高露潔 (CL) 2018 Q1 法說會逐字稿

Good day, and welcome to today's Colgate-Palmolive Company First Quarter 2018 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com.

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

Thanks, Alicia. Good morning, and welcome to our first 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; Henning Jakobsen, Vice President and Corporate Controller; and Elaine Paik, Vice President and Treasurer.

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 our more recent filings with the SEC, including our 2017 annual report on Form 10-K and subsequent SEC filings, all available on Colgate's website, for a 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 6 and 6A of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website.

Thanks, John, and thanks to all of you for joining us on the call this morning. At CAGNY in February, I mentioned that we expected 2018 to be challenging, but likely less challenging than 2017. So far, this has not been the case, as quarter 1 was just as challenging as 2017 with rising raw material and logistics costs, heightened competitive activity and a slowdown in category growth in some markets around our world.

I would say that in response, we remain focused on increasing our effectiveness and agility to better deal with this volatile environment where growth is harder to find.

Over the past few quarters, I've highlighted 4 areas of focus as we look to accelerate top and bottom line growth: advertising behind more impactful creative; innovation across our business, particularly in toothpaste and particularly in Naturals; working with our retail partners to drive profitable growth with a focus on e-commerce; and of course, maximizing productivity up and down the income statement. These fundamentals remain our priorities in 2018.

But on the call today, I'd like to focus on 2 topics: first, our developed markets, where we think we've made progress over the past year; and second, our developing markets, where we face some new and continuing challenges that we're working to address. You may remember in the first half of 2017, our North American and European divisions posted declines in organic sales and some weakness in market share. Since then, driven by the increased advertising spend that we committed to and a focus on identifying the category segments and retail environments that would deliver growth, we have returned to organic sales growth and are back to positive market share performance.

In the U.S., in the first half of last year, our categories declined and we gained share in only one of our categories. In this first quarter of 2018, our categories are back to growth and our shares were up in 6 categories and flat in one more. This was a continuation of the improvement we began to see in the fourth quarter.

In Europe, for the second quarter in a row, we are seeing broad-based growth in sales and market shares. Elmex continues to drive premium growth in our toothpaste portfolio, while Sanex is driving share growth in Personal Care and Soupline is gaining share in the fabric softener category. Hill's has returned to sales growth with both pricing and volume growth in the first quarter.

In the U.S., volume growth was positive in the quarter despite challenges in the specialty channel. Our Hill's e-commerce business in developed markets saw a 42% growth in the quarter. And so in simple terms, developed markets delivered this quarter, and we remain sharply focused on continuing this recent momentum.

Turning to emerging markets. Our emerging markets took a bit of a step back. So what are we seeing there and more importantly, what are we going to do going forward to reaccelerate growth in these markets?

Latin America category growth rates slowed in the first quarter due to lower levels of inflationary pricing in markets like Argentina and Brazil, while volume growth slowed in Mexico behind some macrolevel concerns and some heightened competitive activity, which in some cases, we chose not to match.

In Latin America, our pricing improved sequentially this quarter, and that's a trend we expect to see continue over the balance of the year, helped by easier comparisons as we cycle increases in promotional activity last year. We expect inflation to remain below historical levels, but we do foresee modest inflation given GDP growth, increasing wages and rising commodity costs.

In terms of reaccelerating volume growth in Latin America, we do have a robust plan in place for the balance of the year. We have a very active innovation calendar, including in Brazil significant premium Oral Care innovation in the high-growth pharmacy channel. And John will discuss our strong Brazilian market share performance in his section.

For Personal Care, we have innovation in the Protex line in bar soaps and in the Palmolive line in the Naturals space. In Mexico, where volume has been down for the last 2 quarters, we expect to see less of an impact from trade destocking.

In Asia, we're beginning to see the benefits of our aggressive push into the Naturals space, where we are now rolled out across the geographies, but we know we still have a lot of work to do. In the first quarter in Asia, our toothpaste market shares improved sequentially from the fourth quarter in 4 of our 5 largest markets, while in toothbrushes, our shares improved sequentially in all of our top 5 markets.

In China, we are restaging our Colgate 360° brand, which is what we call Colgate Total in China, and we're launching elmex as an e-commerce exclusive brand. In India, we are growing, but we need to improve our share performance. And we are expanding our Naturals Vedshakti platform by broadening the geographic reach and introducing a wider range of price points.

Australia was, in fact, the biggest driver of our organic sales weakness in Asia Pacific this quarter. We have been impacted by some difficult retailer dynamics in the market, and we will begin to lap that in Q2. There has also been an increase in competitive activity that's putting some downward pressure on pricing and market shares.

The Colgate Naturals line is entering this market, as we speak, which along with some easier comparisons, should lead to an improvement in Australia over the balance of the year.

So real progress and momentum in our developed markets, which we are focused on continuing. And in our developing markets, we have a clear understanding of what needs to get done to reaccelerate growth with specific plans and a sharp focus on results.

