period.

And as in other developing markets we have product offerings at all price points and both our premium price and mid tier brushes are contributing to the share gains.

In mouthwash, our market share is up 4 points to 37% on a year-to-date basis, and we've achieved leadership in Argentina, Venezuela, Central America, Paraguay and Uruguay.

In bar soaps we consolidated our leadership position up over 2 points to 32%.

Protex is the leading brand and the launch of Protex with vitamin E as well as a strong hand washing campaign has contributed to its success.

Palmolive is the number two brand across the region, also benefiting from innovation.

Turning then to Europe.

As you know, the macroeconomic situation in Europe is quite challenging.

Category growth is slowing and consumer confidence levels are low, but despite that, our oral care shares are solid.

In toothpaste, our year-to-date market share is even with the year-ago period and our shares are up in manual toothbrushes and mouthwash.

So, even in this tough environment we have successfully launched new products.

We found that the consumer is willing to pay a premium for a clear benefit such as whitening or gum health.

Across the region in September, we re-launched our Colgate Max White One whitening toothpaste along with an accompanying toothbrush and mouthwash to provide a full whitening regimen.

The distinctive red packaging, the same as for Optic White here in the US, really does stand out on shelves.

Persuasive in-store presence is a critical component of an integrated marketing campaign, particularly in the more developed markets, and early results for this bundle are very encouraging.

Now, we're also very excited about our launch into a completely new category, electric rechargeable toothbrushes.

Our lead market is the UK.

The product was introduced in early October at the British Dental Trade Association conference, the largest UK trade event with over 10,000 delegates attending, and the reactions were very positive.

As you know, professional recommendations play a very important role in this category.

And, in addition, we introduced a product at booths, the first ever platinum launch for Colgate.

Fifty percent of the category sales are through this one retailer.

Advertising is now on air and although we don't have scanner data until next month, the initial reception has been excellent.

Later, Asia Africa.

As in other divisions, successful new product launches have helped increase market shares.

Across Asia our toothpaste share is up 40 basis points on a year-to-date basis.

In India, both premium and mid-tier offerings have driven our share up 250 basis points to over 53% of the market.

The share gains are across the country in both urban and rural markets, and in China our share continues to grow.

We're up 140 basis points to 33.7%.

We continue to grow our mouthwash business across the region.

Year-to-date, our market share is up almost 3 full points to 19.3% with increases in almost every country.

Both Colgate Plax Fresh Tea and Colgate Plax Fruity Fresh have contribute to the share gains along with a Colgate Sensitive Pro-Relief mouthwash to accompany our Colgate Sensitive Pro-Relief toothpaste in the developed market of Hong Kong and Singapore.

And Hill's.

While Hill's volume declined in the quarter, positive pricing allowed for another quarter of organic sales growth.

A number of initiatives slated for the end of 2012 and the first quarter of 2013 should benefit the business.

On the Science Diet side of the business, we'll be re-launching the Science Diet line at the beginning of December.

The new Science Diet dry offerings will contain natural ingredients with meat or high quality protein as the first ingredient and no chicken byproduct or artificial colors or flavors.

New packaging design will make it easier for the pet owner to find the right product.

In fact, our studies show it reduces the time it takes by 30%.

There will be three new shopping categories that should reduce shelf clutter, lifestyle, life stage, and life care.

Ideal Balance, which provides natural ingredients, and Perfect Balance and contains no corn continues building momentum with third quarter 2012 volume in the US up 19% over the second quarter of 2012.

A very exciting new Prescription Diet product is Prescription Diet Metabolic.

Now, this is the first weight management food with proven real-world results.

Eighty-eight percent of dogs and cats lost weight in two months at home.

And it's also clinically proven to avoid weight regain following a weight loss program.

It comes in dry, wet, and treats for dogs as well as cats.

This product will start shipping in the first quarter of next year starting with the North American market and Japan.

So, in summary, we're pleased with the continued momentum in our business and look forward to a strong finish for the year.

And, as you've heard, Colgate people around the world are winning on the ground, delivering strong results and increased market shares.

