高露潔 (CL) 2016 Q4 法說會逐字稿

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

This call is being recorded and is being simulcast live at www.colgatepalmolive.com.

Today's conference call will include forward-looking statements.

Actual results could differ materially from these statements.

Please refer to the earnings press release and the most recent Form 10-K and subsequent SEC filings, all available on Colgate's website, for a discussion of the factors that to a 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 8 and 9 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.

Now, for opening remarks I would like to turn the call over to Senior Vice President of Investor Relations, John Faucher.

Please go ahead, John.

Thanks, Alicia.

Good morning and welcome to our fourth-quarter earnings release conference call.

This is John Faucher, Senior Vice President for Investor Relations.

Joining me this morning are Ian Cook, Chairman, President and CEO; Dennis Hickey, CFO; Victoria Dolan, Corporate Controller; Elaine Paik, Treasurer; and Bina Thompson, Chief Investor Relations Officer.

On a reported basis, our net sales were down 4.5% in the fourth quarter, primarily due to foreign exchange and the impact of the Venezuela deconsolidation.

Organic sales were up 1.5% in the fourth quarter.

The organic sales growth in the quarter was driven by improvement in pricing while volume, excluding the impact of the deconsolidation of Venezuela, was down 1%.

Pricing was up 2.5% in the quarter.

Latin America was the driver of our organic sales growth this quarter, posting continued volume growth, excluding the impact of the deconsolidation of Venezuela, and strong pricing.

In other regions we saw headwinds in several of our markets, some of which were driven by one-time factors, like Indian demonetization, and some distribution challenges in certain of our African business.

We also did see a slowdown in category growth later in the quarter in some markets.

For the year, reported net sales declined 5%, while our organic sales grew 4%, driven by a combination of pricing and volume growth.

For the full year, organic sales grew in every division except Europe, which was flat.

Excluding the items specified in table 8 of our press release, gross profit margin was up 180 basis points in the fourth quarter of 2016 versus fourth quarter of 2015, led by cost savings from our Funding the Growth initiative and our restructuring program.

On a GAAP basis, our gross profit margin was up 160 basis points in the fourth quarter 2016 from fourth quarter 2015.

Excluding the items specified in table 9 of our press release, our full-year gross profit margin rose 160 basis points to 60.3%.

On a GAAP basis, our gross profit margin was up 140 basis points versus the year-ago period to 60.0%.

Excluding the items specified in tables 8 and 9 of our press release, our operating profit was up 2% in the quarter and flat for the year.

Operating profit on a GAAP basis was up significantly as we lapped the deconsolidation of our Venezuelan operations.

Excluding items in table 8 of the press release, diluted earnings per share on a dollar basis for the fourth quarter was $0.75, up 3% year over year.

On a full-year basis, diluted earnings per share on a dollar basis, excluding the items in table 9 of our press release, was even with last year, but up double digits on a currency-neutral basis after also excluding Venezuela's results in both periods.

On a GAAP basis, EPS was up 79% year over year, primarily due to the impact of the deconsolidation of Venezuela in fourth quarter 2015.

Through strong working capital performance we continue to grow our free cash flow, further strengthening our balance sheet.

For 2016, our net cash provided by operations was up 7%.

A year-over-year reduction in capital expenditures as our restructuring program is entering its final stages meant that free cash flow before dividends was up 13% year over year.

While the Q4 organic sales growth was lower than anticipated, we are optimistic that the pace of our growth will improve as we progress through the year, driven by increased advertising support behind a full pipeline of new products around the world.

From an EPS standpoint on a dollar basis, excluding charges from the 2012 restructuring program, and the other 2016 items specified in table 9 of our press release, based on current spot rates we are planning for growth in the low-single digits.

The main drivers versus our previous expectations are foreign exchange and slowing category growth in several key markets.

We expect free cash flow before dividends to be strong in 2017, reflecting solid operational results and continued focus on working capital.

Now we'll go through the performance in the divisions.

First off North America, North America nets sales, unit volumes, pricing, foreign exchange and organic sales were all even with last year's fourth quarter.

In the US, volume growth in toothpaste was offset by declines in toothbrushes and liquid hand soap.

In the quarter, we saw strong volume growth for our Canadian business and for Tom's of Maine.

Operating profit declined 3% in the quarter, as gross profit margin expansion was more than offset by an increase in selling, general and administrative expenses.

A few North American highlights in the quarter, in the US we finished the year with market shares either up or flat in the majority of our categories.

Our innovation continues to perform well.

We have a strong pipeline planned as we head into 2017.

Our premiumization strategy continues to pay dividends.

Colgate Optic White franchise finished 2016 with 6.4% market share year to date, up 80 basis points year over year.

We expect further momentum in 2017 behind this month's launch of Colgate Optic White Radiant.

We are also seeing year-over-year improvement in market share for our sensitivity business, helped by our latest launch of Colgate Sensitive Smart White toothpaste.

Tom's of Maine also posted good growth in the quarter and the year.

Year to date, Tom's toothpaste market share is up 20 basis points versus last year, driven by new products, particularly Rapid Relief Sensitive toothpaste.

Latin America finished the year strongly, with organic sales growth of 10.5% in the fourth quarter.

Including the impact of the deconsolidation of Venezuela and foreign exchange, net sales were down 10.5% for the quarter.

We remind you that we have now lapped the Venezuela deconsolidation and 2017 numbers will not need to be adjusted.