And finally, I would like to complement our team for a strong start to the year from a productivity standpoint. We achieved solid results on funding-the-growth, which helped us offset the vast majority of our raw material inflation. And we saw limited impact from the increase in freight and logistics in the United States, as flexible programs like Uber Freight and our new 4 PL logistics provider enable us to limit our exposure to the higher spot market rates.

And now back to John.

Thanks, Ian. I will now provide a brief overview of the quarter, including some further commentary on divisional performance.

As Ian discussed, while Q1 represented progress in net sales, operating profit and earnings growth on a reported basis, our organic sales growth took a slight step back. We are focused on driving sequential improvement in organic sales through the balance of the year and the plans Ian highlighted demonstrate that focus.

Our net sales growth of 6.5% in the quarter was the highest since the third quarter of 2011. Net sales growth was driven by 2% growth in volumes, with 0.5% coming from our professional skincare acquisition, flat pricing and a 4.5% benefit from foreign exchange.

Our pricing performance improved sequentially by 100 basis points, and we still expect positive pricing for the year as our pricing comparisons get easier and we plan to take some additional pricing to help offset raw materials inflation.

On a GAAP basis, our gross profit margin was down 10 basis points year-over-year. Excluding the impact of our Global Growth and Efficiency Program, it was down 40 basis points year-over-year.

As Ian mentioned, our strong productivity savings, led by our funding-the-growth initiatives, was unable to completely offset higher raw material costs. On a GAAP basis, our operating profit margin was up 40 basis points year-over-year in Q1. Excluding the impact of our Global Growth and Efficiency Program, our operating profit margin was down 20 basis points as the decline in gross margin was offset by a 30 basis point decrease in our SG&A-to-sales ratio.

On a dollar basis, advertising investment was up 4% year-over-year in Q1 but was down slightly on a percentage of sales basis as we lapped our highest spending quarter in 2017. As Ian mentioned in the press release, we are continuing to spend behind our brands in 2018 and we still expect advertising to be up for the full year on both the dollar and a percentage of sales basis.

The remainder of our SG&A expense was down 10 basis points year-over-year as a percentage of sales, as a moderate increase in our freight and logistics costs, primarily in the United States, was offset by savings from our Global Growth and Efficiency Program and funding-the-growth initiatives.

On a GAAP basis, diluted earnings per share of $0.72 was up 13% year-over-year in Q1. Excluding the impact of our Global Growth and Efficiency Program, diluted earnings per share was up 10% at $0.74.

Now moving to the divisions. We'll start off with North America. As Ian mentioned, we saw further improvement in North America in Q1, continuing the turnaround we began to see in the second half of 2017. Net sales growth was driven by our toothpaste business, which showed strong balance through a combination of pricing and volume growth. Tom's of Maine also delivered double-digit net sales growth in Q1, benefiting from the continued positive trends in the Naturals category.

Our Canadian business delivered strong net sales growth as well in the quarter, with growth across Oral Care, Personal Care and Home Care. Ian covered most of the important details on Latin America. Latin America delivered 0.5% net sales growth in the quarter, as volume was flat and pricing was up 0.5%. Foreign exchange was flat.

As Ian mentioned, our market share performance in Brazil during Q1 was very strong. We gained 1 share point in toothpaste year-over-year, almost 2 share points in toothbrushes and 3.5 share points in mouthwash, behind the launch of Colgate Total 12 Mouthwash.

Moving to Europe. Europe delivered solid organic sales growth in Q1, with broad-based performance across our geographies and categories. Net sales growth of 16% was driven by 4% volume growth, partially offset by a pricing decline of 2.5%. Foreign exchange was favorable by 14.5%.

Our toothpaste market share growth in Europe continues to be widespread with share gains in France, Germany, Greece, Switzerland, Austria and Denmark. The Colgate Natural Extracts line continue to drive incremental sales across the division, and we will be launching a new Charcoal variant during the second quarter. We saw benefits from other new products in the quarter as well. We launched Colgate Max White Expert Complete in the U.K., which has proven to be nicely incremental to our Colgate Max White market shares in that market.

And Sanex continues to gain share behind the 0% line, which we are expanding through the launch of Sanex 0% lotions. This new line addresses an unmet need for moisturization with fewer chemical ingredients.

Ian also discussed Asia Pacific, so I will simply add a few comments. Net sales in Asia Pacific were up 5.5% in the quarter with all of the increase coming from currency, as organic sales were flat. While our brick-and-mortar business in China was weaker than expected, we saw strong growth in e-commerce market shares and have market leadership in toothpaste in China e-commerce. The Africa/Eurasia division reported net sales growth of 3.5% in Q1, as positive foreign exchange more than offset a decline in volume while pricing was up low single-digits. The volume weakness was driven primarily by South Africa, where we were lapping a difficult comparison.

In Russia, along with Colgate Naturals, which we have mentioned before, we expect the recent launch of Colgate Safe Whitening to boost market shares and expand the high-margin whitening segment, which is underdeveloped in the region. We are also very pleased with the performance of our 12-gram sachet in Africa, particularly in Kenya. This package has a retail price point of KES 15, equivalent to USD 0.15 or just over USD 0.01 per usage. So consumers can purchase with the change they have in their pockets. Along with our Bright Smiles, Bright Futures program, this is part of our long-term strategy to increase penetration and usage in emerging markets.

