Colgate-Palmolive Company (CL) — Q4 2017 Earnings Call Transcript

Thanks, Lisa. 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; 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 2016 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 8 and 9 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. Good morning, everybody. Belated Happy New Year. As has been our custom for a little while now, I'd like to provide some introductory thoughts, and I intend them to be framed on the fourth quarter results and our thinking for 2018. You will recall on the last call and, indeed, the one before that, we talked about four areas of business focus for the company: increased advertising spending behind more impactful creative innovation across the business but especially naturals in toothpaste, which I will come back to; working with all retail partners, especially e-commerce; and then, finally, aggressively maximizing productivity up and down the income statement. And those remain our four areas of business focus. But to talk more specifically about the fourth quarter and 2018, let me start by saying that while our organic sales performance in the quarter improved sequentially versus the third, the rate of improvement was modestly less than we expected and comes despite what we see as sequential improvement in growth rates for our categories and importantly, improved market share performance as we work our way through the quarter. That's, of course, particularly true for our Oral Care business where we made significant incremental advertising investments across the second half of last year. So let me focus specifically on four things, which, hopefully, will give you some clarity on the progress we believe we're making. First, category growth. As we discussed on the third quarter call, we continue to see improvement in category growth across many parts of the world. If we look at the U.S., growth in the categories in which we compete improved from being down slightly in the first half to 1% in the third quarter and 1.6% in the fourth quarter. In Asia Pacific, we saw a second half acceleration in toothpaste category growth in key markets like China, the Philippines, Southeast Asia, and Australasia. And in Europe, we are seeing initial signs that our categories are strengthening with the improvement in growth driven by Oral Care. And very interestingly, this morning, the scanner data for the last four weeks in Europe just issued, which show our sales, on a consumption basis, up around 7.5% and our toothpaste market share, up a full point. So all signs we see of an improvement in category growth. Secondly, on top of that category growth, we continue to focus on growing our market share. This is one of the key reasons for our increased advertising over 2017 and, as we said in the release, continuing into 2018. And we do believe we are seeing initial signs of this paying off as our market share performance is improving in many of the key markets where we have ramped up the advertising. We're seeing it in Europe. And during the fourth quarter, we gained market share year-over-year in six categories. Through the third quarter, we were not gaining share in any categories. And it is broad-based. It is beyond simply a reinstatement in one retailer in the western parts of Europe. In Brazil, we posted a 73% market share in the fourth quarter. In fact, in December, our market share was 73.7%, which is basically tied for the highest share we've ever had in that country. And we gained market share year-over-year. I would also say that our market share in Mexico is back up to 83%. And we continue to spend behind new launches as well, including the Colgate Naturals offerings. In Russia, which, under the name Ancient Secrets, has a very unique and differentiated advertising campaign. We're seeing very strong performance. We have seen nationally the market share build to over 2 percentage points with distribution building. It is adding to the overall share in Russia, which we have seen grow for the last three periods. And indeed, in some of the retail outlets, where you build faster distribution, we have seen market shares north of 3% and approaching 4% with penetration, thereby, trial building very nicely. We've seen our Naturals offerings in China just under 1 share point. We've seen them in India approaching 1 share point and in the Morgan trade, approaching 2 share points. So we believe these businesses are off to a good start from a concept point of view, supported the point I was starting with, with compelling advertising and seeing that in our market shares. So we're seeing improvements in the category growth rates and market shares, which, of course, is leading to increased consumption, which you see in the scanner data, particularly here in North America. And we think that increase in consumption is going to support, and I'll come back to organic sales for 2018, but is going to support our ambitions for organic growth in 2018. And suffice it to say, that is, of course, our number one priority. Another area for us in 2018 is acting with greater speed and agility. You may recall, when we began our journey on the Global Growth and Efficiency Program, we said that one of the underlying objectives was speed and agility. And we have made quite a few changes over the last several years, which is opening up opportunity in that area. And clearly, the way the world is moving, whether it's e-commerce, digital in general, or the local brands, we are committed to moving more rapidly. And this is not just true around innovation; it's about how we go about doing everything in the company. I mentioned briefly on the third quarter call this Colgate Dare to Love toothpaste co-created with one of our e-commerce partners in China. And I just came back from China, actually, and we created the product in a very short period of time, around 5 months. It was our largest and fastest-selling multipack on the 11/11 Singles' Day in China and the single biggest growth driver in our portfolio for this online retailer. Now interestingly, it has additional benefits. It brings us to a younger