高露潔 (CL) 2016 Q2 法說會逐字稿

Good morning, everyone and welcome to today's Colgate-Palmolive Company second quarter 2016 earnings conference call.

(operator instructions)

Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. These refer to the earnings press release and the most recent 10K and subsequent SEC filings, all available on Colgate's website for discussion of the factors that could cause actual results to differ materially from these statements.

This conference call will also include a discussion of non-GAAP financial measures, including those identified in tables eight and nine of the earnings press release. A full reconciliation with the corresponding GAAP measures is included in the earnings press release and is available on Colgate's website. And now for opening remarks, I would like to turn the call over to the Senior Vice President of Investor Relations, Bina Thompson. Please go ahead, Bina.

Thank you, Angela, and good morning. Welcome to our second-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.

Happily, the momentum we saw in the first quarter continued into the second quarter with good organic sales growth within our targeted range of 4% to 7% and as compared to the strongest quarter of last year. Gross profit margin accelerated nicely, which allowed us to increase worldwide advertising as a percent of sales.

And as you will hear in more detail, our market shares are strong. New products continue to play an important role in our strategy. Innovation across categories has helped fuel growth around the world. And our Global Growth and Efficiency Program is on track.

Our balance sheet is strong, and so is our cash generation. We continue to be faced with macroeconomic challenges in many parts of the world, coupled with ongoing and sometimes volatile currency headwinds, so in light of this, we're particularly pleased with the results.

Just a quick housekeeping note before we get into the divisions. As was mentioned in this morning's 8K filing, as a result of management changes effective April 1, 2016, the Company realigned the geographic structure of its Europe, South Pacific, and Asia operating segments. Beginning this quarter, the results of the South Pacific operations are reported in the Asia-Pacific operating segment. There is no impact on historical company results overall. For informational purposes, recast historical geographic segments and geographic sales growth information conforming to the new reporting structure has been provided within this morning's 8K and the for investors section of Colgate's website at www.colgatepalmolive.com.

So, now let's turn to the divisions. Starting with North America, we're pleased with another solid quarter in North America. Our US and Canada businesses, including our Tom's of Maine and professional businesses contributed to good growth. Innovation across categories helped drive market shares and as referenced in the press release, market shares increased on a year-to-date basis in toothpaste, manual toothbrushes, mouthwash, liquid hand soap, body wash, liquid cleaners, and fabric conditioners.

Our oral care franchises is strong. In toothpaste, our leadership position year to date through June 35.7% has increased to 35.8% in the latest read. New products supported by impactful marketing campaigns and in-store activity have been critical to this success.

Colgate Total Daily Repair Toothpaste, our most recent addition to the Colgate Total equity, is driving growth in the super premium segment with year to date shares increasing from 3.7% in 2015 to 4.3% in 2016, increasing our overall Colgate Total share by 60 basis points. In addition to equity drivers such as engaging media, and in-store, and online support in the second quarter, we linked Colgate Total to national women's health week.

Colgate Optic White is performing well with a full portfolio including multiple toothpaste offerings as well as whitening toothbrushes and mouthwash for a complete regimen approach. Adding to the basic Optic White, Optic White Platinum Express white and Optic White Platinum Lasting White variants was a recent launch of Optic White Platinum High Impact White toothpaste. Our overall optic white toothpaste share is at 6.3% year to date, and in the second quarter reached 6.6%, up 80 basis points from a year ago period.

Colgate 360 degree toothbrush continues to deliver differentiated and incremental innovation. In the first quarter, we launched Colgate 360 degree Enamel Health Whitening toothbrush with spiral polishing bristles and stain erasing cups. Market share for the Colgate 360 degree toothbrush range has grown from 13.1% in 2011 to 19.8% in 2015 and is up again this year achieving to 22.1% through June.

Continuing the momentum for the Colgate 360 degree franchise, shipping this month in the US is the new Colgate 360 degree Total Advanced 4 Zone manual toothbrush. This revolutionary new toothbrush features a high-tech ergonomic design, and a tongue and cheek cleaner with longer rubber nubs than any previous Colgate 360 degree toothbrush.