Excluding the impact of the deconsolidation of Venezuela, we saw volume growth of 1.5% in the quarter, with growth in markets including Mexico, Colombia and Argentina, partially offset by declines in Brazil.

While currency and the impact of the Venezuela deconsolidation resulted in a net sales decline in this division, productivity from Funding the Growth and pricing helped deliver 550 basis points of operating profit margin expansion.

Thus, operating profit grew in the quarter despite the net sales decline.

Some highlights in Latin America include, in Brazil our toothpaste share is at 73% year to date, up one share point year over year.

We are seeing strong share growth in both Colgate Triple Action and Colgate Maximum Cavity Protection.

In Mexico, we maintained toothpaste market leadership with an 81% share behind strength in our Colgate Luminous White program, with market share performance improving sequentially as we finish the year.

We remain encouraged by the solid volume and organic sales performance of our Mexican business.

Latin America should continue to see benefits from a strong innovation calendar in the second half of 2016.

In personal care, we've seen multiple innovations across the Protex, Palmolive, Speed Stick and Lady Speed Stick brands in the third and fourth quarter.

Now moving to Europe, Europe's net sales and organic sales in the fourth quarter were down year over year, with sales impacted by macroeconomic conditions, foreign exchange, and difficult retail dynamics.

Organic sales were down 3.5% in the quarter driven primarily by volume declines in France, where our categories slowed sharply in the quarter, with the United Kingdom partially offsetting the decline.

Operating profit in Europe was down 5% in the quarter, driven by the net sales decline.

Operating profit margin was up 70 basis points as a percentage of sales, driven by lower selling, general and administrative expenses.

Our market share performance in Europe is solid.

We continued our toothpaste share leadership at 35% of the market and our premium priced GABA business continues to grow share, up 40 basis points year to date in Europe.

We've seen regional share market gains year to date in manual and battery toothbrushes, body wash, bar soap, body lotion and fabric softener.

Our manual toothbrush share is up 170 basis points for 2016, driven by the premium priced Colgate Max White toothbrush plus built in whitening pen.

In Q1 we have significant new product news in toothpaste behind the launch of Colgate Enamel Strength and our Colgate Natural Extracts toothpaste.

Now Asia-Pacific: organic sales declined minus 2% in Asia-Pacific, with flat volume and negative pricing.

Volume growth across most of the division was offset by a decline in India, caused by the demonetization.

The negative impact of foreign exchange further contributed to the net sales decline of 4% in the quarter.

Operating profit was up 3% year over year.

Operating profit margin was up 240 basis points year over year, driven primarily by lower selling, general and administrative expenses.

Some points on Asia-Pacific include, as mentioned above, in India demonetization caused us to swing from strong growth through Q3 to a decline in Q4.

Our recent launch of Colgate Cibaca Vedshakti continues to gain home momentum in the fast-growing natural space.

In Greater China, we still have work to do, but our organic sales growth improved sequentially and our volume was positive for the quarter.

Our online business is accelerating, offsetting most of the impact from a difficult offline market.

Now Africa Eurasia, net sales in the region were down 1.5% in the quarter and organic sales declined 2%.

Our Africa Eurasia business was negatively impacted by business disruptions with certain distributors, primarily due to liquidity issues in sub-Saharan Africa.

Volume was down 12% in the quarter, driven by the sub-Saharan Africa region and South Africa.

Pricing was up 10% and was positive across much of the region.

Operating profit was down 4% in the quarter.

Strong gross profit margin improvement, driven by pricing and Funding the Growth, was offset by increased advertising investment.

Overall, our toothpaste market shares in Africa Eurasia continue to trend positively, with our shares up year to date in the majority of our markets in the division.

Q4 highlights in Africa Eurasia include, our toothpaste market share in Turkey continues to grow year over year, driven by Colgate Total.

Colgate Total brand market share is up 70 basis points year to date, driven by the Colgate Total line, with share growth for Pro-Breath Health and Pro White.

In Saudi Arabia, the second-largest oral care market in the region, our toothpaste market share is up 100 basis points year to date, driven by Colgate Maximum Cavity Protection, Colgate Sensitive Pro Relief and Colgate Total.

Finishing up with Hill's, Q4 was a difficult quarter for Hill's due to challenges in the pet specialty channels.

Organic sales were flat in the quarter as growth in pricing was offset by volume decline.

Net sales were up slightly and included a benefit from slightly favorable currency.

Operating profit grew 7%, primarily driven by gross profit margin expansion as Funding the Growth savings and increased pricing offset higher cost.

In the US, our strong growth in online and vets was more than offset by weakness in the pet specialty channel.

We continue to expand our online availability in the US and our e-commerce growth in the quarter and the year was very strong.

We are also seeing significant growth in our online business in Europe, where e-commerce is an even bigger piece of the pet food category.

Developing market volumes were up nicely, driven by Hill's Prescription Diet Metabolic Plus Mobility and Metabolic Plus Urinary, Hill's Prescription Diet Derm Defense and Hill's Prescription Diet z/d.

That's it for the divisions.

With that, I'm going to turn it over to Ian, who has some thoughts on our 2017 outlook.

Ian?

Thanks, John, and good morning, everyone.

Let me wish you all a happy and healthy 2017.

What I'd like to accomplish this morning is two things.

Number one, reflect a little bit on 2016 and then talk more specifically about our plans for 2017 in the context of the fourth quarter we have just completed.

I think it is safe to say that 2016 has been a year of growing uncertainty, filled with unpredictable and disruptive events, especially in the fourth quarter, when we saw significant foreign exchange volatility following the US elections, the unexpected demonetization activity in India and category slowdown in several of our key markets.

