Colgate-Palmolive Company (CL) — Q4 2016 Earnings Call Transcript

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 Venezuelan 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 businesses. 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 is flat. Excluding the items testified in table eight 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 and growth initiatives and our restructuring program. On a GAAP basis, our gross profit margin was up 160 basis points in the fourth quarter 2016 from the fourth quarter 2015. Excluding the items specified in table nine 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 eight and nine 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 a deconsolidation of our Venezuela operations. Excluding the items in table eight 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 nine of our press release, was even with last year but was 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 the fourth quarter 2015. Very 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 free cash flow before dividend 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 nine 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 expectation 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 division. First off, North America. North American net sales, unit volume, pricing, foreign exchange and organic sales were all even with last year's fourth quarter. In the U.S., volume growth in two states was offset by declines in toothbrushes and liquid hand soap. In the quarter we saw strong volume growth for our Canadian business and put-on-demand. Operating profit declined 3% in the quarter. The gross profit margin expansion was more than offset by an increase in selling, general and administrative expense. Up here, North American highlights in the quarter. In the U.S., we finished the year with market share either up or flat in the majority of our categories; our innovation continues to perform well. We have a strong pipeline plan as we head into 2017. Our premiumization strategy continues to pay dividends. The 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 the Colgate Optic White variant. We are also seeing year-over-year improvement in market share as it relates to our sensitivity business, helped by our latest launch of Colgate Sensitive Smart White toothpaste. Tom's of Maine also posted growth in the quarter; 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 brand, 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 in 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 personal care business continues to grow share, up 40 basis points year-to-date in Europe. We've seen regional share gains in manual and battery toothbrushes, body wash, bar soap, body lotion, and fabric softener. Our manual toothbrush here is up 170 basis points for 2016, driven by the premium priced Colgate Max White toothbrush with 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 by 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 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 administrative expenses. And points on Asia Pacific include, as mentioned above, in India, demonetization cost us a swing from strong growth through Q3 to a decline in Q4. Our recent launch of Colgate Cibaca continues to gain 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 is positive for the quarter. Our online business is accelerating, offsetting most of the impact from a difficult offline market. Now, for 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 regions 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 improvements, driven by pricing and funding the growth, were offset by an increased advertising environment. Overall, our toothpaste market share in Africa-Eurasia continued 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, which 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 Pro line, which achieved 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. Now, finishing up with Hills. Q4 was a difficult quarter for Hills due to challenges in the pet facility channel. 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 growth profit margin expansion as funding the growth, savings, and increased pricing offset higher costs. In the U.S., our strong growth in the online industry was more than offset by weakness in the pet facility channel. We continue to expand our online availability in the U.S., 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 utility category. Developing market volumes were up nicely, driven by Hills' Prescription Diet Metabolic + Mobility and Metabolic + Urinary, Hills' Prescription Diet Derm Defense, and Hills' Prescription Diet z/d. That's it for the divisions, and with that I'm going to turn it over to Ian, who has some thoughts on our 2017 outlook.