It's specifically designed to clean the four zones of your mouth. Your teeth, tongue, cheeks and gums. This launch is being supported via comprehensive shopper activation in key retailers.

And personal care, innovation in both liquid hand soap and body wash have driven share increases. In the first quarter, we launched Softsoap Pure Foaming Hand Soap. The simple general formula cleans and purifies and has 100% natural fragrance with no dye or alcohol.

We told you last quarter about Softsoap Luminous Oils Body Wash which comes in two variants: avocado oil and iris, and macadamia oil and peony. This new line has been incremental to our overall body wash share, and the macadamia oil and peony variant has been the number one Softsoap body wash variant at a major US retailer for 13 out of the last 15 weeks.

Let's turn to Europe. Despite continued macroeconomic uncertainties across the region, Europe delivered another quarter of positive organic sales growth. Toothpaste market shares remained relatively stable at 35.2% across the region. And we enjoyed market share increases in manual and battery toothbrushes, body wash, bar soap and fabric conditioners.

While toothpaste share was relatively stable across the region, we saw some good increases in individual countries as referenced in the press release. With strengths in both of the Colgate and GABA brands.

You may recall we told you last quarter about the rollout of our toothbrush plus whitening pen which has met with great success. Our regional overall manual toothbrush share is at 27% year to date, up 250 basis points from the year ago period, and over 10 share points ahead of the nearest competitor. In France, one of the first launch markets to launch the toothbrush plus whitening pen, our overall year to date toothbrush share has gone to 25.5% from 18.2% in the year ago period.

Our year-to-date body wash share is up 40 basis points from 12.7% to 13.1%, with gains coming from both the Palmolive and Sanex brands. You will recall we recently launched a range of Sanex products including body wash four dry and atopic skin. In the bigger Sanex markets, France, Spain and the UK, our overall body wash shares increased 100 basis points,140 basis points, and 30 basis points, respectively, year to date.

Our fabric conditioner share year to date increased 150 basis points across the region from 23.3% to 24.8%. Our largest market, France, saw growth of over a point from 47.4% to 48.5%, with the most recent read at 50.1%, and this in the face of continued stiff competitive activity.

More innovation is planned for the back half of this year. As in other part of the world, the toothpaste whitening segment is strong and growing at almost twice the rate of the overall toothpaste category. We lead in this segment with all a 43% year-to-date share. So to capitalize on the growth opportunity, we are relaunching Colgate Max White Optic with revitalized graphics and an improved formula which is three times more powerful for instantly and visibly whiter teeth.

A new GABA product is there meridol Parodont Expert, a clinically proven daily use toothpaste which increases gum resistance against periodontitis. This offering fills the gap in our portfolio.

And in personal care, we hope to continue the momentum in body wash with the launch of Palmolive gourmet spa, a unique concept which has been proven in other geographies. As I'm sure you recall, this range of body washes has a high density, creamy formula offered in vanilla pleasure, chocolate passion, peach delight, and strawberry touch. New sleeve packaging provides a premium look, high quality satin finishing, extended communication service, and strong shelf impact.

Sanex is now launching Sanex men, a unique positioning for the mass market as it is the first range of products, body washes, shampoos, and underarm protection, which is truly focused on men's skin health.

Turning then to Latin America. The strong organic sales growth of the first quarter continued into the second quarter and as you would expect, innovation contributed to these results across categories.

In toothpaste, our regional share year to date is up 80 basis points to a record 75.5%. In Brazil, our share is at a record 73.3% with the most recent read at 73.5%.

In the highly competitive whitening category, our Colgate Luminous White equity is doing well. The complete regimen offering of toothpaste, manual toothbrush, toothbrush plus Whitening Pen, and mouthwash, has been supported by a new and strong marketing campaign designed to make you shine. In Mexico, where our overall toothpaste share is back over 80%, Colgate Luminous White toothpaste has achieved a record 9.1% share year to date, up 60 basis points over the year ago period.