And our new global growth and efficiency programs for sustained growth announced today should help us to continue to deliver strong results in 2013 and beyond.

That's the end of my prepared remarks.

Brian, now if we could open it up to questions, that would be terrific.

Thank you.

(Operator Instructions) We'll go first to Bill Schmitz with Deutsche Bank.

Hi, guys.

Good morning.

Did you say how much of the restructuring program is going to be reinvested versus how much you think will flow down to the bottom line?

No, we didn't, Bill.

And at this stage -- first, let me take a step back on the whole program because this has been the output of well over a year's study.

As I think you have seen from the release and Bina's comments, we've taken a view here that is strategic for the long term while benefiting starting in 2013 to build the kind of structure and skills we think we will need to compete effectively in this fast-changing world over the next five to ten years.

And important to say that we're really expanding structures and capabilities that we know very well how to handle, something that we have been doing in various parts of the world for over 15 years, shared service center pioneered in Europe at about five years and, of course, in terms of manufacturing and sourcing we started the millennium with something like 85 factories and have worked that down over time.

And I think, as you saw with the 2004-2008 program, we have the focus and ability to get these programs executed without impacting the continued flow of the business.

Now, as to how we will use the funds generated by the program, if you take the near-end view, with a we're really saying in 2013 is that we intend to continue the pace of organic top-line growth in a world that has more slowness to it than not at the 6% to 7% range and expect to return to double-digit EPS on a dollar basis.

How we allocate the second half benefits we'll get next year will depend by geography and by program, and that will be the same view we will use in the out years.

But if you look at 2013, the commitment is really to the double-digit earnings per share growth on a dollar basis while maintaining that 6% to 7% organic top-line growth.

Our next question comes from Nik Modi with UBS.

Can you just give us any perspective?

Bina kind of addressed the Western European environment being sluggish, but can you talk about the other markets, especially Latin America, kind of what you're seeing from a market growth standpoint?

And then just a quick follow-up question on minor housekeeping.

Venezuela, do you believe you can still deliver the dollar kind of 10%-plus even if we get a de-val in Venezuela next year?

So, let me take them in the order you asked them, Nik.

If you look at our world, and by our world I mean our categories by geography, as we have said before, in Europe we see low single-digit category growth, very low in the 1% to 2% range, closer to 1% than 2%, and in some cases negative.

In North America we see category growth rates in that 1% to 2% range.

And in the emerging markets we continue to see category growth rates at high single digits.

That would be the 8% to 9% growth rates.

And we continue to see that right through the latest periods of data available to us.

And having just come back from Vietnam, Laos, Cambodia, and Myanmar, I would say in these high-growth geographies, consumer optimism is still high.

So, you see it in the numbers and you feel it on the ground when you're interacting with consumers.

Venezuela, obviously there is a lot of speculation about Venezuela.

Clearly, there would be two components to any devaluation were it to occur.

One would be the one-time impact on net monetary assets which would be a one-time event as it was before.

And then to answer the heart of your question, it's really going to come down to the ability to take pricing in the country or not.

And I think it would be highly speculative to say what that position might be at the time.

Hopefully, the governmental view, in terms of making product available to consumers, would be to allow pricing to facilitate bringing raw materials.

And, remember, we make 85% of what we sell in the country providing employment, but bringing raw materials into the country.

If we see a devaluation with no ability to take pricing, that is going to be painful for everybody operating in the country and would weigh on our ability to deliver the double-digit dollar EPS growth.

And our next question comes from Dara Mohsenian with Morgan Stanley.

Ian, on the Hill's business, top line performance continued to be disappointing and that seems in contrast to some of the hope you had had that the new products would reinvigorate the business and help with the market share issues in the natural segment.

I just want to get an update there.

And, also, can you give us some detail on the Ideal Balance launch in terms of its incrementality and repeat rates and some perspective on potential growth for the division in 2013?

Yes.

It's a tale of two cities.

Ideal Balance is doing well, as Bina said.

Trial rates are high and repeat rates are high.

And we know we're bringing in about half of the new users from other natural products, but it's not big enough to shift the entire business.