female millennial user with a higher wealth program. So the combination of our advertising and the offering itself sees us broaden our reach in terms of consumers. We've also brought greater speed and agility to how we go about our digital marketing efforts. I've mentioned before our consumer engagement centers, which are truly always on as we listen to what's happening in real time online, quickly engaging with consumers. And our increased digital media investment and focus on faster, easier ways to test and improve the creative has led to significant improvements in return on investments over the year. And this has helped us increase our e-commerce market share leadership in toothpaste in the U.S. for both the fourth quarter and the full year. I would say, editorially, is that our e-commerce business, in general, was up just under 60% for the full year. And finally, although it may seem a minor area to you, packaging development for us is an enormous part of what goes behind bringing our products to the marketplace. And we have completely reengineered our packaging process to get our products from design brief to the shelf in about half the time and about a third lower cost across our packaging systems all around the world. So the third area of operating focus is speed and agility. And obviously, the last area I'd like to come back to is productivity. We have a strong history of margin expansion, and we expect that to continue going forward. Our margins have been under pressure across our industry over the past year or so, and we know we need to push productivity aggressively. Now our productivity efforts start with funding-the-growth, and we have seen and did see in the fourth quarter increased logistics costs given fuel and availability, and indeed, raw material costs stayed at about the third-quarter level but due to hurricanes and the price of oil resins and given pulp packaging going up beyond our initial estimations for the fourth quarter. So through our funding-the-growth program, we are working to reduce these costs through many digital platforms interestingly to see us real-time looking at what our logistics providers are paying for fuel, allowing us to economize, and at the same time, using new technologies, like Uber Freight, where we are a founding participant, to improve service and manage volatility. And I'll come back to funding-the-growth when we go through the margin roll forward. And as we talked about on our last call, we remain resolutely focused on maximizing our Global Growth and Efficiency Program to streamline our cost structure. The key, of course, is to focus on where we think we're going to be in the future and organize for that, so that we can meet those changes head-on. For example, we, in the last four months, have just redesigned our supply chain organization to become organized by region while keeping the central capability, which allows us, again, to respond more speedily to local market needs while still leveraging at global scale and capability. The productivity is not just about cutting costs. We also think it's about simplification, which is a very big area of focus for the company. And for example, while we are launching new products like the Naturals I just mentioned, we're also focused on reducing the complexity of our business by eliminating less productive SKUs. This allows us to be more efficient and effective in bringing these products to the marketplace. Now if we look at our SKUs on a global basis, we see them down about 7% on a global basis and our range of reduction is from 12% at the high end and, in the case of one division, a modest increase. But overall, a 7% reduction in SKUs globally at the time we're bringing innovation to the marketplace, which allows you to put the more productive SKUs on the shelf and, therefore, get more productive consumption and sales velocity from them. And as we go through that, we see average improvement in offtake productivity approaching 7%. So those are the key takeaways I'd like to leave you with as we reflect on 2017 and more importantly, look at what we need to do to further accelerate profitable growth in 2018. Now before I turn it back to John who has stayed for all of this, I wanted to discuss our longer-term outlook for top line growth, which many of you have asked me about at conferences and on past conference calls. Now before this year, we have consistently delivered against our 4% to 7% long-term organic revenue growth target, although as we have seen more towards the lower end since the financial crisis. You may recall that that range was determined when global growth for our categories was around 4% to 5% per year on a fairly consistent basis. Of course, if you look at our categories over the last 12 to 18 months, they've been growing at roughly a 2% rate, slightly up, as I commented earlier, in the fourth quarter. But the 2% we've been operating in was developed markets moving closer to 0 with developing markets coming down from a high single digit to the mid-single digits. Now while we believe these growth rates are beginning to improve, we think it's appropriate to plan with an assumption that category growth rate will be below those heavy historical levels even if it's greater than what we've seen in the most recent past. So as we look forward, starting with 2018, we think it more probable that our categories will grow in a 2% to 4% range. And on top of this growth, we believe that we will return to consistent market share growth behind the strength of our brands, our increased investment, our ability to innovate, and in our market execution. And we believe, from a consumption point of view, we're already seeing signs of that. So this combination of category growth and market share growth should put us in the range of 3% to 5% top line organic growth rate, and that's the stance we are taking for 2018 and beyond. Now obviously, we will be doing our level-best to help bring our categories back to the higher growth rates. But for now, we think that prudence is warranted. And clearly, if the growth rates accelerate, that's a good problem to have.