And we'll finish up with Hill's. Hill's delivered 5.5% net sales growth in the first quarter. Volume growth of 0.5% was led by the United States, while pricing was up 1%. Foreign exchange was plus 4%.

The United States volume growth was driven by continued strength in Prescription Diet business, which is posting rapid growth in the online channel as we highlighted at CAGNY. We are also excited about our new advertising campaign on our science diet brand in the U.S., which focuses on science being at the heart of biology-based nutrition.

Now we'll turn to our updated outlook for 2018. As stated in our press release, we expect net sales growth to increase mid-single-digits in 2018. Given the slower start to the year, we now expect organic sales to be up low single-digits with sequential improvement in organic sales growth in the balance of the year versus low- to mid-single-digits previously. On a GAAP basis, we expect gross margin to be up 75 to 125 basis points in 2018. Excluding the impact of our Global Growth and Efficiency Program, we expect gross margin to increase up to 50 basis points for the year.

Greater-than-expected increases in raw material costs are the primary driver of our revised guidance. As Ian mentioned on our last conference call, our forecast does assume that some raw materials, including oil, trend lower in the second half of this year from their current levels. Our funding-the-growth initiatives are off to a strong start this year, and we anticipate FTG will help us offset much of the raw material inflation.

As I mentioned previously, we also expect positive pricing in the balance of the year, which should provide a modest benefit to gross margin. We remain committed to consistent advertising across the year, and we expect digital to represent about 30% of our media spending this year.

Both on a GAAP basis and excluding the impact from our Global Growth and Efficiency Program, we still expect our tax rate to be in the range of 26% to 27% in 2018. We expect GAAP earnings per share to be at double digits for the year. Excluding the charges related to the Global Growth and Efficiency Program and the onetime provisional charge resulting from U.S. tax reform, we still expect earnings per share growth to be around 10%.

And with that, we will open it up for questions.

(Operator Instructions) We'll go to our first question from Andrea Teixeira from JPMorgan.

Ian, I would like to just, in terms of the price increases that you embedded in guidance. So if you can explain how in the back end of the year, you're going to be able to raise prices given the elasticity of what we see in developed markets?

Yes, I guess, as we think about pricing, Andrea, and we talked about this a little bit on our last call. Clearly, there is underlying commodity cost pressure that affects everybody. And clearly, we have seen slowing of category growth in some markets around the world. And what that has resulted in, in some cases, is heightened promotional activity price base to try and get more of that smaller pie, and that puts pressure on pricing. But as we said in the last call with the underlying commodity pressure, with the inflation that we think will come back modestly in Latin America and other emerging markets, we believe there is the potential to take pricing over the balance of the year. We know we can do it from a consumer point of view, and we think that other manufacturers are faced with the same cost pressures that we are faced with. And as I mentioned in my prepared remarks, in some instances, where we thought the promotional activity was economically destructive, we did not participate. So I think a combination of the underlying commodity price pressures, modest inflation, and I would say an expected lessening, and we are seeing that in some cases of promotional activity, which is not a constructive way to build the business for a medium-term, gives the potential for pricing over the balance of the year. On top of which, by the way, we have, John mentioned, the Naturals expansion. Much of our innovation, while not technically an increase in prices, is very much at the premium end of the category, which, obviously, gives you the margin benefit of the elevated premium price inherent in our innovation grid.

That's helpful, Ian. So just on the U.S. and probably like as you lapped the price competition in Mexico, is that a read into those key markets for you in terms of the pricing or the promotional spending kind of -- at least lapping in the fourth quarter of last year and being able to get, in the balance of 2018, a better at least last couponing, if you will, on the pricing perspective? Is that the way we should look at it? Or at least price increases?

Both, both. In the North American environment, I think you saw fairly substantial improvement from the fourth quarter to the first quarter in terms of our pricing. The same in Latin America. So we went from basically negative 1 to flat quarter-on-quarter, and we expect that progress to continue. And we will be taking some of these price increases in parts of the world to offset that underlying commodity inflation. And on top, although it isn't in the price measure, our innovation flow is more at the premium end, which will drive value and margin.

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

So Ian, I'm basically going to ask the same question I did last quarter, which is if you take a step back in emerging markets, has something really changed here? Because clearly, your market share looks like it's under pressured despite the ad boost from the back half of last year, the Naturals focus and your other strategy tweaks. And it's sort of odd that such a strong organization is not seeing more traction and you're consistently missing your own expectations. The organic sales growth is weaker than we've seen in history in emerging markets. And I appreciate some of the country-specific commentary, some of the comments on category weakness. But again, taking a step back from an overall broader standpoint over the last couple of years, not just this quarter, it does feel like there's a pretty pronounced change in your competitive positioning in emerging markets. So I'm just hoping for sort of a State of a Union at the high level on what's pressuring that competitive position. Why we should believe you can prosper versus the local competition that's clearly cropping up to a greater extent in that time frame? And how you sort of manage differently in the context of that environment?