Thanks, John. And good morning everyone, and let me wish you all a happy and healthy 2017. What I'd like to accomplish this morning is two things. 1) Reflect a little bit on 2016; and 2) 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 U.S. 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. Topline organic sales growth up 4%, broadly healthy market shares as John has exemplified in his remarks, good gross margin progress up 160 basis points to 60.3%, and 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 unpredicted events occurring as the year unfolds. So how are we planning for 2017 in the context of how we ended 2016 in 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. And my third point for 2017 would be that our overarching priority and objective focuses on growth. So 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 the major geographies that take the following shape. For North America, we are seeing our categories grow around 2%. In Europe, we are seeing, in aggregate, categories basically flat. And for our emerging markets, we continue to see category growth of mid-single digits, cast at closely around 5%. So, with that as a context of our consumer's behavior, the organic sales growth plan that we have for 2017 sees us targeting the low end, about 4% to 7% 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 the first quarter. And from an organic sales point of view, we expect to see sequential improvement in the first quarter. 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 and 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 get country-specific data and detail, but I think in a circumstance in the fourth quarter, we feel it's important to clear on the 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, and 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 in organic business. In fact, excluding India, the division would have seen positive organic sales growth. So 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 the 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. And 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 volumes and in value, and 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 Hills, as John said, we posted strong e-commerce progress; indeed, our e-commerce growth in the United States with Hills was up from 60%. Our market share on e-commerce is higher than the overall market share and we expect that growth as we expand e-commerce distribution to continue in 2017. That was more of an 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 the focus, as John said, on channel mix. And finally, Latin America, although 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 would 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 as we speak. But 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 innovation that we have, the strong brand equities that we possess, and for example in India, Colgate was rated one more time the most trusted brand in the country, and 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 that relates to the school programs that we have around the world. These are all proven vehicles to build brand awareness, brand loyalty, and induce trial. And 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. 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 to growth program is as vibrant as ever and we will receive sharp focus. As John said, we will redouble our efforts behind structural cost reduction in this last year of the global growth and efficiency program, and we will, from a category, a product, and indeed the channel mix perspective, focus on the premiumization that can be delivered with the consumer. And 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. So 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 points 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 are 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 or the different tax policies that may be adopted, and if one uses holistically, we would expect it to be a net benefit, but again, our current tax rates of 31% to 32% don't include any assumed benefit. So to summarize, our plan will see us growing at the low end about 4% to 7% organic sales range, with sequential improvement beginning in quarter one. 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 and capability, and it's growth supported by advertising that is up absolutely and as a percent to sales and planned for continuity. And of course, we have the clear focus on the ground plans and executional discipline to help accelerate that growth and that is our primary focus in 2017. Gross margin, as I said, at the high end of our 75 to 125 basis points range, strong net operating cash flow expected as you have seen in the release, earnings per share of low single digits in dollar terms, and an absolute focus by folks in our company on delivering the growth across 2017. So those were my prepared remarks, and now we would be delighted to open the call to questions. Hello?

Thank you very much. Could you just quickly tell us what your thinking is on the currency hit to EBIT and earnings, and then, as I always do ask, Ian, if you could talk a little bit about the climate in China and Brazil, those two countries which seem to—Brazil seems to have deteriorated meaningfully for the first time for you. China, the brick-and-mortar business maybe has deteriorated as well, so if you could just touch on those two that would be great?

Yes, I think the foreign exchange, from a Forex point of view, when I was estimating it, was about 3%. Obviously, the bottom line impact is more so 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 slow market growth into our planning for next year. Turning to China and Brazil, I would say two cases: Brazil is indeed in challenging economic times; as John said, overall in Latin America we have been very pleased with our performance. We note that several companies have been negative on Brazil; I think half of you would be very pleased to note 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 volumes from time to time. So we are just going to keep focusing on 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 showed us making 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. But we do have the 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. So, 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.

Hi, good morning. My first question is really just a follow-up. I mean when you talked us in late October, it didn't sound like the world was falling off as much as it clearly did for your business, and other than the India demonetization, which is an extraordinary event, I am surprised things all decelerated as they did. So I guess my first question is on with your guidance to planning to see sequential improvement in 2017. What’s your confidence kind of where we are set here end of January that the first quarter will impact show an improvement from 1.5%? And then kind of tucked on to 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, and I am just wondering if it's time to look at that, reset that at least take maybe six and seven part of that guidance off the table? And if you were to do that, would you be able to take another hard look at your cost structure and 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. And you are right that we’re a collection of evidence 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. And therefore, the plan we have is precisely that—we want to see us sequentially improving in the first quarter and see us driving full growth at the low end of that 4% to 7% range. Another restructuring, Wendy, I think the way I would rather comment that is 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 that it had. So, we recognize the challenge, and we are being and will continue to be relentless in taking advantage of the opportunity of this last year of the restructuring program to address that structural cost.