Against that, I would say overall for 2016 we delivered solid performance overall, top line organic sales growth up 4%, broadly healthy market shares, as John has exampled in his remarks, good gross margin progress, up 160 basis points to 60.3%, and at just over $3.1 billion net operating cash flow, up 7%.

As we move into 2017, I think it's safe to say that the uncertainty continues and indeed, there is likelihood of more events unpredicted occurring as the year unfolds.

So how are we planning for 2017 in the context of how we ended 2016 and the fourth quarter?

From a high-level point of view, I think we feel confident that the strategy we have been deploying for over a decade, a strategy that focuses on engaging with consumers, developing a steady stream of innovation for those consumers, focusing on the efficiencies that allow us to fund our growth, and perhaps most importantly, continuing to develop a cadre of talented leaders that we can deploy around the world to keep focusing on winning on the ground.

Secondly, I would say that our discipline and focus on the fundamentals has served us well and will continue to serve us well.

My third point for 2017 would be that our over-arching priority and objective is focused against growth.

Coming back to the categories, as I mentioned, categories in several key markets slowed in the fourth quarter and we are now seeing growth in our categories across each of our major geographies that take the following shape.

For North America, we're seeing our categories grow around 2%.

In Europe, we're seeing, in aggregate, categories basically flat.

For our emerging markets, we continue to see category growth of mid-single digits, clustered closely around 5%.

With that as a context of our consumers' behavior, the organic sales growth plan that we have for 2017 sees us targeting the low end of our four to seven percentage point organic growth range.

The growth we deliver in 2017 is expected to rely on less pricing, with a sharpened focus on profitable volume growth for the full year, starting in quarter one.

From an organic sales point of view, we expect to see sequential improvement in quarter one.

The innovation pipeline that John talked to remains as robust as ever.

We continue to invest in the capabilities that we need to serve new consumers in new places, think e-commerce, and as we said in the press release, strong advertising support will be behind our brands and the innovation and I will return to that in a short while.

Now, it's unusual for us to give country-specific data and detail, but I think given the circumstances in the fourth quarter, we feel it's important to a clear understanding of why we have confidence in the growth for 2017, so let me offer a few comments by each of the divisions related to the organic sales growth that we are targeting for 2017.

Let me start with Asia.

As John said, the demonetization in India was indeed unexpected and that saw a high-single-digit organic sales growth business become in the quarter a double-digit decline organic business.

In fact, excluding India, the division would have seen positive organic sales growth.

As we look forward into 2017 from that unexpected event, we were pleased in the fourth quarter with the sequential progress we made in China and a return to volume growth.

We expect that sequential progress to continue in China and we expect the recovery in India to build across the first half.

For Africa Eurasia, the actions we took against a selected number of distributors are behind us and the division would have seen positive organic sales growth without those actions.

We expect to see positive progress in organic sales beginning in the first quarter in that division.

In Europe, the decline traces largely to France and in France we saw strong category declines in the fourth quarter, both in volume and in value.

The subsidiary in France is developing stronger plans that are being put in place with key customers to help drive category growth and our growth alongside the category.

In North America, we also saw a slowdown in the category growth rates and consumer consumption, and this was the one division we saw increased promotional activity, which we are meeting in 2017.

For Hill's, as John said, we posted strong e-commerce progress.

Indeed, our e-commerce growth in the United States with Hill's was up some 60%.

Our market share on e-commerce is higher than our brick-and-mortar share and we expect that growth as we expand e-commerce distribution to continue in 2017.

That was more than offset, though, by the weakness in the pet specialty category, which again is being addressed by strengthened programs in partnership with the principal retailers there and a focus, as John said, on channel mix.

Finally, Latin America, where we expect to see continued growth in 2017.

Now, I mentioned the strong innovation pipeline.

I mentioned the capabilities that we are investing in to reach consumers in new places.

But, I'd like to return to advertising and make a couple of comments.

Number one, we will continue with our focus on customer marketing activities in store that can and do build categories and we are deploying that, indeed, as we speak.

Turning to the traditional below-the-line advertising, in our 2017 plan, our advertising is up absolutely and as a percent to sales.

It's advertising that is increasingly digital and mobile and we have planned for continuity of advertising across the year.

The advertising will be behind the innovations that we have, the strong brand equities that we possess; India for example, Colgate was rated one more time the most trusted brand in the country.

We will also have advertising focus behind the community programs that Colgate does in many countries, the turn off the tap type of advertising, the scholarship program advertising and advertising that relates to the schools programs that we have around the world.

These are all proven vehicles to build brand awareness, brand loyalty, and induce trial.

We are substantially increasing our sampling in 2017 to further drive trial of the strong innovation we have.

Now, for 2017, we are obsessive about protecting those investments.

As you know, a sudden change in foreign exchange can put pressure on short-term results, given the lead lag of actions to offset the impact of that foreign exchange.

We are not going to reduce our investments in advertising to deliver a quarterly number.

What we are going to do is to focus relentlessly across all lines of the income statement on productivity.

Our Funding the Growth program is as vibrant as ever and will receive sharp focus.

As John said, we will redouble our efforts behind structural cost reduction in this last year of our global growth and efficiency program.

We will, from a category, a product, and indeed a channel mix perspective, focus on the premiumization that can be delivered with the consumer.

From a material cost point of view, the environment is relatively benign in 2017, with material costs estimated to be flat to modestly up, with a little bit of pressure in fats and oils, but a relatively muted landscape.