Well, a few things to say to all of that. Again, stepping back and taking the broader view, the issue we have to address and we're discussing often across last year coming into this year was the weakness in our developed world. And so we're actually quite pleased with the progress we have made there, particularly as the growth of our categories in those parts of the world is now moving back into a 2% range rather than the 1% or less that we were talking about before. So we think that's a very good progress. In the emerging markets, I challenge the notion of share weakening. In fact, as we try to demonstrate by going through some of our key markets, we are beginning to see sequential share progress in the key markets in those emerging countries. In a couple of cases, I mentioned in Latin America, we elected not to compete with promotional activity that when you reverse engineered, it carried something like an 11 gross margin. You can see volume in market share. We don't think it's economically rational to go chasing that kind of business. So you're making choices all of the time in those emerging markets. Emerging markets, by the way, where our market share is significantly advanced of our competitors. We've never ducked the fact that the local brands are having an effect in the emerging markets. And we have said for some while that our response was going to be with Naturals and Naturals at a premium price because that was what was being effective in the marketplace, and we have now positioned our Naturals offerings in those categories. I think the fundamental issue in the first quarter was the categories just slowed largely in Latin America because of an absence of pricing. And you will remember an awful lot of the near-term growth in Latin America for all companies had been pricing driven. And in Asia, some destocking with this phenomenal growth of e-commerce, particularly in China, where, by the way, as John said, we are #1 in building share and our e-commerce business was up some 67%. And behind all of that, when you do the rational work on are people continuing to brush their teeth, the answer is yes. And we continue to invest to bring new people into the category. So in terms of the category growth itself, while it's slowed in the first quarter, interestingly, with the pickup in the developed markets, our underlying category growth rate is about 2.5%. And we expect those emerging markets to come back as pricing gets more rational. And meanwhile, we are sequentially building share and we are putting advertising behind it. And we continue to have innovation behind it. We all wish these things moved in a straight line. But unfortunately, as I said on the last call, they don't seem to. However, we don't think the model is broken, and we think the same focus and activity and tools that we are deploying will be effective.

We'll take our next question from Wendy Nicholson of Citi Research.

My question has to do with the U.S. market. First of all, the 5% sales growth that we saw, is it your read that there's any pipeline sale in that? Is there any sell in that makes for a potential sequential slowdown in the second quarter? Inventory levels look straight, et cetera, et cetera. And then the second question is it feels like or it sounds like the growth in the U.S. has been driven or the recovery in your business in the U.S. has been driven more by your increased ad spending as opposed to really breakthrough or really meaningful innovation on -- I mean, good innovation, but nothing that's kind of like a total toothpaste or an Optic White or something like a big headline like that. And so can you just say, is there anything specific to the advertising? Is it just more dollars? Is it more share of voice? Are you doing more digital? Is there something about the advertising that's making it particularly impactful?

Thanks, Wendy. First, I would say, North America, obviously, is cycling a weak first quarter of the prior year, where we suffered from destocking and the sharp slowdown of the category. So I would say we benefited from that underlying category growth rate in North America is about 2%. But there is certainly nothing in terms of an inventory build because of the activity. I would say, it's the year-on-year comparison and the strengthening growth rate in the category, which as I said earlier, with the investment we are putting behind the business and the innovation which we can judge however we want to judge it. In the end, the consumer is the final arbiter. And if the market share goes up, it's good innovation in my book. So that's really the story on the North America, but nothing that says the underlying business performance would be disadvantaged over the balance of the year. Now on the advertising side, you have to think about these things holistically. When the advertising -- as we have said before, it's not just about advertising the innovation, but it is advertising the basic benefit of a brand. Indeed, it is sometimes advertising what we call brand purpose, which is what a brand stands for. So we can run advertising that we call equity advertising. That is very simple, very basic in the emerging markets, talking to people, having a future they can smile about on subjects like education, on subjects like water conservation on a basic anti-cavity benefit, which may not sound glamorous and wildly different, but it's extremely emotionally persuasive. And I think what we have come to, which we believe is making our advertising more effective, is that we've got this balance between the emotional connection with the consumer and the rational connection with the consumer. Certainly, the quality of our advertising is increasing. And then you look at the shift we have made to digital, which gives you a lot more information in terms of how you address consumers. And that is playing a role as well. And finally, I would say, this year, we would have completed a journey over 3 years, which has seen us reduce the amount of line we spend in, what we call, nonworking media by something like 15 -- I'm sorry, 25% to 30%. And of course, that money then gets directed into what we call working media, which is advertising consumers actually see. So in the same, advertising-to-sales ratio, you have a shift of money away from nonworking into working. So you get that additional benefit as well. But I think it's the type of advertising. It's the vehicles we're using for the advertising and that alongside the innovation. So it's not just flowing money, it is doing it in an intelligent way with a focus on making sure we have quality advertising vehicles with that money.

We'll take our next question from Stephen Powers of Deutsche Bank.