Our regional mouthwash share is also strong, up 30 basis points to 31.5% year to date. In Brazil, the launch of Colgate Plax Ice Infinity has met with exceptional results and driven our share up 170 basis points year to date to 35.2%.

In the personal care category in Brazil, we launched Protex Pro-Hidrata with macadamia oil. A line of bar soap, body wash, and liquid hand soap offering moisturizing sensation as well as the antibacterial protection for which Protex is known. The bundle is incremental to the Protex equity, driving the Protex body cleansing share from 13.6% in December 2015 to 14.6% in the most recent period, further establishing Protex as a leading antibacterial body cleansing equity in Brazil.

Our new product flow is continuing in the second half of the year. Launching now are two new toothpastes. The first, priced at the premium range of the category, Colgate Total Professional Daily Repair creates a shield in 100% of the mouth's surfaces that helps repair early enamel demineralization and prevent teeth and gum problems. The second, Colgate Triple Action Extra Whitening should help drive share in the base business. Its exclusive formula with micro-polishing particles provides extra whitening. It removes stains, works from the first brushing and restores the teeth's natural whiteness. Along with the triple action toothpaste will be a companion Colgate Triple Action whitening toothbrush.

To further build on our momentum with Protex we are continuing the launch of Protex for men three in one. The product, which comes in liquid or bar soap form, delivers three benefits. Besides eliminating 99.9% of bacteria, it actively cleans the body without drying out the skin, it prepares the skin for soft shave, and it can be used as a shampoo leading leaving men's hair clean with a masculine fragrance.

Turning then to Asia/South Pacific. Results were somewhat muted in the region and this quarter on an overall basis with pockets of strength. For instance in the Philippines, our toothpaste share increased over 200 basis points year to date to 62.6% with the most recent read at 64.6%.

Lower price offerings such as Colgate Triple Action and Colgate Fresh Confidence as well as premium priced Colgate Sensitive contributed to the share gains. To continue the momentum, we're in the process of introducing Colgate Fresh Confidence Bamboo Charcoal toothpaste in that market.

In India, our manual toothbrush share is up 200 basis points year to date to 45.7%. Colgate Zig Zag Black has contributed to the share gain.

And as you would expect, we have more innovation slated for the balance of the year. In India, the consumer believes strongly in natural ingredients and we told you last quarter about two toothpaste initiatives, Colgate Active Salt with Neem, and Colgate Sensitive with Clove Essence. A third toothpaste launched in this quarter under Cibaca subbrand is Colgate Cibaca Vedshakti. The positioning is a toothpaste packed with the goodness of natural ingredients to help keep dental problems away.

In the toothbrush category, we are launching Colgate Slim Soft Charcoal Spiral. Charcoal toothbrushes have been particularly successful in this region and this latest brush offers spiral bristles with charcoal.

Mouthwash is a small but growing category across the region. Our regional shares is up year to date by 30 basis points to a record 28%. And to continue the momentum this quarter in India, we are launching Colgate Plax Spicy Fresh, delivering spicy freshness without the burn.

Turning then to Africa/Eurasia. Our business across the region remains solid despite macro economic challenges and continued currency headwinds.

Our toothpaste market shares are strong. In Russia, our share is up 120 basis point year to date to 34.9%. Much of the growth has come from our mainstream businesses, Colgate Triple Action and Colgate Maximum Cavity protection. In Turkey, our share is around the prior year to date level at 26.8%, but in the most recent period, our share is at 28.1%. And in South Africa, our year to date share is at 50.4% of 10 basis points with the most recent read at 50.6%.

In South Africa, our manual toothbrush share is up 60 basis points to 38.6% year to date with the most recent read at 39.2%.