With that focus and with that landscape, we expect our gross margin to be up at the high end of our 75 to 125 basis point range.

Tax rate for 2017 is assumed to be in the 31% to 32% range.

Obviously, any changes to tax policy from the new administration is not included in that estimate.

We have obviously run many different scenarios.

We are as informed on the matter as you are and obviously, if anything firm arises, we will inform you.

I think I would say that we are certainly looking at tax holistically, all the different tax policies that may be adopted and if one views it holistically, we would expect it to be a net benefit.

Again, our current tax rate of 31% to 32% does not assume any assumed benefit.

To summarize, our plan will see us growing at the low end of our 4% to 7% organic sales range, with sequential improvement beginning in quarter 1. For 2017, it's growth with less pricing and a sharper focus on profitable volume growth.

It's growth supported by innovation, it's growth supported by investment in capability and it's growth supported by advertising that is up absolutely and as a percent to sales and planned for continuity.

Of course, we have the clear focus on-the-ground plans and executional discipline to help accelerate that growth.

That is our primary focus in 2017.

Gross margin, as I said, at the high end of our 75 to 125 basis point range, strong net operating cash flow expected and as you have seen in the release, earnings per share of low-single digits in dollar terms and an absolute focus by folk in our Company on delivering the growth across 2017.

Those were my prepared remarks and now we'd be delighted to open the call to questions.

(Operator Instructions)

We'll go first to Caroline Levy of CLSA.

Thank you very much.

Could you just quickly tell us what your thinking is on the currency hit to EBIT and earnings?

As I always do ask, Ian, if you could talk a little bit about the climate in China and Brazil, those two countries which seems to -- Brazil seems to have deteriorated meaningfully for the first time for you.

China, the bricks-and-mortar business maybe has deteriorated as well.

If you could just touch on those two, that would be great.

I think the foreign exchange, from a ForEx point of view, we're now estimating at about 3%.

Obviously, the bottom line impact is more.

The change from the guidance we provided, preliminary guidance we provided before entering our budgeting process, is really composed of two factors.

One is the foreign exchange and the second is, based on the assumptions I just went through, the fact that we have recognized slower market growth into our planning for next year.

Turning to China and Brazil, I would say two separate cases.

Brazil is indeed in challenging economic times.

As John said, overall in Latin America we've been very pleased with our performance.

We note that several companies have been negative on Brazil.

I think our view would be our market shares continue to be strong in that country and indeed growing, as John said.

We have taken pricing necessary to offset foreign exchange in part and we have seen some slowdown in category growth, with negative volume from time to time.

We're just going to keep focusing on growing our market shares in Brazil and overall in Latin America expect a healthy business there to continue.

Regarding China, again, we were pleased that the fourth quarter saw us make sequential improvement, which had been our plan.

We were particularly pleased to see volume growth come back positive.

Our market shares are holding well.

You are correct that our e-commerce business has loads of potential.

We grew dramatically in China.

We have a completely standalone team that focuses on driving that business in China.

We do have opportunity to increase our market share further, because in China our market share is not in line with our brick-and-mortar share yet on e-commerce, so that gives us plenty of opportunity to grow.

We remain, I must say, overall very committed to the emerging markets.

We see a strong consumer base there.

We have strong brand loyalty there and we continue to see good opportunity for growth there.

Thank you.

We'll go next to Wendy Nicholson of Citi.

Hi.

Good morning.

My first sort of question is really just a follow-up.

I mean, when you talked to us in late October, it didn't sound like the world was falling off a cliff as much as it clearly did for your business and other than the India demonetization, which is an extraordinary event, I'm surprised things all decelerated as fast as they did.

I guess my first question is, with your guidance to planning to see sequential improvement in 2017, what's your confidence kind of where we sit here end of January that the first quarter will in fact show an improvement from the 1.5%?

Tacked onto that, and sorry for the long question, but Colgate has long had this 4% to 7% organic growth target and you haven't been there for a while.

I'm just wondering if it's time to look at that, reset that, at least take the maybe 6% and 7% part of that guidance off the table.

If you were to do that, would you be able to take another hard look at your cost structure, maybe have another restructuring program?

Thanks.

Good.

Well, thanks for the question, Wendy.

Yes, we feel confident in sequential improvement, which is why we say it and why we went through the divisions, making the comments we have made.

You are right, there were a collection of events that impacted us in the fourth quarter.

One has to say that the foreign exchange aspect of things was a surprise to most.

Surely the India demonetization was a surprise.

But what gives us confidence are the reasons I have laid out in my prepared remarks in terms of we understood what needed to be addressed.

We are in the process of addressing them.

Therefore, the plan we have is precisely that, one that sees us sequentially improving in the first quarter and sees us driving for growth at the low end of that 4% to 7% range.

Another restructuring, Wendy, I think the way I would rather come at that is, I understand the intensity behind the language when we say that we are going to be relentless in driving the last year of our current restructuring program, which clearly focuses on structural cost and as, again, we have said, in a world that is slowing even more than it has.

We recognize the challenge and we are being, and will continue to be, relentless on taking advantage of the opportunity of this last year of a restructuring program to address that structural cost.

When you think about what happened in the fourth quarter, sort of the zigs and zags, I mean, one of the markets that I think is most interesting to me is France, not that it's all that large or whatnot, but it strikes me as a very stable market generally and for it to turn negative in terms of category growth surprises me.

I just wonder -- maybe I'm forgetting history and developed markets have always been so economically sensitive when it comes to toothpaste.

