Colgate-Palmolive Company (CL) — Q1 2018 Earnings Call Transcript

Thanks, Elysia. Good morning, and welcome to our first quarter earnings release conference call. This is John Faucher, Senior Vice President for Investor Relations. Joining me this morning are Ian Cook, Chairman, President and CEO; Dennis Hickey, CFO; Henning Jakobsen, Vice President and Corporate Controller; and Elaine Paik, Vice President and Treasurer. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and our most recent filings with the SEC, including our 2017 Annual Report on Form 10-K and subsequent SEC filings, all available on Colgate's website, for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in Tables 6 and 6a of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website.

Thanks, John, and thanks to all of you for joining us on the call this morning. At CAGNY in February, I mentioned that we expected 2018 to be challenging, likely less challenging than 2017. So far, this has not been the case as quarter one was just as challenging as 2017, visualizing all material and logistics costs, heightened competitive activity and a slowdown in cash growth in some markets around the world. I would say that in response, we remain focused on increasing our effectiveness and agility to better deal with this volatile environment where growth is harder to find. Over the past few quarters, I've highlighted four areas of focus as we look to accelerate top and bottom line growth: advertising behind more impactful creative, innovation across our business particularly in toothpaste and particularly in naturals, working with our retail partners to drive profitable growth with a focus on e-commerce, and maximizing productivity up and down the income statement. These fundamentals remain our priorities in 2018. But on the call today, I'd like to focus on two topics: first, our developed markets where we think we've made progress over the past year, and second, our developing markets where we face some new and continuing challenges that we're working to address. You may remember in the first half of 2017, our North American and European divisions posted declines in organic sales and some weakness in market share. Since then, driven by the increased advertising spend that we committed to and a focus on identifying the category segments and retail environments that will deliver growth, we have returned to organic sales growth and are back to positive market share performance. In the U.S., in the first half of last year, our categories declined and we gained share in only one of our categories. In this first quarter of 2018, our categories are back to growth, and our sales were up in six categories and flat in one more. This was a continuation of the improvement we began to see in the fourth quarter. In Europe for the second quarter in a row, we are seeing broad-based growth in sales and market shares. elmex continues to drive premium growth in our toothpaste portfolio, while Sanex is driving share growth in personal care and Soupline is gaining share in the fabric softener category. Hill's has returned to sales growth with both pricing and volume growth in the first quarter, with volume growth being positive in the quarter despite challenges in the specialty channel. Our Hill's e-commerce business in developed markets saw a 42% growth in the quarter. So in simple terms, developed markets delivered this quarter, and we remain sharply focused on continuing this recent momentum. Turning to emerging markets, our emerging markets took a bit of a step back, so what are we seeing there and more importantly, what are we going to do going forward to reaccelerate growth in these markets? Latin America category growth rates slowed in the first quarter due to lower levels of inflation, repricing in markets like Argentina and Brazil. While volume growth slowed in Mexico behind some macro-level concerns and some heightened competitive activity, which in some cases we chose not to match. In Latin America, our pricing improved sequentially this quarter, and that's a trend we expect to see continue over the balance of the year helped by easier comparisons as we cycle increases in promotional activity last year. We expect inflation to remain below historical levels, but we do foresee modest inflation given GDP growth, increasing wages, and rising commodity costs. In terms of reaccelerating volume growth in Latin America, we do have a robust plan in place for the balance of the year. We have a very active innovation calendar including in Brazil significant premium care innovation in the high growth pharmacy channel. And John will discuss our strong Brazilian market share performance in his section. For personal care, we have innovation in the Protex line in bar soaps and in the Palmolive line in the naturals space. In Mexico, where volume has been down for the last two quarters, we expect to see less of an impact from trade destocking. In Asia, we're beginning to see the benefits of our aggressive push into the naturals space where we have rolled out products across the geographies, but we know we still have a lot of work to do. In the first quarter in Asia, our toothpaste market shares improved sequentially from the fourth quarter in four of our five largest markets. While in toothbrushes, our shares improved sequentially in all of our top five markets. In China, we are restaging our Colgate 360 brand, which is what we call Colgate Total in China, and we are launching elmex as an e-commerce exclusive brand. In India, we are growing, but we need to improve our share performance, and we are expanding our naturals Vedshakti platform by broadening the geographic reach and introducing a wider range of price points. Australia was, in fact, the biggest driver of our organic sales weakness in Asia-Pacific this quarter. We have been impacted by some difficult retailer dynamics in the market, and we will begin to lap that in Q2. There has also been an increase in competitive activity that's putting some downward pressure on pricing and market shares. The Colgate naturals line is entering this market as we speak, which along with some easier comparisons should lead to an improvement in Australia over the balance of the year. So, real progress and momentum in our developed markets, which we are focused on continuing, and in our developing markets, we have a clear understanding of what needs to get done to accelerate growth with specific plans and a sharp focus on results. Finally, I would like to compliment our team for a strong start to the year from a productivity standpoint. We achieved solid results on funding the growth, which helped us offset the vast majority of our raw material inflation. We saw limited impact from the increase in freight logistics in the United States as flexible programs like Uber freight and our new 4PL logistics provider enable us to limit our exposure to the higher spot market rates. Now back to John.