So, as we have said before, the second half of what we need to do and will do at the end of this year, as Bina said, is to reformulate and repackage from a design point of view our base Science Diet line to contain ingredients that natural users want and shout out those ingredients on our package.

And so while we expect to continue to see organic growth this year, I think as we have said before, we expect to return to positive volume growth in 2013 behind the continued growth of Ideal Balance and, more importantly, from an overall business point of view that upgrade of the entire Science Diet line.

And next we'll go to Bill Chappell with SunTrust.

Hi.

This is Sarah Miller filling in for Bill this morning.

My question is on -- it seems like there's kind of been cost initiatives and some smaller restructuring programs over time, but this program seems like it's kind of a little bit different and I'm just wondering if there was a certain genesis behind the program.

What kind of brought it to light now and just the drivers behind that?

Thank you.

Well, I was going to say, Sarah, you didn't sound much like a Bill.

Let's talk about the program.

The other programs you're talking about were really opportunistic actions taken to lower our structural cost at a time when we got a one-time gain from divesting a small business.

This program, which is a global growth and efficiency program, is obviously more strategic in nature and, as I said earlier, is the result of over a year's study thinking about how we should best organize ourselves, how we should best invest behind growing the business for the next five to ten years.

So, its genesis, to use your words, was a strategic genesis and the content is really taking around the world structures and capabilities that we have had in place in some geographies for a long period of time, have validated, know they work, and know how to get them done.

So, this is moving our global structure to a place that we think will make us sustainably competitive for the next five-plus years.

That was the genesis.

We'll go next to Wendy Nicholson with Citi Investment Research.

Hi.

My question is a follow-up on that.

And if I look back over history, I thought once was the day that Reuben really prided himself and a big point of what made Colgate is special is that programs like this were sort of considered part of doing business every day and, you know Colgate never used to take extraordinary charges and that was something that really distinguished the Company.

And I wonder if something has changed culturally because these are huge charges and obviously everybody cares about pro forma earnings and I get that, but still on a GAAP basis your earnings will not have grown for an awfully long time given the magnitude of the charges.

I guess, number one, maybe that's just a statement about how difficult the macro is.

But, number one, can you talk about that philosophy?

Should we start to think of Colgate as a company that's going to take big charges every five, seven, or ten years, something like that, so it's a little bit of a different story?

Second thing, when you talk about how difficult the external environment is, can you tell us is that two-thirds of the macro and the consumer and economic environment and one-third the competitive situation or is it the opposite?

What is making the macro more difficult so that you take such big charges now?

Thanks.

Yes.

First of all, Wendy, I take exception to the point that we have not done these things in the past.

We have a record of having taken significant restructuring activities, not every three to five years, but usually in an eight to ten-year cycle.

And, again, as we tried to say earlier -- I mean, your question searches for an underlying problem that forces the action to be taken now and we don't view it that way.

We view it that the world is certainly fast changing and volatile.

We view it that we want to prepare ourselves to continue to deliver that sustained growth both on the top line and bottom line over time, and we believe we have enough validation and the capacity to get this done in a compressed period of time to make us better able to compete in the world for the longer term.

So, that was the thinking.

That was the thinking behind it.

And our next question comes from Caroline Levy with CLSA.

Good morning, everybody.

And I had to hop off for a second, so I hope we haven't addressed this already.

Just looking at Latin America, certainly versus what I expected, it was a little worse than I'd been hoping for, particularly the top line.

And it appears -- there had been a market where you had been beating I think what everybody thought was possible on sales, both volume and pricing, and that seemed to slow.

And I know you pulled out great margin performance, but can you talk a little bit about the environment there, if there is anything that's changing or is this slowdown relative to the very strong double-digit growth over the past five quarters?

Is this a one-off?

And I'm looking at -- .

Go on.

I was looking at the organic growth rate.

Yes, as am I. The answer is, I guess, two-fold.

Number one, if you look at the year-on-year comparison, the first two quarters we're up against lesser performance in 2011 and the third quarter comes up against mid teen double-digit growth rates in the back half of 2011.

And we still think in that context 9% is good.

You heard from Bina, the shared performance is good.