And 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 what but it strikes me as a very stable market generally, and for it to turn negative in terms of category growth surprises me, and I just wonder maybe on forgetting history and developed markets have always been so economically sensitive when it comes to toothpaste. But can you make any comments on that whether that is 'Oh yes, not a surprise' or 'Oh yes, that's kind of something new and different that we haven’t seen before?'

Well, clearly, France's category 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. So, you're certainly seeing deflation in France and indeed in some categories, volume reduction. So, the focus has to be to right that with your customer partners on two things: 1) Is innovation that is price accretive, so that you can grow the category volume and hopefully the volume; and 2) brand marketing and in-store customer marketing to drive consumption at the retail level? So, the sharpness of the slowdown was a surprise.

Got it. Thank you.

Hi, how are you?

Wonderful.

It sounds like guidance for 2017 assumes a lower level of pricing growth. I'm just trying to get a sense of whether you are expecting a significant change in pricing, obviously you mentioned North America, but are there any issues with price gaps in other regions? And then could we talk more about tweaks to promotional levels or could there be less price changes? And then the second part of that is you also mentioned higher marketing spending in 2017. How comfortable are you that you get a tangible topline 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. Well, so on pricing, when we talk about selling price increases, we simply had in our plan less pricing, and because commodity pressures are more benign and transaction impacts have lessened. A large part of that pricing is indeed carryover pricing from year-to-year. When you talk promotion and tweaking promotional level, that has been for us largely in 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. But beyond that, I would also note broad-scale observation. On marketing spend, again, the focus here is growth. We have returns on investment models, like everybody else. I think when you talk about in-store activity or shorter 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. So, I think that needs to be the focus rather than diminishing returns. And on the advertising side of things, given the strength of our advertising, of our brand and given the strength of their innovation, we see that it's a very good return particularly with the effectiveness of advertising but I tried to elude to earlier and the continuity of advertising over time. And of course, from an e-commerce point-of-view, that has very good returns, and from a digital marketing point-of-view, that has very good returns as well. So, 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, so we're reaching where we need to but it's certainly not something we're looking to leap.

Great, thanks.

Good, Dara.

Great, thanks. First just a follow-up on France. I know you said that the category slowdowns in that market, at least on toothpaste, according to the Nielsen data that I'm looking at—this appears 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, Glaxo and Han holding the beneficiaries. So just some more commentary on that will be great. And like a tuck on, a forward-looking question. I know John cited category dissolution and dilution effects to really explain the lower EPS outlook, but I was somewhat surprised not to hear elevated competition in that algorithm as well. So just any thoughts there would be appreciated because your gross margin outlook doesn't imply significant competitive pressure either. So again, just your outlook on competitive pressure and how that changed since your October outlook. Thanks.

Yes. First, let's start with the comment on France. And 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 resolved and will see us back where we were before in the first half of the year. So 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 is now being addressed in a mutually acceptable fashion and we'll see business trading return to normal in the first half of this year. Now, as we got competitive pressure, the one that we have spelled out is frankly the only one that we see between 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. Hello?

Oh, that's great. I didn’t know my—I didn't know it's 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?

Yes. I'm not open, Steve.

Okay.

No. 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 range is out there and that's why we try to give the headline that from a holistic point of view, plus minus, we would expect the net benefit to be favorable. And really, I think that's enough to say at this stage.

Alright, thank you very much.

So, I guess the stock reaction would suggest that there is still a debate about what you are saying and kind of brief in acceleration, and what I’m really hearing from investors just to go into some of the previous questions is that investors really want to understand and to figure out your top-line organic slowdown and expect acceleration further than they have done so far. So just thinking on that a little bit, can you tell us kind of what your precise number, what percentage of deceleration category in yours would you attribute to macro versus kind of one-time events like in France versus competition? And if you say the bulk is not competition like I think you did to seize the question. Second ago, I would want to know that the list of countries you are losing share has grown, so Mexico, India, China, France, U.K. now over the years it's definitely grown, and as you look forward what you are expecting to change from either macro or competition or one-time events to see the top line acceleration, or is it really just your own activities to improve and get deceleration?