Two fairly quick ones, if I could. I guess, the first, as you mentioned at the outset, Ian. You started off the CAGNY presentation saying, that you'd seen or you saw improving 2018 in terms of top line growth. And that -- this suggested to me that we're off to a slightly better start to the year than we're seeing today. So I guess, the first question is just did you see something happen late in the quarter that might explain that? Or is this representative of the improvement you expected because it seems just a bit of a disconnect there? And then on the gross margin outlook, if I could. I think you said, up to 50 basis points assuming some sequential reversal of oil from here. And I guess, the question there is, without cutting into investment spending, how much flexibility do you foresee in the model this year if commodities don't cooperate?

Frankly, Steve, we did, from CAGNY, see changes. Actually, the developed markets played out pretty much the way we would have expected. It was really in the emerging markets, and it was this pricing activity, which stepped up as the quarter unfolded and we had to take a position in terms of would we respond or would we not respond. That took pricing out of the category, which led to the slowdown in the value growth rate of the category. So yes, it did unfold after CAGNY, to our disappointment. Look, in terms of flexibility on the year, we have the last year of our Global Growth and Efficiency Program remaining. We have a very strong funding-the-growth program off to a very good start this year. 6 new areas, the fundamental development in funding-the-growth, which we are now tackling beyond the usual. And of course, the pricing that I mentioned earlier. So we're working all of the internal angles to give us flexibility across the back half of the year. If our commodity forecasting does not pan out the way we expect it to, we'll obviously be close to how that unfolds as the year progresses. But we are pressing in all of the areas you would expect to give us the most flexibility we can get because, as we said in the release, we are committed to increasing our advertising absolutely and as a percent of sales because of the quality of innovation we have and we believe the quality of advertising vehicles that we have across the portfolio.

We'll take our next question from Jason English of Goldman Sachs.

I've got one quick follow-up and then another question, I'll try to jam in here. First, following up on Dara's question, I think you pushed back, Ian, on his assertion that your market shares were softening somewhat in the emerging markets. In your prepared remarks, you certainly talked about the momentum and strength in some of your largest developed markets. When we look at your market share data that you guys disclosed, just looking at toothpaste globally, it's down year-on-year. It's weakened from where you -- what you last gave from fiscal '17. How do we put those 2? And then my second question is on Hill's overall. A lot of moving pieces in the U.S. pet landscape, a lot of competitive turbulence, a lot of channel turbulence, a lot of it seems really reminiscent of P&G and Iams, with -- what General Mills is intending to do with Blue Buffalo. That clearly creates some opportunities for you guys then. I know the landscape is a little bit different where the growth is, is shifted from pet specialty into online today. But is there reason to believe that some of this turbulence could once again create opportunities for you like it did back then?

Well, let me take the second and then come down -- come back to the first. On the Hill's strategy and model, we have been very disciplined over the years. As you know, we have 2 businesses there. We have a wellness business for general use, and we have a prescription business against specific conditions in pets. And we have limited our distribution to those outlets that have advisers for the consumers that allow them to make an intelligent choice, and of course, in the case of prescription, respond to a script from a vet. Interestingly, e-commerce is the perfect channel for us because you can write anything you want and pet owners will read it all because they are absolutely fixated on the health of their pet. So given the scientific quality of the Hill's products, given the scientific benefits that have been demonstrated clinically and given the discipline we have in maintaining that connection with the vet, we obviously are working very hard to take as full advantage as we can of any opportunity in that landscape. One hates to predict, but we will be doing our level best to do that. In terms of the market shares globally, yes, the dollar share is down modestly. Actually, the volume share on our business is effectively flat year-to-date, year-on-year, and some of that pressure traces to Latin America because I mentioned that we had walked away from some promotional activity. And what we are now seeing in the emerging markets, I think we talked about the fact that sequentially toothpaste is up in 4 of the 5 largest markets and toothbrush is up in all 5 from the fourth quarter. So again, we think the plans we're putting behind the business are making progress, and we will keep driving that over the balance of the year.

We'll take our next question from Bonnie Herzog of Wells Fargo.

I just have a few follow-on questions. First, in North America, wondering how much of the volume left in the quarter was driven by a mix impact via innovation? And then realistically, how sustainable is the strong growth that you had in the quarter given all of the headwinds you mentioned, Ian, this morning and then commentary we've been hearing from others? And then just a quick question on local competition in emerging markets. I realize you guys are working to innovate as a means of competing more effectively with some of the local competitors. But do you guys think that's going to be enough? And have you considered being more proactive with M&A as a way to be more competitive in some of these markets?