Clearly, Venezuela is a little bit of a drag, as you would expect, but the other geographies are performing extremely well and Venezuela is to plan.

So, I don't think there is anything untoward.

We have fairly consistently said that we think high single digit, low double digit is the kind of level you should expect from that geography.

And we'll go next to Lauren Lieberman with Barclays.

Thanks.

Good morning.

Just really quick.

The past work that you've done on the shared service center in Europe and the hubbing of regions, I guess I was wondering if you could remind us how much of that in the past was funded through restructuring or one-time charges to get that in place or if it was done just in the course of operations and over time?

Thanks.

It varied.

In the early days, we definitely ran it more through the income statement because we were moving quite slowly, giving ourselves the confidence that perhaps would give us what they thought they would give us, which is better capability to win on the ground at the same time with lower cost.

Some we have run through prior restructurings.

And in this case, now having it in the geographies in most of our geographic regions, we're taking it in a charge because we think we can deploy it more quickly than the 15-plus years we have had having in place.

And our next question comes from Javier Escalante with Consumer Edge Research.

Sorry for going back to the restructuring and the savings.

But first I would like to understand whether -- and it's the same question.

Whether these savings programs are going to be beyond funding the growth or replacing it?

And in the case that it's not replacing it, that's it's on top and beyond funding the growth.

If you step back, you have -- these would be your third layer of savings.

You have first funding the growth which is $600 million.

Then you have supply and demand synchronization which is another $100 million.

And then you're going to have another $45 million in savings because of this restructuring in 2013.

So, that is about $745 million in savings.

This is over 4 points of margin expansion.

And the question has to do, can the organization manage so much pressure to generate and take so much cost out of the system is kind of a -- I guess it has to do with the reaction to the timing of the restructuring and how ambitious all these three saving programs on their own merits are?

Thank you.

Okay, Javier.

Well, actually, now that you've given me the introduction to the funding of the growth, why don't I just do the customary walk through on the gross profit margin which would save that question being asked relative now to the third quarter.

Obviously, the prior year gross profit was 56.8%.

We picked up a 1.1 point benefit from pricing, a 2.2 benefit from funding the growth savings again in line with the curve of last year.

Material prices were negative 1.8 points.

And then there was minor pickup of 0.3 from other which is the walk through to the 180 points improvement.

Now, coming back to your broader strategic questions.

I guess you have to break these things into the three different component elements.

Funding the growth is a program we have had in place in this Company for many, many years.

And whilst it is comprehensive, by which I mean it doesn't just touch gross margin, a large part of it is gross margin and that program will continue because it is part of the culture of the Company, because it is part of our year-on-year savings program.

Synchronizing the supply and demand again is really squeezing waste out of a process which is eliminating redundancy and doesn't bring pressure to a business.

The new program again is not predominantly a margin benefit.

It, when you look at it with hubs, with shared services, with reduced facilities, is going to hit more in the SG&A area, and that's what we've been talking about for quite a while, which is with the slowing growth in the world in general, lowering structural cost is an important part of how to organize the Company.

Again, it will require a changed management.

I think we have demonstrated with the prior programs we have conducted that we have the focus to do it and the content of the program, the hubs, the shared service centers and the facility and the manufacturing facility rationalization, these are all things we know how to do.

We have validated them before and we believe now is the right time to do it from a position of strength and readying us for the future, and balancing what we believe we need to do to sustain top-line and bottom-line growth for that future.

Our next question comes from Jason Gere with RBC Capital Markets.

Good morning.

Most of the bigger picture questions have been asked.

So, maybe just talk a little bit about the promotional environment.

I think it was only a quarter ago we heard one of your competitors kind of talking about some of the offensive spending that was out there for trial building, that there might be a little more defensive spending coming about.

So, I guess really focusing on Western Europe and North America, how your outlook has changed maybe over the last three months?

Anything there just coinciding with maybe some of the tempered global market views on those regions?

Thanks.

Yes.

I must say thus far nothing of -- nothing meaningful for me to say in terms of change.

We continue to see promotional emphasis from folk and in North America we've just been pleased at our ability to continue to generate both price and volume in the third quarter, but no significant change in that environment.