Yes, I mean just aggregating all of that, I mean particularly the competitive activity piece is almost impossible. And in fact, we don't break it down that way, so the largest change that shapes our top-line projection for 2017 was the reduction in category growth, the lessening in category growth that we are seeing that we have simply re-planned against, and we see our top-line growing for the reasons I have mentioned. When you come to the competitive activities, the kind of shares you are talking about, if you take Mexico, which I think John talked to, our share is about 81, and in the prior 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 are not accelerating in any way with the exception of the French matter on Colgate that I just described. So I mean 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 and the manner that I have described. A focus on the fundamentals at retail, and I think from a competitive activity point of view we will be responsive where we need to be responsive from a competitive point of view, but we don't want to do it in a zero-sum game fashion.

So, that's helpful. Thank you. The reason I am, well, maybe what’s behind kind of the question I have got a little bit is that if you really been able to leverage even the lower end of the 4% to 7% organic sales growth target that you have been delivering, question for the past few years, the lower end of that into double-digit EPS growth ex-currencies. But for 2017, it surely doesn't seem like that is something you are able to do, suggesting you are going to have to spend more back, and I am trying to kind of get underneath that in terms of, but you're not getting those details for this year, but your top line is roughly, you are saying what it's going to be, well what it has been, so you are spending more back. Why? Right? So is it that you are feeling when I’m buying on China, being more aggressive, Procter or Patanjali, whoever have you lost a little bit of the mojo? Like why are you spending more back if it's not competition, I guess what I am trying to get at?

I guess the answer would be, and I think what we are beginning to see through this earnings cycle is that growth in many places has indeed slowed further. And so, what we are 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. And so, we are saying, I mean 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 comparison group and the focus on the restructuring that I mentioned earlier and further driving down on structural cost will equip us to be leaner going forward if this rate of growth—if the world doesn't reaccelerate. And so, I am saying we are saying that we think it is right at this point in time to overweight focus on growth. 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. So from the big picture point of view, it's always a competitive environment; what I am 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 innovations but we will be competitive where we need to be competitive, and I think that's the year we are looking at.

Okay. Thank you very much.

Yes, thanks and good morning. The question is on category growth. So can you give any context of clarity on in fact what's driving some of the drop in the category growth? Is this trade down? Is this frequency? Is it inventory outside of obviously what you talked about in South Africa? Any context around that would be really helpful?

Yes, I think there are few elements to this. And it's not a generalized statement for the world. Obviously, there in some parts 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 behavior of brushing their teeth. They will exhaust pantry inventories, so which is to say people have more than one toothpaste at home they may try and scratch that tube before they reload their own pantry. There is, as we have seen, sort of a subtle inventory correlation to a slowdown in categories. So these are all components and factors. I mean, from the pent-off study, Colgate is in two-thirds of the households on the planet, and we are very disciplined and focused on in making sure our in-home penetration stays at those elevated levels. So if there is any sort term slowdown from a volume point of view due to pantry destocking, that will bounce back afterwards. So, I wouldn't point to anything, Nik, that says there is down the line behavioral change here that is of concern.

Hi, good morning.

Hi, Bill.

Can you just bridge the gap between the old sort of 10% local currency EPX growth to five? Because maybe a point of it is some sort of category growth, but where is the other 4% shortfall coming from, the follow-up?

It’s foreign exchange, Bill. I mean the two principal elements are now this is against the preliminary guidance we gave in October to where we are now. So 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 it was 10% local currency growth, and it seems like the implied guidance now is 5% local currency growth. Am I incorrect?

No, no. Sorry, I was misunderstanding. No, no. The implied currency guidance is 5%, and that is structurally driven by the income statement. I mean the growth we have, the margin expansion and the investment we choose to make behind the business.

Okay. 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 five.