Now, we have told you before about Colgate Total Pro Breath Help toothpaste, first launched in Latin America. This toothpaste was a new formula with ON12 complex and neutralizes bad breath bacteria while protecting 100% of the surfaces of the mouth will be rolled out across this region, supported by media and key visuals in-store to communicate the benefits. Similarly joined from other regions, we will be launching Colgate Sensitive Pro-Relief Repair and Prevent toothpaste, formulated to repair the cause of sensitivity and prevent further sensitivity from gum recession. A product developed for the Russian market is our new Colgate Altai Herbs Ginseng which adds ginseng, a natural healing ingredient, to the Colgate Altai Herbs toothpaste launch previously.

In the personal care category, we are relaunching our Palmolive Gourmet Spa line of shower gels with improved graphics. And in addition we have added two new variants, mint and coconut.

Turning to Hill's. With the Colgate businesses, Hill's continues with solid results fueled by successful innovation. Launched now over a year ago, Prescription Diet Metabolic Plus continues to deliver outstanding performance. The complete range of dry and stews has been rapidly distributed across all regions and is now selling in 46 countries.

Building on the solid Metabolic Plus platform in May of this year, we launched Prescription Diet Metabolic plus Urinary Stress for cats, with clinically proven nutrition for concurrent conditions of obesity and feline lower urinary tract disease. This launch was integrated into an overall focus on urinary problems which are very common in cats. The product is now available in 13 countries across the North America and Europe.

Dermatological disorders and skin issues represent the fourth largest therapeutic food category in dollar sales for pets. In 2016, we had two major initiatives in this area. Prescription Diet Derm Defense and an upgrade of our perception diet z/d.

Prescription Diet Derm Defense is Hill's first and only nutrition with HistaGard Complex, formulated to reduce signs of environmental allergy by disrupting the internal allergy response, and creating a barrier against future episodes in dogs. It is now in the US and Europe and will be rolled out across the rest of the world.

The science was presented both at a global derm symposium in April in California and at the World Congress of the Veterinary Dermatology in May in France, driving awareness among key thought leaders. Our Prescription Diet z/d upgrade has been reformulated to increase ingredients known to support skin and coat and G.I. health. In addition, we launched a small bites variant for the rapidly growing small dog population.

Innovations across our Science Diet platform continue to do well. In addition to our Science Diet Perfect Weight and Science Diet Healthy Cuisine which we told you about last quarter, our Science Diet Urinary Hairball Control for cats is exceeding original sales estimates in a North America. It is now the number one wet variant for Science Diet. In Europe, we have an online quiz and game as well as videos for the product to generate interest and trial.

In summary then we are very pleased with how the year is progressing. Our organic sales growth is solid and our savings programs as well as our Global Growth and Efficiency Program are delivering a healthy growth profit margin increase.

Around the world, Colgate people are executing our focused strategies. Our innovation pipeline is full and we're excited about what is yet to come. So we look forward to sharing our results with you as we go through the balance of the year.

Now, Angela, I should like to turn it over to questions.

Thank you.

(Operator Instructions)

And we will take our first question from Wendy Nicholson with Citi Research.

Hi, good morning.

Hello, Wendy.

I don't think I heard Bina, you comment on China, even though in the press release you mentioned volume declines. So could you talk about the magnitude of the volume declines in China, what the pricing environment was like, and maybe a broader question of kind of what is going on? Is it your market share? I know Proctor has talked about the need to more premiumize the oral care category. Do you share that view? Sort of a specific on the quarter, how did China fare and bigger picture, what is your take on China right now? Thanks.

Thanks for the question, Wendy. I guess overall, I would start a little bit further back and say that in balancing all of the geographies and the headwinds we are facing in the world, we were delighted to post an overall 4.5% organic growth. Asia, as you saw, was more muted at 2%, although with some highlights as Bina has already discussed. I don't think based on what you have heard over the last couple of weeks from other companies that operate in China, that there are some short-term issues in that geography. Let me explain our analysis of what is going on, which we view as a relatively short term issue as I will describe, and then I can come back and talk about market shares both overall and respective to China.