Yes, I -- let's start with your first, which is with North America. There's nothing substantively different in terms of the mix of the business coming into this year. I think the 2 fundamental factors are the year-on-year comparison, where we had a weak first quarter last year because of the slowdown of the categories and the attendant inventory destocking at retail. So you've got to rebound in category growth, which started in the fourth quarter and is now at a reasonable 2% underlying growth rate. We've got good quality innovation as we plan to have every year, and we are building market share because of that innovation and because of the expenditure behind quality advertising in the business. But it would be fair to say that the first quarter itself benefits from the year-on-year comparison. But looking forward, there is nothing about the underlying strength of the business that concerns us from a planning point of view over the balance of the year. And then in terms of local competitors in emerging markets, this is a journey. We have said when we started talking about Naturals sometime back that these offerings were at premium price points. We think we have shaped some very interesting bundles. Although we talk about Naturals in kind of a generic sense, actually, the offerings we have vary across the world to reflect local market preferences and we are seeing progress. It's not going to be overnight. And I think it would be fair to say in the broader sense, Bonnie, in terms of M&A, look at what we have done over the years with Tom's of Maine or even the elmex brand in Europe, which had a dominant position in the Germanic countries. Certainly, if there are quality assets, Tom's and GABA would have been local brands in that definition, the relationship we have with Darlie in Asia is another local brand in that regard. That would certainly not be off strategy -- certainly not off strategy. And interestingly, a little bit of an aside, the Elta business, 1 of those 2 Personal Care companies that we bought, is building -- has built a very strong business in China as an e-commerce business. So in addition with them, we are learning some interesting skills in building direct-to-consumer businesses online in China with imported products. So not completely off the list of possibility, Bonnie.

And we'll take our next question from Kevin Grundy of Jefferies.

First, Ian, a detail-oriented question. So the industry growth rates now in emerging markets, which you indicate are slowing. Do you have a specific number for us? I just would like sort of a point of reference relative to the 0.5% organic sales growth in the quarter. And then the broader question, Ian, in emerging markets, are you comfortable with your investment levels in those markets? You have very attractive margins. Not every company can say that in some of these regions. And is it possible that the cost of business is moving higher, investment levels need to move higher to compete with some of this local competition just to return Colgate to some of the growth rate that's -- that it's enjoyed in the past in some of these regions? So your comments there will be helpful.

Yes. Again, our -- how do I say, our understanding of the slowdown in the emerging markets is not that we see this as a permanent slowdown, but as I mentioned before, in the developed world, we have now seen category growth rates move up into the 2% range. Historically, they had been 1% and lower. So that's good news. In the emerging markets, what we saw was mid-single-digits move down to something in the 2.5% to 3% range. And then, of course, you have the destocking that goes with that kind of slowdown. The -- and largely that was, in those markets, pricing driven because of that promotional intensity that I mentioned. Now the underlying usage of consumers is the same. And interestingly, if you profile our categories around the world and our geographic mix, if those emerging markets were to stay at 3%, let's say, and the developed world at 2%, if you look at our mix of the world, our underlying category growth rate would still be 2.5%. If as we expect, those emerging markets come back because we will have the opportunity to price and given our strength in the category that will lift the value of the category, then you could expect the underlying market growth rate will move north of 2.5%. Now from an investment point of view, when we think about advertising, as I have mentioned before, we do it from the bottom up. And so we do it by geography, by activity, by product in our portfolio and that ends up in a ratio. We don't work the ratio down through the income statement. So our first quarter advertising was slightly off the highest of last year. On a ratio basis, it happened to be higher than the average of last year. And you can imagine, in our priority markets, it is higher still. And we think and believe certainly from a share of voice point of view and a consumer engagement point of view, we have an adequacy certainly of investment in those marketplaces we need to capitalize on e-commerce, which I think we're saying we are doing. And we need to continue to build these Naturals offerings around the world in the emerging markets. But I think it's more building what we have than the need for absolutely more dollar investment. The pleasing thing with much of this innovation in the emerging markets now is that it's at a premium level, which gives you investment opportunity underneath that.

We'll take our next question from Ali Dibadj from Bernstein.

I guess, I'm still a little confused about what Colgate's root problem is. Despite all the micro-positive you described in the prepared remarks and some confidence here and showing us some confidence -- category confidence. I mean, results are clearly not what you expected, not what we expected. They're pretty tough, right? And I get that you can blame the category growth. But consistently, if you tell your competitors as well, I mean, you are 40% plus of the category and in theory, the leaders. And instead we're actually starting to hear kind of different things from you guys, saying something and then what we see in the numbers is slightly different. So advertising, I get what you're saying for the year, I do, and I get the bottom-up approach, but advertising was supposed to be up as a percent of sales already, right? It's not, it's actually down. Gross margin is 50 to 75 that it was, now up to 50. And commodities, frankly, from CAGNY, haven't changed that much. FX has gotten better. It's trying to help you -- it should have helped you on gross margin. We saw top line, certainly from our previous discussions, would accelerate already. Top line is decelerating. Pricing, that was supposed to be up, remains challenging and your comps get tougher here. Innovation was already supposed to help, but dollar share is actually down in India and China and U.K. and Russia and Mexico, where we're hoping innovations would help. And this isn't kind of a temporary thing it sounds like. It doesn't sound like they're onetimers, like we heard about last year. It sounds like it might be tougher longer term. And that's a struggle like I -- personally, as I look at the stock today, I guess I think you guys dodged a bazooka, I was going to say bullet. But I think you guys dodged a bazooka a little bit because investors are starting to -- I guess, are continuing to blame the things that are out of your control. But a lot of things that are in your control aren't coming in like we expected. And so I guess, going back to the core question, I guess, I'm still scratching my head about what the root cause of the issues are. You talk about one-off things that we're trying to do, but I struggle with what the root cause is. And should investors continue to give the stock, the generous benefit of the doubt it's been given so far and why?