Can you make any comments on that, whether that's is oh, yes, not a surprise or yes, that's something new and different that we haven't seen before.

Clearly, France categories turning negative was not a pleasant or expected event.

I think there is public information out there that says that some retailers in France have suffered from the same problem, which is to say consumer purchasing weakness in France.

You're certainly seeing deflation in France and indeed, in some categories, volume reduction.

The focus has to be to right that with your customer partners on two things.

Number one is innovation that is price accretive so that you can grow the category value and hopefully the volume and the brand marketing and in-store customer marketing to drive consumption at the retail level.

The sharpness of the slowdown was a surprise.

Got it.

Thank you.

We'll go next to Dara Mohsenian of Morgan Stanley.

Hey, Dara.

How are you?

Wonderful.

It sounds like guidance for 2017 assumes a lower level of pricing growth.

Just trying to get a sense, are you expecting a significant change in pricing?

Obviously, you mentioned North America but are there any issues with price gaps in other regions and are we talking more about tweaks to promotional levels or could there be list price changes?

The second part of that is you also mentioned higher marketing spending in 2017.

How comfortable are you that you'll get a tangible top-line payback from the higher marketing as well as the incremental promotion, given it seems like from an industry perspective the volume payback in those areas is less than it's been historically recently?

Thanks.

Okay, Dara.

On pricing, when we talk SBI selling price increases we simply have in our plan less pricing because commodity pressures are more benign and transaction impacts have lessened.

A large part of our pricing is indeed carryover pricing from year to year.

When you talk promotion and tweaking promotional levels, that has been for us largely North America, where we did see stepped up promotional activity in the fourth quarter and we have made some pricing gap adjustments in China on our business, which has returned us to the volume growth which we plan to build on in 2017.

Beyond that, I would offer no broad-scale observation.

On marketing spend, again, the focus here is growth.

We have, like everybody else, return on investment models.

I think when you talk about in-store activity or sharper marketing, if you will, you're talking more about what can you do to induce purchase of higher priced products with less reliance on price at retail.

I think that needs to be the focus rather than diminishing return.

On the advertising side of things, given the strength of our advertising of our brands and given the strength of our innovation, we see that as a very good return, particularly with the effectiveness of advertising that I tried to allude to earlier and the continuity of advertising over time.

Of course, from an e-commerce point of view, that has very good return and from a digital marketing point of view, that has very good return as well.

We're quite comfortable with the return side of things.

I think what one has to try and guard against is a devolution into zero sum promotion pricing.

We're reacting where we need to, but it's certainly not something we're looking to lead.

Great.

Thanks.

We'll go next to Stephen Powers of UBS.

Great.

Thanks.

First just a follow-up on France.

I know you cited the category slowdowns in that market, but at least in toothpaste, according to the Nielsen data that I'm looking at, the issues appear more Company specific than category.

I think Nielsen has Colgate volumes down 30% in the December period, relative to flat for the category, with Unilever, Glaxco and Henkel the beneficiaries.

Just some more commentary on that would be great.

If I could tack on a forward-looking question, I know John cited category decelerations in FX really explaining the lower EPS outlook, but I was somewhat surprised not to hear elevated competition in that algorithm as well.

Any thoughts there would be appreciated, because your gross margin outlook doesn't imply significant competitive pressure either.

Again, just your outlook on the competitive pressure.

Has it changed at all since your October outlook?

Thanks.

First, let's start with the comment on France.

I was trying to be, shall we say, broad-based in my remarks earlier.

The fact of the matter is, we have had an issue with a retailer in the French environment which is revolved and will see us back where we were before in the first half of the year.

That's the specificity to the Colgate aspect of France, but it takes nothing away from the fact that on the other categories, the category declines were sharp and meaningful.

But on the Colgate brand specifically, there was a customer issue which has now been addressed in a mutually acceptable fashion and we'll see business trading return to normal in the first half of this year.

Now, as regards competitive pressure, the one that we have spelled out is frankly the only one that we see beyond what has been normative in our markets and that is in North America and that is one that we have stepped up to address within our planning guidelines for 2017.

That's great.

I didn't know I was still open.

Thank you very much for that.

If I am open, could I just have you comment on the tax scenarios that you had run and just the range of impact that your scenarios point to?

I'm not open, Steve.

(laughter)

Okay.

The answer would be I don't think that's time well spent, which is why we try to frame our comments in the holistic sense.

I mean, nothing is firm.

You all know what the ranges out there are and that's why we tried to give the headline that from a holistic point of view, plus/minus, we would expect the net benefit to be favorable.

Really, I think that's enough to say at this stage.

All right.

Thank you very much.

Okay.

We'll go next to Ali Dibadj of Bernstein.

Hey, guys.

Hey, Ali.

I guess the stock reaction would suggest that there's still a debate about what you're saying and kind of belief in the acceleration.

What I'm really hearing from investors, just to build on some of the previous questions, is that investors want to really understand and disaggregate your top-line organic slowdown and any expected acceleration further than maybe you've done so far.

To get under that a little bit, can you tell us kind of what your -- does not have to be a precise number, but what percentage of a deceleration category and yours would you attribute to macro versus kind of one-time, like in France versus competition?

If you say the bulk is not competition, like I think you did to Steve's question a second ago, I would want to note that the list of countries you're losing share in has grown, so Mexico, India, China, France, UK now.

Over the year, that's definitely grown.

As you look forward, what you're expecting to change from either macro or competition or one-time to see the top line acceleration, or is it really just your own kind of activities to improve and get the acceleration.