Thanks, Ian. After providing some general commentary on the quarter, I will briefly go into some detail on divisional performance. I will then provide some further detail on our outlook for 2018 before opening up for your questions. As Ian said, we showed progress in the fourth quarter on our efforts to reaccelerate top line growth. We showed sequential improvement in net sales growth in key markets, like the U.S., Western Europe, and India. Furthermore, our takeaway trends, as shown in syndicated data, improved at a greater rate with sequential improvement in market share in key markets. We exit 2017 with Q4 representing our highest growth quarter of the year in net sales, organic sales, and volume. Net sales are up 4.5% in the quarter versus Q4 2016 with 3% volume growth, minus 1% pricing, and a 2.5% foreign exchange benefit. Organic sales growth was 2% in the fourth quarter, continuing the sequential improvement we saw in the third quarter. On a GAAP basis, our gross profit margin was down 60 basis points year-over-year. Excluding the impact of our Global Growth and Efficiency Program, it was down 40 basis points year-over-year. We delivered strong funding-the-growth savings in the quarter, which mostly offset higher raw material costs, while pricing was a negative impact to gross margin. On a GAAP basis, our operating profit margin was down 200 basis points year-over-year in Q4. Excluding the impact of our Global Growth and Efficiency Program in both periods and the 2016 litigation matter, our operating profit margin was down 190 basis points driven primarily by an increase in advertising investment. On a dollar basis, advertising investment was up 24% year-over-year in Q4. As Ian mentioned in the press release, we intend to continue to spend behind our brands in 2018 with a focus on our base business, new products, and consumption-building activities. On a GAAP basis, diluted earnings per share of $0.37 was down 46% year-over-year in Q4. Excluding the impact of our Global Growth and Efficiency Program in both periods, U.S. tax reform, and the 2016 litigation matter, diluted earnings per share was flat year-over-year at $0.75. For 2017, we returned more than $2.9 billion to shareholders through share repurchases and dividends. Now moving to the divisions. We'll start off with North America. In Q4, we saw a sequential improvement versus the third quarter in volume, net sales, and organic sales growth in North America. Net sales were up 1% in the quarter with organic sales up 1% driven by volume growth of 4.5% and pricing of minus 3.5%, while foreign exchange was even with the year-ago period. We continue to see significant pricing pressure in the liquid hand soap and hand dish categories. Category growth rates in the U.S. continue to improve sequentially with every category, except power toothbrush, posting faster growth in the second half of '17 versus the first half of '17. In Oral Care, we widened our market share leadership in toothpaste and toothbrushes in the U.S. In toothpaste, after seeing declines year-over-year in the first half of the year, our market share increased year-over-year in the fourth quarter driven by our premium brands, including Colgate Optic White and Tom's of Maine. Now we'll look at Latin America. Latin America delivered 4% net sales growth in the quarter driven by a combination of 4% volume growth and 1.5% foreign exchange, while pricing was minus 1.5%. Organic sales for the division grew 2.5%. Net sales growth in Latin America was driven by Mexico and Brazil. In Mexico, our volume declines were more than offset by positive pricing. We gained toothpaste market share versus Q4 2016 behind our Kids line and Triple Action Xtra Freshness. Our double-digit net sales growth in Brazil was driven by strong volume performance. And as Ian mentioned, our toothpaste shares in Brazil are improving behind increased advertising support, effective merchandising, and new products. Brazil also benefited from the launch of Colgate Total mouth rinse, which has added two points to our mouth rinse market share since its Q3 launch. In 2018, Brazil should benefit from several new Oral Care product launches in the high-growth pharmacy channel, along with a robust Personal Care pipeline. Moving to Europe, Europe continues to show strong sequential improvement in Q4 with net sales growth of 13%. Organic sales grew 4%, our best organic sales performance in Europe since first quarter 2010, driven by 6% volume growth with negative 2% pricing. Foreign exchange is favorable by 9% in the quarter. While our price business benefited from lapping against easy comparisons, the volume growth in Europe continued to be broad-based. We saw particular strength in Southern and Western Europe, Poland, and the Nordic countries. Europe saw a significant step-up in advertising spending in the quarter versus the prior year, and we believe this is paying off in sequential improvement in market shares as well as in organic sales growth. In Germany, our largest market in Europe, we have gained a full point of market share year-to-date in toothpaste with our year-over-year share gains accelerating in the fourth quarter driven by strength in the elmex and meridol brands. Last quarter, we mentioned the success of our launch of Colgate Natural Extracts line in Europe, and sales for Colgate Natural Extracts continued to come in ahead of our expectations. The Naturals category is relatively underdeveloped in toothpaste in Europe, and we are looking to launch Colgate Naturals in more markets in 2018 to drive incremental growth. Sanex continued to deliver solid growth behind the 0% line, while our French fabric softener business, Soupline, which is the market leader in that country, continued its strong growth through premium innovation. Next is Asia Pacific. Net sales in Asia Pacific were up 6% in the quarter with organic sales up 2.5%. Net sales growth was driven by a combination of pricing and volume growth, while foreign exchange added 3.5%. Our net sales growth was driven primarily by India and Greater China. Our volume in India was up double digits as we lap demonetization in the year-ago period. India also benefited from positive pricing, and we continue to see benefits from our launches in the Naturals space with Colgate Cibaca Vedshakti and Colgate Swarna Vedshakti driving incremental sales. In Greater China, negative volume was offset by positive pricing, and we continue to benefit from growth in e-commerce where we have market share leadership. The Africa/Eurasia division reported net sales growth of 2% in Q4 as positive foreign exchange offset a slight decline in volume, while pricing was even with the year-ago period. We saw volume growth in our Sub-Saharan Africa business as we lap last year's distributor changes. We also delivered solid volume growth in Russia driven by the continued benefit from our Q3 launch of Colgate Ancient Secrets toothpaste, as Ian mentioned. As we called out on our Q3 conference call, the volume weakness this quarter was primarily driven by economic softness in the Middle East. And we'll finish up with Hill's. Hill's delivered 2.5% net sales growth in the fourth quarter driven by a combination of positive pricing and foreign exchange, while volume was even with the year-ago period. Organic sales grew 0.5%. We continue to see strong growth in e-commerce in developed markets. In particular, we are seeing strong share gains on e-commerce in the United States with Prescription Diet. We are also seeing rapid growth in several of our emerging markets, particularly Russia and Latin America. In the United States, both volume and pricing were up slightly. We have seen modest improvement in consumption trends in the pet specialty channel, but the dynamics in this channel remained difficult. I am also pleased to announce that earlier this month, we closed two premium skincare transactions, PCa Skin and EltaMD. Both companies are delivering significant top line growth in the professional skincare channel and in e-commerce. Now we'll turn to our outlook for 2018. As stated in our press release, we expect net sales growth to increase mid-single digits in 2018. We expect organic sales to be up low to mid-single digits with improvement in our growth rate versus the second half of 2017. We are encouraged by our volume growth over the second half of 2017, and we plan for a combination of pricing and volume growth for 2018. 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 our gross margin to be up 50 to 75 basis points as a combination of pricing and productivity from our funding-the-growth initiatives should more than offset higher raw material costs. We expect another year of increased advertising spending in 2018, both on an absolute basis and as a percentage of net sales. We still see significant opportunity to spend behind our core brands, support new product launches, and drive consumption in emerging markets. Now moving over to the impact of recent U.S. tax reform. On both a GAAP basis and excluding the impacts from our Global Growth and Efficiency Program, we expect our tax rate to be in the range of 26% to 27% in 2018. We expect GAAP earnings per share to be up double digits for the year. Excluding charges related to the Global Growth and Efficiency Program and the one-time charge resulting from U.S. tax reform, we expect earnings per share growth to be around 10%. And with that, we'll open it up for questions.