That's it? The -- I don't know where to start really. The -- I think in business in general, you have to put everything in context. You make the assertion that these are root problems with the company. We pay pretty close attention to the pressures others in our space and other spaces had in this operating environment. You challenged on the fourth quarter this notion of pricing being negative and the underlying question was, with pricing negative, would this put pressure on margins? And therefore, in addition to the share commentary, the model could no longer be effective. So we have tried to explain that the pressure point that was the developed world, which is where everybody has been focused, we feel quite pleased with the progress over the 18-month period. And we think those 2 businesses and the underlying category growth is favorable for us going forward. And then, we end up with this heightened activity in some emerging markets pressing price and leading to category slowdown. And you make some choices. And in some cases, we chose short term not to chase. Economically, we thought, unviable volume. And you take a short-term share hit and you take a volume hit. Faced with the same set of circumstances, we would, on balance, make the same decision. And when we look at the shape of the structure of our business, we see pricing now flat, which is not common in our industry space. We thought of the gross profit. We would have liked to have done better if we had had pricing, but we thought that was quite contained. And we kept very competitive spending on the table running through the income statement. We never said the spending was going to be up on a ratio basis starting January 1. We said we were going to increase our spending and keep that money on the table to build the business. So when you break these things down, unfortunately, there is no simple single silver bullet that says problem solution, you have to manage many moving parts. And as I have said before, this is not moving in a straight line. But the underlying consumer behavior is still there. The medium-term growth potential we have with the growing middle-class in the emerging markets is still there. We have an innovation profile to allow us to build market share in those categories while we now have strengthened our developed countries. So while the first quarter was not what we expected, which it seems to me we were in reasonable company in that regard, we think the plans we have for the year allow us to deliver the progress that we have committed to for the year and the underlying consumer behaviors are still sound and solid and we have the brand strength to compete.

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

Hi, can you hear me? Hello?

I couldn't, but I can now. Yes.

Okay. Perfect. My question goes back to North America because, obviously, that was quite a bit better than many of us had expected and certainly better than what track channel data would have implied. So were there particular categories that drove this? In particular -- more of, obviously, in untracked than tracked? And flipping the prior question the other way, did retailers destock too far in the past and now they're actually restocking back to normal levels? And then following on that, North American pricing looked, obviously, better. And given what Procter said about price last week, I would be curious what your view is on North American pricing from here. Because just in our channels, just both online and off, we're seeing some pretty meaningful price promotions, particularly with larger packs at the premium end. So would just love your commentary on that.

Yes. Again, I think North America is largely influenced by the year-on-year comparison. Last year, the categories were declining and retailers were destocking. And we saw indeed, our organic growth decline mid-single-digits. This year, the category -- the underlying category growth rates have moved up into the 2% range, healthy for a developed world standard. We have -- we are building our market shares in 6 categories and a flat in one more, and we have put advertising behind that to do that. And we have -- we said in the fourth quarter, we had reacted to some pricing and category specific challenges, and we've managed intelligently to, we think, handle that in a balanced way. So the underlying category growth rate in North America is around 2%. And as I said earlier, we don't expect anything to change that underlying strength of our now reestablished North American business. Interestingly, from an inventory point of view, we continue to see retailers work down inventory. But on our businesses for this quarter in a more measured way or a more modest way than we saw in the first quarter of last year when the categories were actually in decline. But the press for efficiency is still very much there and we participate year-on-year with retailers in that regard.

We'll take our next question from Nik Modi of RBC Capital Markets.

Ian, I just wanted to ask a question about culture. I mean, Colgate has historically been known to be a very thoughtful company as it relates to capital allocation and just business strategy in general, maybe on the conservative end. And that was -- and that worked well. Your returns are high. Your margins are high. But the environment is changing dramatically and business as usual doesn't seem like it's working. So I was just curious on your thought as a CEO of this company and culture and risk tolerance and how you think about that?

Well, very carefully, I guess, is the first answer. We've realized the world is changing, but we think we need to be disciplined in managing our company over time. In other words, we think this is an era for urgency, but not a panic. And -- so it's easy to throw out a lot of, what would I say, make work to window dress the issues we're all dealing with. And we still very much believe in the fundamentals. I mean, the fundamentals of these kind of businesses, where people use your products every day, the benefits the product provides are important to their health and wellness with their everyday usage of products. So you need to build brands and you need to find ways of making a connection, and you need to find ways of bringing the next generation of users into the business. Now that is being disrupted in no end of ways, how you communicate, how you sell and so on. And we think we are doing quite a lot in all of those areas with a view to building our brands and building value while we do that. Now our risk tolerance in capital allocation is, I think, quite balanced. I think we have demonstrated, if you take the M&A space, for example, I think quite a good track record of identifying good quality assets, bringing them into the portfolio and building them over time. And in building them, building the overall company. We continue to be very focused in that area, like much else in life, it does not move in a straight line and we do not choose to be cavalier and panicky in the allocation of our capital in that regard. That may not be a fashionable thing to say today. But we think in terms of the underlying health of the company, it's the right position to take. So urgency, we get. And we are changing and have been changing a lot of things with this restructuring program we started a few years back, and we continue to change a lot of things. But we resist the temptation to panic and make work for effect rather than for the long-term health of the business. And we're always trying to balance the long-term with the short-term.