Disaggregating all of that, particularly the competitive activity piece, is almost impossible.

In fact, we don't break it down that way.

The largest change that shapes our top-line projection for 2017 was the reduction in category growth, the lessening in category growth that we're seeing that we have simply re-planned against and we see our top line growing for the reasons I have said.

When you come to the competitive activities, the kind of shares you're talking about is -- I mean, take Mexico, which I think John talked to, our share is about 81% and in the prior year it was just over 81%.

That's on a value basis.

Our market shares in general, Ali, if you go through them, if there are slippages, they are quite modest slippages and they're not accelerating in any way, with the exception of the French matter on Colgate that I just described.

What we think will build our business is innovation, is the advertising that we are committing to, including the in-store advertising, but with a commitment to the brand advertising in the manner that I have described, a focus on the fundamentals at retail.

I think from a competitive activity point of view, we will be responsive when we need to be responsive from a competitor point of view, but we don't want to do it in a zero-sum game fashion.

That's helpful.

Thank you.

The reason I'm -- maybe what's behind kind of the question when I scratch my head a little bit is that you've usually been able to leverage even the lower end of the 4% to 7% organic sales growth target that you've been delivering, to Wendy's question, over the past few years.

You're at the lower end of that into double-digit EPS growth ex-currencies, but for 2017 it certainly doesn't seem like that is something you're able to do, suggesting you're going to have to spend more back.

I'm trying to kind of get underneath that in terms of, look, you're not going to get double-digit EPS growth for this year but your top line is roughly you're saying what it's going to be -- what it has been.

You're spending more back.

Why?

Is it that you're feeling (inaudible) China being more aggressive or Proctor or potentially whoever?

Have you lost a little of the mojo?

Why are you spending more back if it's not competition, I guess is what I'm trying to get at.

I guess the answer would be, and I think what we're beginning to see through this earnings cycle, is that growth in many places has indeed slowed further.

What we're saying is, what is a reasonable growth objective in uncertain times and how do we ensure that we build our brands to deliver that growth at this unique point in time.

We are saying -- I think the gross margin expansion is quite strong.

I think from a top-line point of view, organic sales growth at the low end of our range will certainly put us in a good comparator group.

The focus on the restructuring that I mentioned earlier and further driving down our structural cost will equip us to be leaner going forward if this rate of growth in the world does not reaccelerate.

I'm saying, we're saying that we think it is right at this point in time to overweight focus on growth and -- but it is growth of our businesses at a time when, sure, all competitors are looking to do the same thing.

In a slowing world, everyone is still looking to grow.

From the big picture point of view, it's always a competitive environment.

What I'm trying to delineate against is, we believe in the quality of our innovation to drive our business against competitors.

When I talk promotion, it's more in-store pricing promotion, which we would rather put against trial for new innovation.

We will be competitive where we need to be competitive.

I think that's the year we're looking at.

Thank you very much.

We'll go next to Nik Modi of RBC Capital Markets.

Yes, thanks and good morning.

Ian, the question is on the category growth.

Can you give any context or clarity on exactly what's driving some of the downdraft in the category growth?

Is this trade down?

Is this frequency?

Is it inventory outside of obviously what you talked about with South Africa?

Any context around that would be really helpful.

I think there are a few elements to this and it's not a generalized statement for the world.

Obviously there are -- there is in some part of the world, particularly Europe, deflation as pricing comes down to stimulate volume in some categories.

We have seen that for several years and that remains unabated.

From a consumer behavior point of view, they don't go away from the he behavior of brushing their teeth.

They will exhaust pantry inventory, which is to say if people have more than one tube of toothpaste at home they may try and stretch that tube before they reload their own pantry.

There is, as we have seen, a sort of a subtle inventory correlation to a slowdown in categories.

These are all component factors.

I mean, as you know from the Kantar study, Colgate is in two-thirds of the households on the planet and we are very disciplined and very focused on making sure our in-home penetration stays at elevated levels.

If there is any short-term slowdown from a volume point of view due to pantry destocking and the like, that will bounce back afterward.

I wouldn't point to anything, Nik, that says there's an underlying behavioral change here that is of concern.

We'll go to our next question from Bill Schmitz of Deutsche Bank.

Hey, good morning.

Hey, Bill.

Can you just bridge the gap between the old sort of 10% local currency (inaudible) escrow to 5%, because maybe a point of it is some slower category growth, but where is the other 4% shortfall coming from?

Then I have a follow-up.

It's foreign exchange, Bill.

The two principal elements are -- now, this is against the preliminary guidance we gave in October to where we are now.

It is simply the foreign exchange and the lower category growth, which is reflected in our growth target for the year.

It's those two things.

I thought before you were at 10% local currency growth.

It seems like the implied guidance now is 5% local currency growth.

Am I incorrect?

No, no, no, sorry, I was misunderstanding.

The implied currency guidance is 5% and that is structurally driven by the income statement, the growth we have, the margin expansion and the investment we choose to make behind the business.

Was it not 10% before?

Am I off?

I thought it was like you thought 10% local currency was the right number and now it's 5%.

It was 10% in 2016.

We guided in October to 10%.

Actually, at that time, that was in dollars.

What we're tracking against is that October guidance to where we are now and we're saying that the two differences are foreign exchange and volume.

We'll take our next question from Olivia Tong of Bank of America Merrill Lynch.

Thanks.

Around advertising, can you talk about sort of order of magnitude on the advertising margin change?