Next we'll go to Ali Dibadj with Bernstein.

I first wanted to really praise the peremptory restructuring announcement.

I think it's good you are doing it now and you're responding to the headwinds instead of waiting like the Company used to do.

However, I want to get a sense of what I think is kind of a paucity of returns on the restructuring.

Around three things.

First, the 30% return over several years is actually relatively low given your history.

So, 2004 restructuring, I think was a 50% return, just quick, quick math.

And it was even higher for previous ones.

So, it feels like you're kind of squeezing the lemon too much and are you?

Secondly, this is kind of what you need to do to grow double digits in 2013.

So, what should we infer about what your view is on the global marketplace going forward understanding it's changing, but what does that really mean?

And then, third, and pardon me for this, I apologize, but if you put it all together, as you think about your long-term growth, isn't Colgate just being a little bit stubborn?

And, by the way, many your other competitors have done this, so join the crowd.

But a little bit stubborn about double digit EPS growth?

How are you going to convince us that you're still a double digit EPS growth company on a sustainable basis because you're doing a big restructuring to just get there.

And to be fair, again, I am not sure anybody in this sector is really double- digit EPS grower sustainably.

So, a lot in there, but a lot in my head thinking about this.

Well, as usual, Ali, thanks for the single question.

I guess in the end the double digit is going to come down to performance and of course you and others will track that as you track that.

But to come back in sequence, number one, we do not think we're squeezing the lemon.

In fact, the rates of return we got on prior restructurings were in that low to mid 30% level and this is entirely consistent with that kind of benchmark.

We view it as, again, to repeat what we need to do to reorganize our Company to compete effectively, perhaps compete stubbornly over the medium to long term.

We believe and have validated the structure of hubs where for smaller counties you can bring big country capability which arms the folk on the ground with the tools they need to continue to win by growing market share and volume on the ground.

We believe in shared services centers because we have done it with our IT organization ten years ago.

We know it works.

We did it five years ago in Europe, in Poland.

We know we get immediate savings.

We then get second order savings as you simplify your process, and then you get third order savings as you bring additional functions and capability through the shared service centers.

And in the manufacturing and facilities space, that is a continuation of a journey we have been on for over 15 years.

All of it facilitated by SAP and our growing capability to use SAP.

So, it is a strategic view about how we need it to organize.

Turning to 2013, that wasn't the way we viewed it.

The way we have approached 2013 is to say that we expect to grow the top line of our Company by 6% to 7% organic, which we think stands up to any comparison.

And at the same time deliver double-digit dollar earnings per share growth in that 10% to 11% range.

And we will deploy the savings we get from the program by geography by activity as we see necessary.

And we think reaching this new organization structure as we get to 2016-2017 will position us sustainably to deliver consistent top-line growth and that double-digit bottom line growth, and folk will see the measure of it then.

Next we'll go to Connie Maneaty BMO Capital Markets.

Good morning.

I just have a point of clarification.

On your outlook for next year of 10% dollar EPS growth, what's the base we should be using?

Is it the 2012 reported EPS or is it the currency neutral?

And then my real question is on the restructuring.

You've said that you'll reduce the head count by about 6%.

Could you tell us what the timing of that is?

And also how many facilities will be changed or touched or closed during this process?

Yes.

To answer your first housekeeping question, Connie, it's the reported EPS.

As to the second question, in terms of when the head count reductions will take place, the answer is no.

Those plans have not yet been finalized or communicated and that would be premature.

And in the case of the facilities, I think it would be fair to say that by the time we finish the program we will have 10% fewer facilities approximately than the 54 than we have today.

And our next question comes from Joe Lachky with Wells Fargo Securities.

Hi.

I was just wanting to talk about your overall strategy in dealing specifically with competition in emerging markets.

And given your strong share in many of these markets, how do you specifically defend share of like, say, rural areas or the high-frequency stores where you guys are prevalent in?

And do you do anything differently in your execution?

I ask this within context of a major competitor and a major Latin America country making a push into these rural areas.

Yes.