Yes, it was 10% in—it was. And we are saying that the two differences are foreign exchange and volume.

Thanks. So, on the advertising margin change, because is your view to get back to sort of a historical levels about 100 basis points higher as a percentage of sales? And where you said now, because assuming there isn't something really different below the line, it would seem to suggest fairly significant move upwards in operating expenses, to our outlook, your EPS outlook. And then on the other hand, 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 uncertain times 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. So we think it's a good level, Olivia. I mean we have planned due diligently, and we are very satisfied with the advertising level we have. As I said, it includes a sharp uptake in sampling as well. And these are all into the programs that we have on the ground behind brands and the new products that we have. So we think the plan holistically is an appropriate plan for 2017.

Good morning. Thank you very much. Just a couple of questions. First on Hill, some work around the channel. It looks as we have been hearing anyways that at least one of your brands has been dealers in yield. Maybe fall through as a major specialty channel. But also hearing that there is some innovation on the pipeline potentially, so any comment you could make around the Hill business as it relates to that, new products or just progress there, I would appreciate it. Secondly, in India, I know it's a great business for you historically; you mentioned the behavior doesn't really change and it's quite a bit of inventory in anybody pantry of Colgate product. Does this mean that you are going to restock in India and you get better performance at this point in the next six months? Thank you very much.

Regarding your second point, I would like to think so, Jonathan, but I wouldn't rely on it. Our current goal in India is to rebuild the pipeline during the first half of the year; if we see a rebound, that would be great. In terms of broader context, our strategic decision driven by consumer behavior is to maintain our brands' specialty focus, which is primarily in brick-and-mortar locations, while also adapting to where our consumers are heading, which is e-commerce. Consumers are increasingly shopping through traditional platforms like Amazon, and their rate of purchasing our products online is quite high, prompting us to shift our focus there. We have not been delisted from our key pet specialty retailers; we have solid plans with one of them and are in discussions with the other. However, we are facing a short-term challenge with the second retailer, as our shelf placement and the variety of SKUs available have been reduced and relocated. We are confident that we can work together to create a mutually beneficial solution to rebuild the brick-and-mortar business while also expanding our online presence. Regarding innovation at Hill’s, we have significant developments, though I prefer not to share specifics for confidentiality reasons, but that summarizes the situation with Hill’s in the U.S. John.

Thanks. Good morning.

Good morning, Lauren.

Two things. One was just on the two and half things, the conversation around category growth. Ian, it was great when you walk through kind of your outlook by broad region, but I am not sure with the changes—like you assessed in Europe at flattish number market of 5, and I kind of feel like where we have been, so I am just curious what’s changed. Second thing was on the build from kind of double-digit in dollars to lose single digits in dollar for EPS, Fx and volume. Is it more pricing? Because I am hard-pressed to think that you were previously forecasting volume growth as six and now it's four, given you said it's going to be more volume than price leading, so is your outlook on pricing perhaps has changed more than volume? And then finally, just SG&A was actually up quite a bit, and I was just curious on the percentage of sales, given your commentary on focused on restructuring and taking costs out. Was there anything particular in the quarter on SG&A to be mindful of? Thanks.

Yes, so on the category growth, yes, it has changed, actually, Lauren. In the U.S., we were seeing two to three, and you may remember me commenting I was getting widely exuberant that it was moving to three, so that has now come down by a percentage point. Europe was always flat to modestly up. The range of Europe is now negative to modestly up, therefore flat overall. And in the emerging markets, well, I used to talk mid-single digits; the reason I talked 5% now is it included a number with a six in front of it and that is now off the table. So those shifts are real, and that is what is built into our planning. So, if I go back on your second point, indeed it is all volume, because pricing is more or less at the same level we had in the original plans, slightly higher in fact. So it's all volume. And then, finally, your point on SG&A being up—that’s still a leverage. So deleverage rather the actually dollar overhead is down, but with the impact on the top-line and the amount of dollar-denominated overhead, 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 restructure, I think those two or three questions.