So first, I just wanted to get a little clarification of your prepared remarks. I mean, you mentioned market share improved sequentially throughout the quarter. But I'm assuming overall market share result was less than you originally expected, particularly in emerging markets, given you mentioned the organic sales growth was weaker than you expected. So is that the right way to interpret your comments? Or were you trying to say that there's a lot of destocking going on at retail or at the consumer level? I just wanted a bit of clarification there. And hopefully, that doesn't count as a real question because the real question is more around organic sales and the slowdown we saw in emerging markets sequentially on a year-over-year basis or even more so on a two-year basis. It just seems pretty striking in the face of much higher advertising, the greater innovation you mentioned, the execution tweaks, etc., so it feels like something has changed here. So can you help me sort of understand the markets, you're trends in emerging markets, why we're not seeing more improvement, particularly given it looks like we're already seeing rebounding trends in developed markets? And then related to that, how does this sort of change the way you manage the emerging market business from here? Do you have to invest more on price, be more judicious with price increases, particularly given the Latin American pricing decline this quarter?

Thank you for your questions, Dara. I'll begin with the larger issues regarding emerging markets and our market shares and growth. Currently, our main focus is on pricing. Over the past few years, rising transaction and commodity costs have pressured prices, which has led to a decrease in the contribution of volume to our organic growth. There's been a lot of concern about how to regain momentum in volume and strike a balance between pricing and volume. In emerging markets, this effort is complicated, especially as we encounter competitive pressures from other companies aiming to grow in these regions. The primary challenge we face in these emerging markets is navigating the relationship between price and volume. John discussed Brazil, and we see potential to refine our pricing strategy in these markets. Moreover, we have the opportunity to respond to local brands in Asia, which often price their innovations at a premium compared to the average market price, driving market value and our performance regarding share. Our extensive product portfolio allows us to serve all consumers in these markets, including those entering the category. Our goal remains to increase penetration and consumption over the long term. Balancing price and volume is critical to how we approach emerging markets, and we remain focused on these two aspects. As mentioned during our third quarter call regarding Saudi Arabia, we do encounter fluctuations that are often unpredictable. The current global market is not as stable as we may wish, so movements won't always be linear and may not occur as quickly as we would like. Regarding our share performance in the fourth quarter, we feel optimistic. While there are challenges in the developed world with both measured and non-measured channels, we've performed well in the latter. A crucial aspect in the developed markets is understanding the underlying growth rates in the category. We're encouraged by our innovations and investments in stimulating the category, which seem to be paying off. If the positive trends seen in the fourth quarter continue, they will likely play a significant role in driving potential in the developed markets.

I guess, Ian, I was just wondering if you could talk maybe about overall company price deflation. I think this is the first time in maybe six years that we actually saw prices in negative. And I know from time to time, the U.S. and Europe have been a little bit more of an investment market. But usually, you've had the offsets in other markets. So as you think about that low to mid-single-digit growth, what's your outlook on total price as a contributor? And how do you balance that right now when you are seeing the rising, I guess, raw material prices? Do you take comfort that more of your portfolio is Personal Care versus household? Or I think you might be impacting a little bit more. So I was just wondering if you could provide a little bit of color around price and the impact on sales as well as margins.

Thanks. Let me use this opportunity to comment margin by doing the gross profit roll forward, and then I will come back to price as we think about it for 2018. So if we take the gross margin roll forward, the gross margin in the fourth quarter 2016 was 60.8%. Pricing in the fourth quarter of this year was a negative of 40 basis points. Interestingly, funding-the-growth and a very, very modest contribution from restructuring, together, offset a negative 2.6 points of material prices, the ones that I talked about earlier, basically, resins and cardboard packaging, and that led to the 40 basis points reduction year-on-year, although still north of 60% at 60.4%. The comment I want to make of this and then come back to pricing is we were very pleased with our funding-the-growth delivery in the fourth quarter. You know well, some tracking us over the years, that our funding-the-growth savings filled across of the year. But 260 basis points, 2.6 points in the fourth quarter is meaningfully higher than we tend to generate in historical years. Any point being that we have doubled down on driving funding-the-growth projects. And we think in that area of focus, we're quite well positioned for 2018. Now come back to pricing itself. Obviously, the biggest pressure on pricing, as you saw, was North America and, as it customarily is, Europe. The North America, we talked about some categories being under pressure from a promotional activity point of view, very specifically liquid hand soap and dish. And we said we were going to have to meet that activity in the third, and it continued into the fourth quarter. And we have seen a share response quarter-on-quarter positive for both businesses. And couponing was a factor for us in the fourth quarter as well as we edge pricing up in toothpaste. We think that the raw material underlying pressures will inform the marketplace in general about a need to ameliorate promotional intensity to be able to absorb those costs. And we certainly believe that in the emerging markets, we have the pricing power that we have always demonstrated to be able to offset those costs with pure price. And that is something we know how to do and we have done in the past. So it comes back to John's point about our growth in 2018 being a balance between volume and pricing. And we think we are positioned to be able to accomplish that in the developing markets we have done before, and on the other side, the funding-the-growth initiatives we have are deep and rich, and we leave 2017 with very good momentum in that space. And I would say, just to repeat, we are looking for our gross margin to increase by 50 to 75 basis points in 2018 in the face of the environment we're in.