We'll take our next question from Bill Chappell of SunTrust.

Ian, can you just talk a little bit maybe about trends. Since the end of the quarter, I guess, talking about growth rebounding as we move sequentially through the rest of the year. I didn't know if you've seen a bottoming out kind of in emerging markets. And then also, maybe with that, a little more color on Australia. I know that's been weak for quite some time with the retail landscape. So I didn't know if something changed intra-quarter? Or it's more -- we're just going to be lapping kind of the changes as we move into next quarter?

Yes, I'm afraid Australia has been a case literally of -- as you know, the 2 major retailers there control much of the marketplace. And there has been, I would say, a battle for shoppers between the 2 of them. And we have, from a joint business planning point of view, tried to be accommodative but disciplined. And we think we will finally cycle that by the end of the second quarter. I guess, that's the simple way of saying that. In terms of trends, all I can say is the second quarter has started at a better clip for us. And that, I hope, traces to category information, which, as you know, we see on a lagged basis and I can't offer any comment at this time.

We'll take our next question from Jonathan Feeney of Consumer Edge.

I wanted to dig in on China. It's been a little bit of a tough market for a while and particularly call the volume decline. And it struck me that -- I know China historically has been a high e-commerce adoption market. And I was wondering if you could comment about your performance in e-commerce in China versus the market broadly. Is -- are you doing better or worse there? Is there anything related to that, that's created challenges for you? And does that tell you anything about any other markets, maybe strategies you've deployed there or experiences you've had that might be an indicator of what e-comm development looks like in other markets?

Yes, good question, Jonathan. It's interesting, in our Hill's business, e-commerce is an important part of the business in the developed world, North America and Europe. In the traditional Colgate business, the growth of e-commerce has been relatively modest, I would say, in the developed world so far, even though we are deploying resources against it. But in China, it has been quite explosive. As you know, you have Alibaba and Tencent, and frankly, 80 other platforms in China to go after from an e-commerce point of view. I think I mentioned earlier our Asia e-commerce business, which is largely China, was up some 67%. We lead from a market share point of view e-commerce and indeed have made sequential progress month-on-month in terms of share increase this year. And I think interestingly, 2 things to say in terms of skills. Number one, we believe we can, and we are working very hard to do this, build a very important part of our business in China with imported products, so marketplace direct-to-consumer like the GABA product, elmex that you have just brought to China like a powered toothbrush that we have brought to China. And like the Elta product, I was mentioning earlier, where actually they have people they work with, distributors in China, that have very good capability. So the thrust of your question is the right one, which is that we think there's lots to learn in China. It's an important part of where we are focused and we are thinking about it quite broadly beyond even the businesses we sell pure brick-and-mortar in China. And we're doing it as a business building exercise, but, of course, it becomes a bit of a learning lab as well. And we can transfer those learnings and those skills to other parts of the world.

We'll take our next question from Lauren Lieberman of Barclays.

I wanted to just -- something we haven't touched on yet, which is -- and we don't talk about much, which is the Personal Care and Home Care businesses. And I've just been wondering a little bit perhaps about, I guess, one, kind of broad strokes like share performance in those businesses in emerging markets. If the competitive environment has changed for those at all? And then, I guess, also underlying that in Mexico when you talked about some of the competitive activity you chose not to participate. In what category that was in?

Yes. Well, to -- I would say, the Personal Care business is in relatively good shape. We have strong brands. We talk about Sanex. We talk about Palmolive. We have the Protex brand. And then in Home Care, we have different brands in different categories, but our primary 2 categories are fabric softener and dish liquid. Now when you look at the competitive activity in Latin America, Oral Care was one business. But then Home Care was the other business because from a pure volume point of view, the purchase frequency of Home Care products is higher than the purchase frequency of Personal Care products. So if you're looking to drive volume from promotion that is the shorter-term play. So we, indeed, did see a stepped-up promotional activity on the Home Care businesses. And again, we decide whether to play or not to play. And if the margin is destructive, then frankly, we don't, and we will rebuild the businesses with the innovation flow that we have. So that was a factor in Latin America.

And we have no further questions. At this time, I would like to turn the call back to our speakers for any additional or closing comments.

Well, this is Ian. Thank you for joining the call. And we look forward to reconnecting with you after the second quarter. Thanks.

That does conclude our conference for today. We thank you for your participation. You may now disconnect.