Is your view to get back to sort of a historical level that's about 100 basis points higher as a percentage of sales than where you sit now?

Assuming there isn't something different below the line, it would seem to suggest a fairly big move upwards in operating expense to get to your outlook, your EPS outlook.

On the other hand, if it turns out that you need to spend more to drive top-line improvement, how willing are you to do that if it does end up impacting EPS?

I think for 2017 we have stepped up our advertising quite meaningfully from 2016 and we believe in an uncertain time, with clearly slowing category growth, with the innovation pipeline we have, it is to our advantage in 2017 to invest that advertising, deliver that growth, and keep consumers with our brands.

We think it's a good level, Olivia.

We have planned it diligently and we're very satisfied with the advertising level we have.

As I said, it includes a sharp uptick in sampling as well and these are all linked to the programs we have on the ground behind our brands and the new products that we have, so we think the plan holistically is an appropriate plan for 2017.

We'll go next to Jonathan Feeny of Consumers Edge Research.

Good morning.

Thank you very much.

Just a couple of questions.

First, on Hill's, we've been doing some work around the channel and it looks as if -- we've been hearing, anyway, that at least one of your brands has been delisted in one, maybe both of the major specialty channels but also hearing that there's some innovation in the pipeline potentially.

Any comment you could make around the Hill's business as it relates to that new products or just the progress there, I'd appreciate it.

Secondly, in India, I know great business for you historically.

You mentioned the behavior doesn't really change and there's quite a bit of inventory in anybody's pantry of Colgate product.

Does this mean that you get a restock in India and you get better performance at some point in the next six months?

Thank you very much.

On your second point, I'd love to think so, Jonathan, but I wouldn't count on it.

The focus we have in India right now is simply rebuilding the pipeline over the first half of the year.

If we get a rebound, then wonderful.

On Hill's, let me sort of paint a broader context here.

The strategic decision that we have taken based on consumer behavior is to keep our brands specialty, which is obviously a brick-and-mortar channel, and go where our consumers are going and our consumers are going e-commerce.

They're going to the traditional places you would expect, the Amazons and the Chewies of this world, and their rate of adoption of buying our products on e-commerce is very elevated, so we are moving there.

The brick-and-mortar retailers, the two principal pet specialty retailers, we have not been delisted from either retailer.

We have good plans with one and we are in discussion with the other.

The one short-term difficulty we have with the second retailer is that our shelf location and the number of SKUs we have in the store have been both reduced and moved to another position.

We believe that we can, together, develop a win-win solution for that to rebuild the business in the brick and mortar at the same time as we're driving it online.

On Hill's innovation, we have considerable innovation in Hill's.

For confidentiality reasons, I prefer not to talk about it.

That's the story on Hill's in the US, Jon.

We'll go next to Lauren Lieberman of Barclays.

Thanks.

Good morning.

Good morning, Lauren.

Two things.

One was just on the -- 2 1/2 things.

The conversation around category growth, Ian, it was great when you walked through kind of your outlook by broad region, but I'm not sure what change is.

US at 2%, Europe at flattish and emerging markets at 5% kind of feels like where we've been.

I'm just curious what's changed.

Second thing was on the build from a double-digit in dollars to low-single digits in dollars for EPS, being FX and volume.

It feels to me like isn't it more pricing?

I'm hard-pressed to think that you were previously forecasting volume growth of 6% and now it's 4%, given you said it's going to be more volume than price weighted.

Is it your outlook on pricing perhaps has changed more than volume?

Finally, just SG&A was actually up quite a bit.

I was just curious -- as a percentage of sales, sorry, given your commentary on focus on restructuring and taking cost out, was there anything in the quarter on SG&A to be mindful of?

Thanks.

On the category growth, yes, it has changed actually, Lauren.

In the US we were seeing 2% to 3% and you may remember me commenting that I was getting wildly exuberant that it was moving to 3%.

That has now come down by 1 percentage point.

Europe was always flat to modestly up.

The range of Europe is now negative to modestly up, therefore flat overall.

In the emerging markets, whilst I used to talk mid-single digits, the reason I talk 5% now is mid-single included a number with a 6 in front of it and that is now off the table.

Those shifts are real and that is what is built into our planning.

If I go back on your second point, if I go back to our planning, indeed it is all volume because pricing is mas o menos, more or less at the same level we had in the original plan, slightly higher in fact.

It's all volume.

Finally, your point on SG&A up, that's all the leverage -- or deleverage, rather.

Actually our dollar overhead is down but with the impact on the top line and the amount of dollar denominated overweight we have, we don't benefit from a ratio basis, which is why we talked about relentlessly focusing on our cost structure in this last year of the restructuring.

I think those were your three questions.

We'll go next to Jason Gere of KeyBanc Capital Markets.

Thanks.

I'll just make this really quick.

I guess first, just in terms of the reacceleration on the volume, can you maybe talk a little about how excited you are about some of the innovation coming out?

I know there's innovation every year, but certainly with this 1.5% volume you did in the third quarter, put aside the challenges of the fourth quarter, but sounds like you're getting back to a 3% range.

How much of this can you contribute to really the innovation, the step-up in innovation, what's coming out, with obviously giving away in trade secrets?

The second question just on pricing being just a small contributor this year, can you just talk maybe about where you are still taking pricing?

I know a lot of it is rollover from last year, maybe how we should think about Latin America contributing versus where you're still going to have price investment such as Europe, so obviously the two will offset each other to some degree.

Thanks.

The trouble is, Jason, if I was to display enthusiasm, you wouldn't notice the difference.