I want to focus on pricing and sharing return. Were you able to reinvest in pricing in Mexico and Central America, or is that mainly happening in Brazil's cash and carry? I'm inquiring about your declining products in Mexico and Central America, especially since volumes bounced back in Brazil in June. Is that linked to the new price structure, or is it related to destocking among some of your large clients in Mexico who are also major clients in the U.S.? In other words, do you expect slight changes in volumes in Mexico and Central America to be reflected in your top line guidance? For your market share recovery, I assume it's related to household cleaning brands or softener brands. How long do you anticipate it will take for market share to improve in emerging markets?

Yes. I think, actually, we talk prices in some Latin American countries in the fourth. And in Brazil, there was a degree of price promotion, which, of course, led to a very good result for us. We have, as others have commented, seen destocking with retailers. You talked Mexico, specific to Mexico, and we think, when we look at our market shares with the combination of the advertising and the innovation, and the innovation tends to be more at the premium end of things, that we will see growth, volume growth continuing and some price on top of that.

Ian, you have talked a lot about funding-the-growth and the great success you have there. We saw another company announce a very, very deep restructuring, significant layoffs and plant closures and so on. Do you see opportunity to cut more aggressively go beyond funding-the-growth? Because it seems to me that the environment is such that getting gross margin improvement to the extent that you're looking for is going to be awfully challenging. So just any thoughts of other big activities going forward.

Yes. Well, Caroline, we fully endorse that notion. Indeed, we have been and continue with a very large restructuring program, which, when it's done by 2020, we'll see costs of about just under $1.3 billion to $1.4 billion and savings between $0.5 billion and $575 million. And that's a very profound reassessment of how we go about managing our business. It's all to do with the linked capability that SAP gives us and our ability to reorganize how we get work done and reducing the duplication of work done in various locations. So it's a very proper question. It's a very important question. But indeed, it is a journey that we are on and have been on for a while. So we think it's appropriate, and it's something we are pursuing diligently and aggressively.

Just a quick question. Ian, did you comment on trade inventories and destocking? I'm curious if you're observing any trends and how long they might last. Given the challenging environment for all CPG players, have you considered being more aggressive in your M&A strategy across different categories and growth areas? Any insights on that would be helpful.

Yes. Always an appropriate question, Nik, and also an area of focus for us. We tend not to think about overreaching. We are quite broad in terms of thinking about where we might reach. I think, we think the recent additions of PCa and Elta skincare businesses are terrific acquisitions. These are very good technology, highly recommended skin health products with margins that are accretive, growth rates that are attractive and brands that use the recommendation model, of course, in their case, beauticians and dermatologists, to do what we have done so many years in Oral Care and Pet Nutrition. So your question is spot on. The challenge for us is what are the right assets. And I would say, when you think about the use of our capital, clearly, when we think about the benefits of the tax legislation, our mind focuses on what we can do for growth, which is around capital investment that can drive growth organically and, of course, capital allocation that can acquire good businesses to further our category ambitions. And we think PCa and Elta are two such businesses.

I have a question regarding your increased advertising efforts. I'm curious if you think you're effectively reaching your consumers and adapting to the changing behaviors. How do you plan to evolve your approach in this context? Have you utilized social media differently? Also, have you thought about adopting a subscription-based model for some of your businesses, especially considering the new entrants that are doing so? I'm trying to understand how you're improving communication with and attracting consumers as behaviors and the retail environment are changing quickly.

Yes, Bonnie, all good questions, all areas of great focus and great focus with speed on our side. We're going to spend around 30% of our advertising digitally, and of course, that varies depending on the geography and the penetration of digital. The Hill's business is 100% digital, for example. And interestingly, with that business, you talked about subscription, we lead in Oral Care online in the U.S. and the U.K. and in China. And the Hill's business is extremely well developed digitally here in the United States. And to your point, given the quality of brand and the trust, consumers having those diets and what they can bring to their pets, today, over 50% of Hill's e-commerce purchases is subscription in the United States to exactly, as your point, the power of brand translated through the way people want to shop that category increasingly today. In terms of reaching consumers and engaging with them, I mentioned a little bit earlier in some of my opening comments about these consumer engagement centers that we have in the U.S. and China, for example, which allows us to track 24/7 what the consumers are engaging in online and insert ourselves into that conversation with the brand, take Colgate, which is very iconically all about a smile, all about building a future, a brighter future for the people that use our brand. So we can communicate and have built capabilities to communicate in 3 seconds, 6 seconds, or 30 seconds and make sure that the brand's message and brand recall gets through that very cluttered environment. So absolutely, we are leveraging social, and I think we are moving ourselves into the space with speed and agility to do that quickly when you see trends emerge and make sure you stay relevant to consumers. And the last idea I would repeat is this Dare to Love brand co-developed with that e-commerce partner, very familiar with the consumers in that space who can be younger. And indeed, that Dare to Love toothpaste that I mentioned earlier that we launched online in China did precisely that, took the Colgate brand to a younger female purchaser, and we use digital to do that as well. So it's not just message; it's who we are reaching with that message. And if I may, although you didn't ask it, but Nik did and I didn't answer that part of his question, we have seen some retail destocking. I mentioned Mexico. It's fair to say that here in the U.S., year-on-year, some of the bigger retailers have seen a reduction of a weakened inventory compared to last year. So yes, we have continued to see that and deal with that as others are as well.