So first of all, in terms of what is going on in the marketplace, two things. Number one, as we entered the second quarter, the consumer consumption slowed quite sharply. It picked back up and as we look forward, we think that the consumer consumption in China for the balance of the year will continue to be around mid-single digits. But there was a slowdown entering the second quarter. That was compounded by a fairly large structural change that is going on in China which is the shift of business from brick and mortar to online.

Online is showing very sharp growth. Indeed, our online business doubled year to date in China, and both of those things saw inventory build with the wholesalers in part because of back door selling from the brick and mortar retailers which distorted pricing in the market and built inventory with wholesalers. Now, we have seen that before as you know. And we are seeing it again and we are in the process of dealing with that inventory situation and we think, as it was the last time, it will be fully corrected by the time we get to the fourth quarter of this year. But it will continue or a little while.

In terms of market share, we talked on the last call about market share in China. I would comment first on the world. And I would say on the world that our market share in dollar terms, which is what we comment on in the press release, is modestly down but that is all to do with foreign-exchange mix. In fact, our market share on a constant currency basis is up, and our market share in volume terms is up around the world. In China, our market share is beginning to recover in the second quarter, showing two periods of uptrend as the innovation that we spoke about the last time, which is premium innovation to your point Wendy, is beginning to take hold in the marketplace.

So we don't think we are imbalance from a portfolio point of view. The primary local competitor that we spoke about [Unum Bayal] has been flat in market share terms for the past six periods and we think our innovation flow is good. For our business, based on the analysis we see, it is this temporal adjustment again of slowdown in consumption, which has picked back up but perhaps a more substantive shift over time moved from brick and mortar to e-commerce. Again, if the consumption is mid-single digits, we will simply grow our business where consumers do their shopping. The consumption levels will not change.

So something to work through but we don't think it is substantive and we certainly don't think that we have a portfolio issue as we go forward.

I know you commented in the past that you're kind of agnostic at least in developed markets about selling to brick and mortar versus online retailers. Does that apply as well to China or is there a margin difference between where you are selling?

We are agnostic.

Okay. Thanks.

We will now do to Ali Dibadj with Bernstein.

Hey, guys.

Hey, Ali.

I want to drill a little bit into Latin America. It is more than half of your emerging market business right now. At about 9.5% pricing that you took from that region, that is driving about 80%-ish, three quarters, 80%-ish of your emerging market, 6.5% growth you mentioned in the release. To be clear, you are not unique in that reliance among a company that we cover.

I want to get a sense of the sustainability you see in that, especially as we saw some of your Brazil volumes get a little bit worse lately, sequentially here. We see that Latin America is the only region at least from the press release that you increased ad spend on. Mexico is left out of share gaining. Kind of the list of countries, Mexico's left out of that for Latin America. So I want to get a sense of you about the sustainability of driving so much of your growth from that region.

We are quite optimistic on Latin America which may be a contrarian thing to say, largely based on the relationship we have with the consumers that buy our products. Now, the Mexican market share is still North of 80%, which is a fairly respectable place to be, and we quoted the Brazilian share at now approaching 74%.

I actually wouldn't use the term relying on pricing in Latin America. I would more say that we have the elasticity to take the pricing with our consumer in order to offset the translation impact of costs driven by weakening foreign-exchange. You know well from our history that while we see volume slow down as the pricing goes through, that that comes back over time and our forward thinking on Latin America is that the volume negative will dissipate across the back half of the year.

The important thing for us is to watch our market shares. As I said earlier, our market shares are not only up country by country but they are up on a volume basis as well. So people are staying with our product. If we don't face the headwind in costs, as we said coming into this year, you would see our forward business momentum be more volume driven than pricing driven. And indeed, we still stand behind the comment that for this year, as we deliver within the 4% to 7% range that we are staying with, it will be more volume driven than pricing driven for the entire year.