In terms of volume acceleration, reacceleration, part of it is building back from those one-time events that we mentioned.

That is an important part of it and the strengthen in plans we have in place, as I detailed earlier, and innovation is a strong part of it.

We tend to be fairly low key in terms of talking about innovation and I plan to continue that tradition.

John mentioned some.

I would just say we have a broad array of good innovation and we will be driving that starting in the first quarter across the year.

I wouldn't lay innovation as the outsize reaccelerator of growth in the first quarter.

It will be a part of it, but it certainly won't be all of it.

On pricing, I mean, I think the way you should think about it is that in the main, much of our pricing has been to offset the transaction impact of foreign exchange and, therefore, you can assume that the pricing taken or being deployed now is in regions that face those kind of challenges.

I repeat, our focus for 2017 is on growth and our focus within growth is on profitable volume growth.

Great.

Thank you.

We'll go next to Linda Bolton Weiser of B Riley.

Yes, thanks.

I just had a question also on the pet care area.

Can you just explain why the e-commerce penetration is higher in Europe?

Is it just that the bricks and mortar is less developed there or is there an actual difference in how consumers are approaching the market?

Secondly, can you explain, does the trend toward premiumization, is it disconnected from the general economic strength and high consumer confidence in the US in pet care or is it actually linked to it?

As the economy strengthens, is it actually easier to get premiumization or to get consumers interested in spending more on their pets in the US?

Thanks.

Frankly, Europe, and I don't mean anything political by this, Europe is a smaller geography than the US and more urbanized.

When you think of the literal volume of those bags, the convenience factor for e-commerce in Europe is much higher for the consumer and that is a big driver of why the adoption for bulky products is so high.

Premiumization, look, people pay for value and what they perceive as value is not just price.

Therefore, and we have said this before, the reason our focus is on innovation is to create value that the consumer believes is good value, even if the price is a premium price to what he or she may otherwise buy.

We'll go next to Stephanie Benjamin of SunTrust Investment Bank.

Hi.

This is actually Stephanie on for Bill Chappell.

Hi, Stephanie.

Just a quick question.

Do you really expect any impact to your pet veterinary business from the recent Mars acquisition of VCA?

Thanks.

I think the short answer is no.

You may know that Mars also own another group called Banfield.

We have very strong shares in both VCA and Banfield with our Hill's business.

Mars has said -- that they've owned Banfield for coming on a decade.

Mars have said that they will let VCA run as an independent group and you should know for VCA, pet nutrition products are about 5% of their sales.

That's not really their business.

The headline answer would be no.

We'll go next to Mark Astrachan of Stifel.

Thanks and good afternoon, guys.

Wanted to ask about growth by category sort of in a different way versus what we were talking about from a country standpoint.

Anything notable specific to home care, personal care, oral care in terms of your own expectations and perhaps even sort of how you're thinking about that now versus maybe two, three, six months ago?

Then just quickly on something different, the expectations for spend in EPS, how are you thinking about the assumptions for category and competition, meaning your expectations for the increased ad spend, absolute and as a percent of sales?

Does that assume the competition is greater than, equal, less than where you ended 2016 would be helpful?

In terms of your spending question, that's a very complicated question.

We build spend based on what we see by market from competitors.

Now, these days you don't see everything because some of the online spending is not tracked, so there's an estimated component of it.

You structure the spend to be adequately competitive.

I'm now talking the traditional advertising spend.

As I've said, we plan it then to be continuous for the year behind innovation, behind the brand, and sometimes behind our community programs.

Where you see the greatest short-term changes, and I commented on North America, is more in promotion than in the traditional advertising.

We have built a plan for 2017 that we think is adequately competitive and strong enough to drive the innovation we have and the brand equities that we have around the world.

Now, when you get into categories, we have a very clear strategic view, which doesn't change depending on what happens in a quarter.

Our strategic view is that we focus in order of priority behind oral care, pet nutrition, personal care, and home care, in that order.

That has been our focus because of the continuing underlying growth rates of the categories, even if they've slowed, and because of the margin profile of each of the businesses.

Our category decisions strategically are informed by the categories, not by quarterly events.

We'll go next to Jason English of Goldman Sachs.

Hey, guys.

Thanks for squeezing me in.

Hey, Jason.

Happy Friday to you.

Quick question on the Africa-Eurasia distributor stuff that you had to work through.

I apologize if I missed it in prepared remarks, but I don't think I've heard a lot of detail.

Can you walk us through what happened there?

Second question is on capital allocation.

Your share repurchase activity was a bit less -- a bit more subdued this past year.

You're sitting on more cash than you usually end the year with.

Organic growth is clearly a little harder to come by.

How is all that impacting your thought process on capital allocation on the forward?

You did miss some comments, Jason.

Let me talk again about Africa Eurasia.

It was distributor issues with a select number, small number of distributors.

It had to do with liquidity, because cash liquidity, because of foreign exchange moves and it saw us moving business away from distributors and indeed, bringing back some inventory.

I guess the telling point that we made in our prepared remarks was that the division growth would have been positive from an organic sales point of view without that event and that we expect organic sales progress to recommence in the first quarter of 2017.

Relative to capital allocation, our current thinking going into the year is that our share repurchase will be broadly in line with the share repurchases we made in 2016.

At this time we have no further questions.

Okay.

Well, good afternoon to everyone and to any of the Colgate people listening, we're in the first quarter.

Thank you.

That does conclude our conference for today.

We thank you for your participation.