You may have just kind of answered it, Ian, but I was hoping we could just definitively sort of wrap up the line. I'm thinking a couple of questions. Your prepared remarks talked about end market acceleration, market share acceleration. They all sounded really a beat, but reported results are lagging. Is that simply a factor of kind of timing of when you're seeing the accelerations? Or are you referencing sort of leading indicators into the new year? Or is the way you saw on the fourth quarter in some of these transitory destocking issues, etc., prevented the full flow-through? And then second question, as we think into next year, your earnings algorithm, roughly 10%. It looks like you're getting kind of halfway there on just tax, and depending on your FX assumption, almost the rest of the way there on FX, despite organic sales growth and gross margin expansion. So is it fair to characterize next year as another year of outsized reinvestment back in the business?

Yes, Jason, the best way to interpret our comments regarding consumption in the fourth quarter is as a lead into 2018. We could discuss various factors regarding sales versus consumption, but the key point is that we maintained our advertising efforts with higher quality initiatives focused on relevant innovation. We're starting to see a marketplace response, though perhaps not as quickly as some may have expected. While it falls short of our expectations, we are observing a measurable response in consumption, which we believe is promising for 2018. Additionally, as I mentioned earlier, in certain regions, destocking was a temporary issue. As for the earnings growth we discussed for next year, we forecast low double-digit growth, and John estimated around 10% during the call. When I am asked what low double digits means, my consistent answer is 10%, but the way you framed it isn’t accurate. The tax rate isn’t the sole factor, nor is foreign exchange. Looking ahead to 2018, we previously outlined an organic growth target of 3% to 5% on the top line and mid-single digits in dollar sales. We projected gross margin expansion of 50 to 75 basis points and indicated a tax range, including the impact of new legislation on compensation, suggesting around 10% earnings per share growth. A portion of the tax returns will be reinvested back into the business strategically, and we believe the structure of our income statement and earnings trajectory is solid in the current environment.

I would like to expand on Jason's question regarding the guidance related to advertising and marketing spending. It seems that a significant portion of the 50 to 75 basis points of gross margin improvement will be reinvested, which suggests that spending on advertising and marketing will trend back toward 10.5% to 11%. Historically, the company has reached a high point of 11% over the past decade. The key question is whether this increase is a response to the need to spend in the current environment or if it represents a more permanent adjustment that could maintain at 11% or even higher, especially considering weak consumer conditions, including in emerging markets. Any insights on this would be appreciated.

Yes, Kevin. I mean, we think about advertising in a very disciplined way. It serves the purpose, and the purpose is to build our brands. And the purpose of building the brands, particularly in a lower-growth category environment and historically, is to make sure we develop and evolve and grow the market shares of those brands in country by country because that's where you grow them. So we don't think about it top-down as a ratio. We think about it bottom-up as an expense to support a portfolio of businesses and the innovation we are bringing behind those businesses. And for 2018, as John said, we have a plan, that's see the advertising up, absolutely, and on a ratio basis, and that's because we think the portfolio of brands, the quality of marketing technique and the innovation we have in 2018 will be responsive to that investment to drive the organic growth in that 3% to 5% range. So we think about it entirely in those terms. And will it go up in 2019? Again, we'll see what the plans are.

I want to acknowledge the efforts you've mentioned, Ian, regarding focus areas. Those are essential to pursue. However, I have concerns about some aspects from the release, like the high tax rate guidance, discussions around advertising spending, and the challenges with certain products not gaining traction as expected. More importantly, I'm interested in discussing the potential lack of pricing power or a shift in brand strength for Colgate. Are we facing this situation because Colgate has been benefiting excessively over the past few years? You mentioned earlier that while commodity costs are rising, pricing is decreasing, yet you're making substantial investments in advertising. Despite that, your top line is still struggling with market share. Your own data indicates that market share is down 140 basis points over two years. In addition, this quarter shows no gains in key markets like Brazil, Russia, India, the UK, France, and China, partly due to local competitors. I'm finding it hard to feel confident that the situation is improving quickly. While easier comparisons and foreign exchange might help, I'm not seeing signs of fundamental improvement for Colgate. Returning to my initial question, does this suggest we might be looking at a prolonged period of necessary reinvestment to strengthen the Colgate brand and its pricing power? Does this imply that Colgate has been significantly overearning, leading us into years of reinvestment rather than a quick turnaround that suggests Q4 will be better and carry us into a strong 2018? Does that clarify things?