The most important point in all of this, Joe, is the consumer and we should never forget that.

And you'll find in many of these high-frequency stores you can be there, but they're so small, you are not self-selecting the product.

The shop owner is giving you the product that you ask for.

And if you go to these stores, whether it's in India or in Latin America, Brazil, Mexico, the product they'll be asking for is [Gongatha].

So, that would be one.

Number two, we would have the broadest assortment of toothpaste products available in those stores and we have for many, many years had sizing and pricing that is particularly tailored for those stores to equate to cash in pocket, cash outlay, what the consumer can afford, but the heart of it is loyalty versus presence.

And the important thing in the high-frequency down trade stores is the consumer loyalty that we have which, in many cases despite the push, will not see new entrants distributed because the shopkeeper doesn't have any demand for the product.

Next we'll go to Christopher Ferrara with Bank of America.

Hi, thanks.

I just wanted to ask about SG&A for the quarter.

So, it was up 60 basis points.

It's a little bit of a different result than what we've seen over the last, I don't know, six or seven quarters or it's a little higher.

Is there anything unusual going on in that line item in the quarter?

And then on advertising do you feel like we're at kind of a good rate of growth on the advertising line?

Thanks.

Thanks, Chris.

No.

On the overheads, not really.

Part of it is the non-cost of goods transaction impact rolling forward and then it's the timing of some benefit expenses.

So, a timing issue, not a structural issue.

And advertising, yes, we're quite happy with the advertising level we have.

I said for quite a time now in some parts of the world, even though we don't focus on it, there are a lot of programs that are managed through the so-called gross to net.

The trade spending dollar which leads to in-store activity which, in today's world, particularly in the developed parts of our world, is where engaging with the consumer is very, very important.

But in the traditional A & P that you see, yes, we're quite happy with that level.

Frankly, with the stream of innovation we have coming into next year, and as we go through our budgeting cycle, we'll be looking to take that up.

And our next question comes from Alice Longley with Buckingham Research.

Your organic sales growth was 5% and yet you're still guiding to 6% to 7% for next year and holding to your longer term targets there.

Why were you below that in this quarter and why should we expect that to go get better next year?

And then also -- and should we see an improvement in the fourth quarter?

And then tied to this, I know you said that you're seeing your categories slow some and you gave us what you think -- how fast you think your categories are growing in Europe, emerging regions, and North America.

Can you tell us how fast you think, given the weighted average, how fast your categories are growing globally and how fast were you thinking the categories were growing?

So, in other words, so we could see the magnitude of the slowdown that you are seeing?

Thanks.

Thanks, Alice.

If you look at the nine months, we guided to 6% to 7% organic for this year.

I remember when we did some said that was too aggressive.

If you look at the nine months with the third quarter coming up against a tough comparison last year, our nine months organic growth is running at about 6.5%.

And I would tell you that we continue to guide for the full year to the 6% to 7% level.

As regards the category growth rates, I kind of went through them before.

High single digits in the emerging markets which are about 53% of our business and low single digits.

I characterized Europe as 1% to 2%, nearer 1%, and the US as the same, 1% to 2%.

But there's really been no change in those category growth rates.

So, that is what has driven the business next year and that is what we expect to continue to see next year and what gives us the confidence is the continued flow through of our innovation pipeline into 2013 and the effectiveness of many of the marketing programs that we have and, of course, the return to positive volume on the Hill's business.

Our next question comes from John Faucher with JPMorgan.

Hi.

Good morning.

Sorry to belabor all this.

I guess as we look at this I'm trying to figure out one of two questions here.

The first would be is this simply a cost of doing business going up issue, right, in terms of running harder to stick with the, let's say, 6% to 7% growth because the cost of doing business is higher, advertising, what have you?

Or is this simply sort of a reflection that the old model of delivering operating leverage doesn't work any more, okay, where it was categories grow X, you gain a little bit of share to grow Y and that just sort of automatically delivers leverage?

I agree with you if that's the case that it doesn't work any more.

So, I guess where in the P&L are we seeing that break down?

Is it just the higher raw material costs?

Is it the inability to take as much pricing going forward, or is it again something on the SG&A?