Okay, thanks. I will just make this really quick. I guess first just in terms of the re-acceleration on the volume. Can you maybe talk a little bit about how excited you are about some of the innovation coming out? I know there is innovation every year, but certainly with this kind of 1.5% volume which in the third quarter, put aside challenges of the fourth quarter, but sounds like you are getting back to 3% range. How much of this can you contribute to really the innovation, the step-up innovation? What’s coming out? Obviously, giving away any trade secrets. And then 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 are still going to have price investment such as Europe, so obviously the two will offset each other just on the gray. Thanks.

Yeah, the trouble is that, Jason, if I was to display enthusiasm, you wouldn't notice the difference. So in terms of volume, acceleration, re-acceleration, part of it is building back from the one-time events that we mentioned. So that's an important part of it, and the strengthened 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; but, John mentioned some, and 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, but I wouldn't lay innovation as the outsized re-accelerated growth in the first quarter. It will be part of it, but it certainly won’t be all of it. And on pricing, I mean, I think the way you should think about it is that in the main, much of that 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 kinds of challenges, but I repeat, our focus for 2017 is on growth, and our focus within growth is on profitable volume growth.

Great. Thank you.

Yes, thanks. I just had a question on the pet care area. Can you just explain why the e-commerce penetration is higher in Europe? Is it just as the brick-and-mortar is less developed there, or is there an actual difference in how consumers are approaching the market? And then, secondly, can you explain if does the trend towards premiumization is it disconnected from the general economic strength and high consumer confidence like in the U.S. in pet care, or is it actually linked to it? So as the economy strengthens, is it actually easier to get premiumization or get consumers interested in spending more on their pets in the U.S.? Thanks.

Yes. Frankly, Europe—and I don't mean anything political by this—Europe is a smaller geography than the U.S. and more urbanized, and 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 the big driver of why the adoption for bulky products is so high. And premiumization, look, people pay for value and what they perceive as value is not just price. And therefore—and we have said this before—the reason your 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.

Hi, this is actually Stephanie on for Bill Chapel, just a quick question. Do you really expect any impact to your pet veterinary business from the recent Mars acquisition of BCA? Thanks.

I think the short answer is no. You may know that Mars also owns another group called Banfield. We have very strong shares in both BCA and Banfield with that Hill's business. Mars has said they will let BCA run as an independent group, and you should note for BCA, pet nutrition products are about 5% of their sales. So that's not really their business. So the headline answer would be no.

Yes, thanks. And good afternoon, guys. I wanted to ask about growth by category, sort of 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 so how are you thinking about that now versus maybe three to six months ago? And then just quickly on something different expectations for spend in EPS. How are you thinking about the assumptions for category and competition, meaning your expectations for the increased ads spend out in the percent of sales? Is that assume the competition is greater than equal or less than where you were in 2016? Will be helpful.

Yes. In terms of your spending question, I mean, 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 is an estimated components of it. And so you structure the spend to be adequately competitive. I am not talking about the traditional advertising spend. And as I have 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 being more in promotion than in the traditional advertising. So, 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. So 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 slowed, and because of the margin profile of each of the businesses. So our category decisions strategically are informed by the categories, not by quarterly events.

Hey guys, thanks for squeezing me in.

Hi, Jason.

Quick question on the Africa-Eurasia distributor. I thought you had to work through—I apologize, I missed it in prepared remarks, but I don't think I heard a lot of detail. Can you walk us through what happened there? And then second question is on capital allocation. Your share repurchase activity was a bit less—a bit more this past year. You are sitting on more cash than usually and you are—

Let me talk again about Africa-Eurasia. It was distributor issues with a select number, a small number of distributors. It had to do with liquidity, because cash liquidity because of foreign exchange moves, and it was moving business away from distributors and indeed bringing back some inventory. I guess the tailing point about 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 repurchase since we made in 2016.

Okay. Well, good afternoon to everyone and to any of the Colgate people listening, we are in the first quarter. Thank you.