It makes sense. I don't agree, but it does make sense. The words do resonate. I disagree, though, because if we look at pricing in the fourth quarter, we need to take a broader view before projecting future performance. Looking back over many quarters, the criticism was that there was no growth in volume or pricing, which poses a challenge for brands overall. During 2018, with support from advertising, we have strengthened our underlying volume. Others have mentioned that in some regions, slower category growth is an industry-wide issue rather than specific to Colgate. In those categories, some players have invested aggressively in the short term to capture a portion of the market share, and we have made that choice in certain areas as well. Commodities in the fourth quarter exceeded our expectations coming from the third, which seems to be the case for others as well. However, I want to emphasize that our underlying model remains strong; our market shares in Latin America are robust. In China and India, we see opportunities with our Naturals product launched in the third quarter last year, which has generated positive responses, similar to our success in Russia, helping build our market share. We are adept at innovating in response to both multinational and local competitors. The increasing pressures from commodity costs will prompt thoughtful strategies among our competitors. In response to past criticisms, we have the brand strength to implement pricing strategies in developing markets, and while we adjust prices, there will inevitably be fluctuations in volume. We are accustomed to managing that. Additionally, supporting growth will play a role in our goal of achieving a 50 to 75 basis points improvement in gross margin, which we see as sustainable while concentrating on the Global Growth and Efficiency Program over the next couple of years to reduce structural costs and promote our brands. We do not view our model as broken; we believe we possess the brands, innovative capabilities, and quality engagement to drive our business effectively in 2018 and beyond. We are also encouraged by the positive responses in markets like Europe and North America, with Europe showing stability after a long period of stagnation. Therefore, we are confident in our business model and optimistic about the future, particularly as we start 2018.

My question actually goes back to the two skincare acquisitions you made. And I know a short answer would be, 'Oh, they're so small. They don't move the needle. It doesn't matter.' But I guess I'm struck sort of with the question of why bother? It's such a competitive category. It's such a crowded category. I feel like everybody and their uncle is buying these small dermatologist premium price skincare brands. And so just when I think of what is Colgate's kind of right to win in that category, I struggle with that. And I know there's an analogy, hey, we're going to be going to dermatologists the same way we go to veterinarians and to dentists. But at the same time, I mean, a lot of us has been to Topeka. We've been to New Jersey. We've seen your huge R&D facilities. And I've always thought of what makes Hill's and Colgate toothpaste special is how much technology and science you bring to the categories. And I just can't believe that you're going to be able to bring that from a real value-added basis to the skincare category. So why bother? Is this a precursor to bigger M&A in that space? Or would you be better served even taking that relatively small dollar investment and putting it back into your core categories?

Yes, for the record, my uncle did not purchase any skincare companies. We like these two for several reasons. They have high recommendation levels and proven technology, which is why they receive such strong endorsements. Despite Tom's and GABA being relatively small, we've gained significant insights from those acquisitions in their respective areas. We believe we can enhance those businesses with our technological expertise. The concept of applying advanced science to a broader skincare market is very appealing. Additionally, these businesses can be efficiently managed in Australia with the right knowledge of those markets. We see substantial opportunities not only within the businesses themselves but also in terms of the technological advancements we can achieve.

I guess, if we take your word on Oral Care and the price pressure around some of your categories in pricing, maybe we can switch to the other 60% of your business. I mean, maybe Oral Care is okay, but what about the other categories, the home categories and the Personal Care areas in terms of your pricing power in those categories?

Well, we have pricing power in two ways in all categories. We have innovation, which is increasingly premium, which takes category and brand pricing up. And we have demonstrated that across categories, not just in Oral Care and even in tough markets like Europe with a fabric softener is we've seen a very strong end to the year with our supreme brand. And in the developing world, in general, we have brands that can carry price increases—I mean, straight price increases as opposed to reducing promotion and/or increasing mix. And we do that quite regularly. So on the Hill's business, that recommendation is a very powerful vehicle. And I think the testament to that for a product that is quite premium priced is the high level of subscription buying we see in the e-commerce channel, which is a fast-growing space for nutrition. So I mean, we always talk about the Colgate business and the toothpaste business, but we have brands that can earn their right across our portfolio in the world—in the parts of the world that we have those businesses.

So building on some of what you said earlier, and you're absolutely right, in recent years, we were critical, many of us were, anyway, of the industry's potential overreliance on pricing to the detriment of volume. And now we're all harping on the opposite, the absence of pricing even the volumes are better. That's totally fair. But I guess, it's also about gross margin pressure. And I know you called out positive pricing gross margin targets in 2018. But the market, especially today, is obviously very concerned about the risk of an extended price more effectively brewing across HPC, just given the growth challenges that we've seen, the negative pricing and margin pressure, not only in your results, but in those with P&G and Kimberly-Clark early in the week. And I know you called out 50 to 75 basis points of gross margin expansion in '18. But I also think you were targeting like 150 basis points plus in '17 originally, and we finished essentially at 20. So I guess, the punch line is, what gives you the confidence that recent pricing intensity is really temporary versus more structural? And what's the risk that you see that you won't be able to fully offset—or fully get the pricing you want in '18 such that margin aspirations may come under duress as heightened competition doesn't allow full pricing to flow through? And I guess, if I can just tuck on one more thing. Very specific to that, I wasn't sure how to interpret your comments earlier, should we extrapolate the negative pricing in Brazil that we saw in 4Q going forward as the cost of volume acceleration in 2018? Or was that really specific to the fourth quarter?