So it is a response to the headwinds that we face to help generate the kind of gross margin expansion that you are seeing which allows us to continue to lift our traditional advertising, which I know you favor. And at the same time, continue with the in-store work that we also believe engages with consumers. So we are very comfortable with our approach and that comfort is based entirely on the enduring relationship we have with the consumers at buy our products in that part of the world.

On the enduring relationship with consumers in that part of the world, it seems like you want to increase that through incremental advertising spend there but nowhere else? So none of the other regions you say ad spend goes up as far as I can tell except for that region? So trying to get a better sense of that. And if you might be able to give a little more granularity on Brazil. So are people trading down? What you see happening now? We have heard some people saying it is bottoming. Just some perspective there. Thanks.

As usual, thanks for the one question. On Brazil, I think we take the view as many others have announced that we see this continuing for the balance of the year. We have not seen trading down in terms of our portfolio. Indeed, we did not see that. You will remember during the sub prime period and if consumers find themselves cash stretched, they tend to buy a smaller size before they come back to the payday weekend.

So I would venture to say more continued turbulence in Brazil for the balance of the year. We have long said that we did not think this would be a short fix. Again, our category growth rates continue in that mid single-digit range. Yes, largely driven by pricing at this time, but these foreign-exchange trends will eventually change. So that would be Brazil.

In terms of the advertising alley, I think you have to watch our planning over a year rather than drill in to one geography in one quarter. We stand by what we say, which is that we are planning for our advertising for the full year to be up both absolutely and as a percentage to sales and we will see how that unfolds over the balance of the year. Frankly, again, even though this may continue to be contrarian in some parts of the world where the consumers are particularly stressed, we are finding that the in-store efforts produce a better result with good brand scores and a good ROI. And we will continue to do that in a balanced way to build our brands.

Thank you.

Sure.

We will now go to Olivia Tong with Bank of America Merrill Lynch.

Just for clarification, is your share online in key markets similar to what we can see in brick and mortars, or are there other markets where there are disconnects? In terms of price mix, following up on that, the price versus volume contribution obviously [somewhat] back to price being a bigger contributor versus volume. Does mix have any impact in there? And then just sort of your thoughts on the second half in terms of the dynamic. I know volume a bigger piece than price over time, but just sort of a clarification on the second half expectation. Thank you.

The online is interesting because what you see online often is that the share composition is very different. So for example, in the US, we are the brand share leader online but for example, our Tom's of Maine business has a disproportionately elevated share online, which may trace to the demographics of the consumer. So you see our shares profiling strongly but sometimes the composition of those shares is very different to what you would see in a brick and mortar account.

Relative to this pricing notion, our price was greater than our volume in this the second quarter for the reasons that I have mentioned. You will remember our volume is a dollar weighted volume. So mix is not a factor in the discussion and to repeat what we said to Ali, it is our planning, but for this year in total, our growth which will be within the 4% to 7% range, we have been guiding will be more driven towards volume than price on a relative basis to last year.

Great. Thanks. If I could follow up on developed markets pricing, it has been pretty negative in developed markets. In the case of the US, got more negative versus last year. Your main competitor seems to have a bit more of a sense of urgency in other categories. What are you seeing on the competitive front that is causing you to keep promotional levels heightened like this? Thank you again.

I am not sure the pricing situation in Europe is unique to us. If you talk about North America, oftentimes, this traces here to the couponing that you use to put behind your new innovation. We all have our thoughts and plans in terms of innovation flows which vary by company, but our pricing in North America, we think overall, we get a good organic growth out of it. It really does trace more to the innovation flow and the couponing that builds trial behind the innovation flow.

With no other questions from Miss Tong, we will now go to Bill Chappell with SunTrust.

Good morning, thanks.

Hey, Bill.

Ian, kind of a simple question. On share repurchase, just looking back, your share count -- average share count went down sequentially every quarter from 2006 until 2015, yet it has gone actually up for the first time both in 1Q and 2Q. Is there a change in thought of use of cash or share repurchase or it is just more of a short-term event?