So, hopefully that question makes sense.

I'm not sure.

So, let me try and answer it in the same spirit that it was given, John.

I guess if you break the program down into two bits, the why are we doing it bit.

And the why are we doing it bit really strategically is more about how we think we should be best organized to manage our business for the medium to long term.

To repeat, we believe in the power of hubs and we validated it.

We believe with the technology available to us today in the servicing ability of shared service centers and so we're expanding it and we have the ability to further reduce our facilities, sourcing our global business.

So, for us, these are the right things to do.

And the why now, the why now is we believe the Company is in a strong position and this is the ideal time to expand structures that we have had in place for a long period of time.

I think it would be fair to say when we talk about a fast-changing world that we have seen a slowdown in category growth rates, particularly in the developed world.

And if you take a jaundiced macro view, is there going to be spillover of that into the emerging markets?

So, we still expect that 6% to 7% organic growth.

We still expect to grow market share, but you're doing it in a world where the rate of category growth, particularly in the developed parts of that world, have slowed.

And, therefore, as we have said for some time, we believe rebasing the structural costs is an important part of how we go about managing our business.

Next we will go to Linda Bolton-Weiser with Caris.

Hi.

I was wondering if you could give a little more commentary on Hill's.

It seems that for kind of a few years now we've been hearing about sluggish growth and then changes or tweaks to some of the marketing strategies and now we're hearing Science Diet relaunch and everything, but it's hard to get a grasp of exactly what's going on.

Is it something in the channel?

Like, is the channel shifting from the specialty channel more toward regular retail channels or are you losing market share?

Can you just give a little more color what's going on, please?

Thanks.

Sure, Linda.

First of all, split our Hill's business into two parts.

There is a prescription diet business.

Those are diets that are specifically for pets with health issues that are prescribed by vets.

We have a 70% recommendation level, a 70% market share, and that business is fine.

As we have been saying for a time, we have been unable, unsuccessful thus far in competing in what has become the fastest growing, quite large segment in the category, which is the naturals segment.

We had offers there.

A product called Nature's Best, but the consumer had a disconnect with this idea of Science Diet and a naturals product and the trial and repeat rates were low and we withdrew the product.

Our first step into that category was the product we have talked about again for a little while, which is Ideal Balance.

And Ideal Balance is what it purports to be, which is it doesn't give up the heritage of Hill's science, but it says it's balanced with the ingredients that a natural -- a naturals user would want and that's working for us.

It's working for us in terms of the trial we're getting, in terms of the business growth we're getting, and in terms of the new users we're bringing from the naturals segment.

It's not big enough to turn the whole business.

And folk aren't just hearing about the Science Diet relaunch now.

We have been saying for a while that we were working to completely relaunch our Science Diet business at the end of this year which, across the line, would therefore give the consumers the ingredients they would be looking for and that, as it works its way through 2013, we think is going to complete the job and get the business back on to a positive volume track.

So, the proof of the pudding will be in 2013.

Our next question comes from Jon Andersen with William Blair.

Sorry if this has been asked.

I just jumped on recently.

With respect to the efficiency program, the press release indicates clearly there are ample opportunities to reduce structural costs through it, but also you call out the benefit that should enable you to help drive your market share positions and support sustained sales growth.

To what degree might you reinvest some of the benefits that you've outlined here?

And, if so, where would those investments most likely be directed?

Thanks.

Well, Jon, yes, the -- you know the areas we're focused on.

We actually called out four areas of investment of those funds.

And the first obviously was innovation and brand building.

The second was enabling technology and analytics, and we had been talking for a little while about our belief that analytics is a new area of discriminating competence for companies like ours.

The third would be continuing to explore and expand our use of digital engagement with customers, with consumers, with suppliers.

And, finally, continuing to strengthen our capability in the emerging markets to underscore the distribution, the in-store visibility that our products have in those parts of the world.

So, again, we will be doing it on a case by case basis, by activity, by country, as we work through this, but they're the four principal areas of potential reinvestment.

Our next question comes from Mark Astrachan with Stifel Nicolas.