Yes, when we talk about pricing versus volume, again, I come back to the fact that finding the right balance is not a straight line. And we're always working to find the right balance. And we think we have that in our plan on a general basis in terms of this balance between volume and pricing. From a promotional point of view, we have seen some pockets, and we have felt the need to respond. I've mentioned the two U.S. categories specifically. But we think that the upward pressure on commodities, which wasn't at the level it is today in the third quarter, has definitely increased, will force people to reimagine how they engage with consumers beyond price in the developed world and in the emerging markets. As I've said before, we have the opportunity to price back to the balance that will see a diminution of volume until that new pricing is established, and then the volume comes back. So those tools, we believe, are there. When we think about gross profit beyond that, clearly, we have mixed opportunity within businesses back to the premium innovation. And as I said earlier, the PCa and Elta businesses may, indeed, be small, but the gross margins are attractive. So we see mix within businesses, and of course, we see mix between categories in terms of respective growth rate. We have that emerging market pricing power. We have promotional efficiency with the revenue growth management capability that we have underway. We have the funding-the-growth that I mentioned in the fourth quarter, fully offsetting the impact of materials in the fourth quarter. And all of that gives us confidence. And we start with guidance on gross margin for 2018, but it's 50 to 75 basis points because of the underlying commodity pressure, not 75 to 125 basis points in a more benign commodity environment. So we think we've been realistic, and we think we have the tools that will allow us to get there.

Just one follow-up, Ian, to something you said earlier. Maybe you could illustrate what you're seeing in the marketplace that merits investment. You mentioned you've already seen some signs of the market—of some of your markets responding to the increased investment that you're making, that you're planning to make in 2018. If you give—but that maybe not to the extent that you really wanted in 4Q, at least not everywhere. Could you give some anecdotes as to maybe one place where the marketplace is really responding to the—in talking specifically about advertising investment in a way that you like and maybe one place where it's not? And what that's—how you reacted to that as a company?

Thanks, Jonathan. Well, markets are different around the world. Again, we were actually quite pleased with the overall consumption in the United States given the currently slow start we had to the year. We're very encouraged by the progress we have seen in Europe as that builds momentum in other developed markets that are struggling. And if you get behind all of those things, it comes back to innovation. It comes back to brand building, and it comes back to good marketing in general, working with the retail partners in the countries. Colgate alone is not going to change the market growth rate in a country or category. But we think we can bring stimulation to that and be a part of what is hopefully a rebuilding of category growth rates going forward. But all situations are so country-specific that actually, it wouldn't be helpful even to go through one country example versus another. The principles are effectively the same.

Hey, just a follow-up on the long-term targets. I understand and I think most of it is expected, kind of the change. But just how the company looked at it in terms of is there a fundamental reason why you can't—the categories can't get back to 4% growth or you can't get back to 6%, 7% growth? I mean, I understand it hasn't done that in a long time. But certainly, it seems like we're seeing a kind of global improvement in economies. You still have a pretty untapped developing market in terms of the Oral Care category. So is there some ceiling that you were seeing? Or are you just more prudent, it hadn't grown that way in the past 5 years, there's no point in forecasting it for the next 5 years?

Bill, life is interesting. We were captivated for the last five years for being unrealistic about category growth rates supporting a 4% to 7% range. We believe deeply in the growth potential of these categories. That's why we invest a fair part of our advertising investment into emerging markets where middle classes will grow because of the underlying economic trends you mentioned to get people to brush their teeth because that will build consumption and that will build marketplace growth. Our mental view and the way we think about it is we want to grow faster than the categories in which we grow business. If we look at where we are today, I guess, I come back to your word, we say prudence dictates with underlying category growth rates maybe now in the 2.5% range if the fourth quarter maintains, that gives us confidence for the 3% to 5%. But we believe deeply in the fact that these categories will grow. And if you look at them on an aggregate basis, e-commerce is another area that we'll continue to grow exponentially. I said we were just shy of 60% growth this year. So it's developing people into the habit, and it's connecting with people in the digital world of the 21st century and all of the other channels in between. So we have belief. We think prudence is called for now. And you can rest assured, if we can be a party to bringing category growth rates back, there will be nobody happier than us to elevate that 3% to 5% range. But the principal we think about is growing faster than the underlying growth rate of the categories in which we do business.

That's okay. We can take it off-line.

Just curious, what are you budgeting for oil prices for 2018 just in the model? And then just more broadly, competitiveness has been more pronounced in certain categories, maybe like Home Care and some Personal Care categories more than like Oral Care. I guess, I'm just curious, and maybe even following up on some questions earlier, how you think about the rationale today for continuing to play in some of those places where there is just more competition than in places like Oral Care and Pet where consumers are less likely to jump around?

Yes, the oil in our budget on average is in below 60s. Obviously front-weighted, the way most forecasts are externally. When you think about business strategy, you have to come back to this concept of balance. There is no question we prioritize our businesses for the reason you assert, which is the emotional connection that consumers have, the trust that consumers have with products that they put in their mouth or their kids' mouths and their pets' mouths, hopefully not their own mouths in the case Hill's, is extremely strong and deep. And that builds brand loyalty. It gives you pricing power, which gives you margin power and usually growth. Then comes Personal Care, not quite as emotionally bonding but close. And we're very interested to go on this journey in the professional stage where you are solving a specific skincare issues with recommendation. And then Home Care, which, yes, is more of a grab-and-go business. It's a scale business. Brands still do well in parts of the world that we have them. And so as I've often said, if you have four kids, you don't love the fourth one any less than the first three. So we have, over the years, as you have seen, divested modestly. Bleach, we have divested in some countries in the world where we think that brand can be better developed by another owner than us. But we're very happy with the business in the markets that we have them. They do very well. The U.S. under pressure on dish for the conversion reasons we have mentioned, that is building back. But taken as a whole, we like the business, and we will continue to keep the business in our portfolio. And remember, we are only focused on those four businesses.

Thanks. Well, thanks, everybody, for joining us, and we look forward to talking with you again after we close the first quarter, so bye.