We simply -- no there is not a change. We simply got behind ourselves. So for the year, we are still talking about a gross buyback of $1.2 billion to $1.3 billion. We fell behind frankly in the second quarter, which is the net result of what you see. Therefore, what you are going to see over the balance of the year is that share repurchase pick up and on a gross basis, it is going to be between $300 million and $400 million a quarter so that we realize the $1.2 billion, $1.3 billion range for the full year. So we're still holding for the full year and therefore there will be an uptick in the second half of the year to compensate.

Okay. That is reflected I guess in the share counts on the outlook.

Exactly.

Thank you.

We'll now go to Jonathan Feeney with Consumer Edge Research.

Thanks very much.

Is this Jon or Jonathan?

It's Jonathan. You can call me either.

Okay. (laughter)

When you think about pricing and volume, particularly in Latin America where you have such strong market shares, it strikes me as a conundrum companies like yourselves face, that you're just at the time when consumers are feeling some distress in other areas from the currency movement, you are asking them to pay more for the products.

When we assuming the currency -- a more neutral currency situation in the future, how much pricing opportunity -- of the pricing that is happening today is increased value add, increased value you're bringing to the consumer, how much do think that will last into a more neutral currency environment, should we ever experience one again, but hopefully at some point in the next year or two. Thanks very much.

Thanks, Jonathan. Latin America is an interesting part of the world. The shopping consumer in Latin America is perhaps one of the most educated on the planet in terms of the vagaries of foreign-exchange and what that means for a shopping basket. The steps that we take are entirely driven by the currency, and if you talk qualitatively with consumers in Brazil, for example, they can almost tell you what the price of the goods that they buy are going to be based on the foreign-exchange moves. I guess the good way to think about it is that our kinds of products, yes you are talking taking pricing, but you are talking taking pricing on an everyday product and at relatively modest levels on top of that. So it does not affect their loyalty to the brand over time.

They have opportunities in the terms of different sizes that we have to buy at different price points and therefore mitigate the cost impact from a cash outlay point of view which indeed they do do. But interestingly, they don't even trade down within our portfolio. So if they are buying the premium end of the Colgate portfolio, they keep buying that. They don't trade down to perhaps what you might say is a more economical option within our portfolio. So our kinds of products at the time these economies are going through what they are going through become the affordable luxuries that people continue to put in their shopping basket. That is the way I would answer it, Jon.

We will now move on to Steve Powers with UBS.

Great, good morning, Ian. I am going to try to sneak in two questions on two different topics. The first one is just to clarify what you said earlier I think in response to Olivia's question. Did you say that mix was not a factor in your reported volume? I thought it was.

Mix is in. We have a dollar weighted volume.

Okay.

So it is in the volume.

It is in the volume. Okay.

It is not separate. She was looking for a separate contribution, that was our point.

Okay. Got it. Just building on that, as you were discussing with Ali, as the volume improves sequentially as pricing subsides, do you, just from a marketplace dynamic, do you expect more of a unit volume recovery or is it more of a resumption of trade up?

We will get both. We will get both. The volume will recover and it will not all be trade up.

We will now move on to Lauren Lieberman with Barclays.

Thanks, good morning.

Hey, Lauren.

Hey. Can we talk a little bit about gross margins. I think maybe you are a little disappointed that no one is asking about you given gross margins were up 190 basis points. If you could run through the bridge for us and then also just talk about how that impacts your view of the moving pieces for the balance of the year. I will follow up once I know the key drivers were.

I was going to ask you to repeat the question because I like hearing 190.

(laughter)

If we just do the traditional roll forward, the prior year gross profit was 58.3%. We got the benefit of 110 basis points of the pricing. We had between funding the growth and restructuring, restructuring modest in gross product as you know, 190 basis points favorable. Material prices were a headwind of 110 basis points. Nothing in [other] and that gets you to the 60.2% which is the 190 basis points.