One follow-up or just housekeeping question.

From an input cost standpoint, anything you call out in particular for next year in terms of how you think it progresses and what your assumptions are for oil?

And then on the restructuring program and cost savings, broadly if we think about it longer term, how does this compare or how does this change your assumptions for gross margins as far as your long-term targets are concerned more specifically?

And then obviously if you could give us some color on the SG&A piece beyond which you've laid out, that would be helpful.

Otherwise, I understand that you probably won't.

No.

Quickly, no, I won't.

But getting to your questions.

Frankly, again we're at the preliminary stages of our budget, but preliminary look would be in the -- from a cost point of view, would be in a 1% to 2% range, kind of consistent with what we have seen this year.

So, that would be the macro view and that would be with oil at an assumed $110, and it would also assume a bit of a headwind from corn, which obviously affects our Hill's business.

From a gross margin point of view, we continue to hold the same plus or minus five-year goal of getting our gross margin into the mid 6s.

So, that continues to be the way we think about it.

And of course the $110, coming back to the oil, is obviously the Brent, not the West Texas.

And next we'll go to Ian Gordon with S&P Capital IQ.

Hi.

Just on the housekeeping.

The FX impact on sales was negative 6%.

Was it the same on EPS?

And then just can you dig into Europe a little bit?

I think this was the first quarter in a while where organic volumes were down.

So, what's changed there?

Was it the competitive environment?

It doesn't look like it was a year-over-year comparison issue.

Thanks.

Coming back.

As we've said several times before, the impact of foreign exchange on the top line -- I'm sorry, on the bottom line is greater than the impact on the top line.

So, we faced a headwind of around 8% on the bottom line relative to foreign exchange.

And in terms of Europe, Europe has always been a difficult environment.

Candidly, for the last half a dozen quarters organic growth has run negative in Europe and so the third quarter is no different than that.

Obviously, when you look at Europe, there clearly is a difference between the North and the South wherein the Iberias, the Italys, and the Greeces, you are seeing lower category growth rates.

Next we have a follow-up question from Ali Dibadj with Bernstein.

Hi, guys.

Thanks for taking the follow-up.

So, Ian, we've obviously jostled/disagreed a little bit about Hill's in the past.

It sounds like these changes you are making are very much in the right direction, but they're bigger changes than at least what I thought you guys had thought about before.

And again that's good, but I'm trying it figure out the costing of it.

So, look, cornmeal costs a whole ton less than corn let alone than chicken or meat.

You need to market this.

You need to get perhaps different distribution or at least get shelf space back and take your other things off the marketplace with discounting, et cetera.

So, can you give us a sense of the costing of this and what we should expect from a run rate on your margin in this business given that these are higher cost inputs?

Well, when you look at the business you know that the gross margin of Hill's is quite attractive to us.

You are correct that moving to these formulas does bring with them a cost.

But, again, I come back to the overall company and say that that is baked into our thinking in 2013 and beyond.

And again we're looking at the top line of 6% to 7% and we're looking at that bottom line EPS growth of 10% to 11% and the impact on the Hill's gross margin is easily manageable in that framework.

Next we will go again to Connie Maneaty with BMO Capital Markets.

Thanks.

My question was answered.

Okay.

I think that's it.

We do have one follow-up question from Alice Longley with Buckingham Research.

Hi.

Two things.

Is it possible -- this is a follow-up to the Hill's questions.

Is it possible that you'll change the pack size for Hill's and make them smaller as a way to address the higher cost and price the smaller pack size as the same as the bigger ones now?

The straightforward answer, Alice, is no.

The Hill's issue is not a pricing issue, it's a formulation issue in this particular case.

So, that's where we need to focus.

And as we have no further questions in queue, I'd like to turn the call back over to our speakers for any further or closing remarks.

Okay.

Well, thanks for all of you calling in.

It was good to have the opportunity to talk about the business today and our plans for the future and, again, for all of those Colgate people listening on the call, thank you for your efforts.

We obviously have a chapter ahead of us and we'll get the job done.

Thank you.

And that does conclude the day's presentation.

We thank you for your participation and have a wonderful day.