Now as we think about that for the balance of the year, first, pleasingly, although these pleasing moments are quickly behind you, but pleasingly, this is the second back-to-back quarter now we have been above 60 in gross margin which as you know was a company goal. Indeed the second edged slightly up on the first. But if you look at our gross profit for the first half of the year, it is up 150 basis points. One and a half points.

As we, as you think about the balance of the year, I guess what we would say is our expectation is that our gross margin increase for the second half of the year will be around the same level as the first half, maybe even a little bit higher. And the primary driver of that of course is, transaction headwinds will start to lessen as the foreign-exchange comparisons, barring another event in our world, improve year upon year.

We will now move on to Iain Simpson with Societe Generale.

Thank you very much. One of your competitors recently commented that oral care was a category that would potentially lend itself to an online subscription model. The advantage being that it would increase rates of toothbrush replacement. Just wondered if that was something you were able to make any comment on or I guess any thoughts around direct-to-consumer, e-commerce more generally.

We think it is a great idea.

All right, we will now move on to Mark Astrachan with Stifel.

Thanks, good morning everybody.

Hey, Mark.

I wanted to ask about Hill's. In the press release, innovation is called out, seems to be largely driven by Prescription Science Diet. I did not see any mention in there of the natural or Ideal Balance categories brand. I guess curious if you could comment on why the focus seems to be on the nutrition science not naturals, which I guess it has been more so in recent years. And if there is anything we should read into it from consumer preference standpoint in terms of changing tastes out there?

I don't think so. I think whatever we do on Hill's, whatever we have done on Hill's, we are always extremely focused as a matter of strategy on the nutrition the diets provide. It does not matter whether it is a prescription product, a science product, or even our Ideal Balance product. I think the thing you might want to read into it is that after we introduced Ideal Balance, we have been through an extensive process of changing the formula composition of our Science Diet product, this the one not recommended or prescribed by a vet, to change the composition of the ingredients in those products to lead with protein and other ingredients that buyers of natural products value. Thereby, no longer providing them with a reason to walk away from the nutrition of Science Diet because Science Diet doesn't offer them a formula composition that they are looking for. And that was a significant change that we made to make that piece of the business less vulnerable to a naturals pure play.

Ideal balance is doing okay. But I would say our major shift has been to make sure from a dietary composition point of view that our core Science Diet business is competitive. And of course in making that change, have validated the fact that the nutritional benefit that the pet is provided is completely unchanged in making that formula adjustment. I guess that is the way I would think about it.

And all of the innovation that Bina talked about on the perception diet side of you've seen with the weight products, we translate that science, if you will, across Science Diet and even bring it to Ideal Balance, although we would market it in different ways given the different positionings of each of those three segments of the business.

We will take our final question from Steve Powers with UBS.

Thanks for the follow-up.

Hey, Steve.

Sorry in advance for the technical question but just as I'm asking you about how you define things in your reporting. If I think about Europe, where you see pricing down again 3% this quarter, which I understand is a well-documented trend, if I go back to 2009 and index your portfolio to 100 and multiply it through the reported pricing, it implies that your pricing -- your portfolio is down almost 20% in aggregate since that time. And obviously there has been a big continuous mix component I'm assuming as you roll in new premium innovation that has helped offset that in the volume line.

But as I think about how that flows through to margins, I am assuming that the premiumization has been beneficial to margins. But if I look at how you define the buckets of margin drivers, especially by segment, you typically call out funding the growth and then all in raw and packaging costs and pricing. I just want to understand, maybe using Europe and as an example, when there is a significant mix benefits or impact on margins, where does that fall? Is that netting against pricing, that mix benefit, or is that somehow contributing to funding the growth as it relates to your margin drivers? Thanks.

Well, thank you for the simple question. I think the mix benefit clearly is picked up in gross margin, and I would say it would be between pricing and cost in the gross margin calculation. Base cost.

And we don't have any other questions at this time.

Well, thank you ever so much. Thank you for your interest in the company in these turbulent times and we look forward to updating you all as the year unfolds, and we take the opportunity to thank all of the Colgate folk that work so hard to make this happen. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.