Thanks, Ian. I will now provide a brief overview of the quarter including some further commentary on divisional performance. As Ian discussed, while Q1 represented progress in net sales, operating profit, and earnings growth on a reported basis, our organic sales growth took a slight step back. We are focused on driving sequential improvement in organic sales through the balance of the year, and the plans Ian highlighted demonstrate that focus. Our net sales growth of 6.5% in the quarter was the highest since the third quarter of 2011. Net sales growth was driven by 2% growth in volume, with 0.5% coming from our professional skincare acquisitions, flat pricing, and 4.5% benefit from foreign exchange. Our pricing performance improved sequentially by 100 basis points, and we still expect positive pricing for the year as our pricing comparisons get easier and we plan to take some additional pricing to help offset raw materials inflation. On a GAAP basis, our gross profit margin was down 10 basis points year-over-year, excluding the impact of our global growth and efficiency program; it was down 40 basis points year-over-year. As Ian mentioned, our strong productivity savings lead to funding the growth initiatives was unable to completely offset higher raw material costs. On a GAAP basis, our operating profit margin was up 40 basis points year-over-year in Q1, excluding the impact of our global growth and efficiency program; our operating profit margin was down 20 basis points as the decline in gross margin was offset by a 30 basis point decrease in our SG&A to sales ratio. On a dollar basis, advertising investment was up 4% year-over-year in Q1, but was down slightly on a percentage of sales basis as we lapped our highest spending quarter in 2017. As Ian mentioned in the press release, we are continuing to spend behind our brands in 2018, and we still expect advertising to be up for the full year on both the dollar and a percentage of sales basis. The remainder of our SG&A expense was down 10 basis points year-over-year as a percentage of sales, as a moderate increase in our freight logistics costs primarily in the United States was offset by savings from our global growth and efficiency program and funding the growth initiatives. On a GAAP basis, diluted earnings per share of $0.72 was up 13% year-over-year in Q1. Excluding the impact of our global growth and efficiency program, diluted earnings per share was up 10% at $0.74. Now moving to the divisions, we will start off with North America. As Ian mentioned, we saw further improvement in North America in Q1 continuing the turnaround we began to see in the second half of 2017. Net sales growth was driven by our toothpaste business, which showed strong balance through a combination of pricing and volume growth. Tom's of Maine also delivered double-digit net sales growth in Q1 benefiting from the continued positive trends in the naturals category. Our Canadian business delivered strong net sales growth as well in the quarter with growth across oral care, personal care, and home care. Ian covered most of the important details on Latin America. Latin America delivered 0.5% net sales growth in the quarter, as volume was flat and pricing was up 0.5%. Foreign exchange was flat. As Ian mentioned, our market share performance in Brazil during Q1 was very strong. We gained one share point in toothpaste year-over-year, almost two share points in toothbrushes, and 3.5 share points in mouthwash behind the launch of Colgate Total 12 mouthwash. Moving to Europe, Europe delivered solid organic sales growth in Q1 with broad-based performance across our geographies and categories. Net sales growth of 16% was driven by 4% volume growth, partially offset by a pricing decline of 2.5%. Foreign exchange was favorable by 14.5%. Our toothpaste market share growth in Europe continues to be widespread, with share gains in France, Germany, Greece, Switzerland, Austria, and Denmark. The Colgate naturals extracts line continues to drive incremental sales across the division, and we will be launching a new charcoal variant during the second quarter. We saw benefits from other new products in the quarter as well. We launched Colgate Max White Expert Complete in the U.K., which has proven to be nicely incremental to our Colgate Max White market share in that market. Sanex continues to gain share behind the 0% line, which we are expanding through the launch of Sanex 0% Lotion. This new line addresses an unmet need for moisturization with fewer chemical ingredients. Ian also discussed Asia Pacific, so I will simply add a few comments. Net sales in Asia-Pacific are up 5.5% in the quarter, with all of the increase coming from currency, as organic sales were flat. While our brick-and-mortar business in China was weaker than expected, we saw strong growth in e-commerce market shares and have market leadership in toothpaste in China e-commerce. The Africa Eurasia division reported net sales growth of 3.5% in Q1, as positive foreign exchange more than offset a decline in volume, while pricing was up low-single digit. The volume weakness was driven primarily by South Africa, where we were lapping a difficult comparison. In Russia, along with Colgate Naturals, which we had mentioned before, we expect the recent launch of Colgate Safe Whitening to boost market shares and expand the high-margin whitening segment, which is underdeveloped in the region. We are also very pleased with the performance of our 12 gram sachet in Africa, particularly in Kenya. This package has a retail price point of 15 Kenyan shillings, equivalent to US$0.15 or just over US$0.01 per usage, so consumers can purchase it with the change they have in their pockets. Along with our Bright Smiles, Bright Futures program, this is part of our long-term strategy to increase penetration and usage in emerging markets. And we'll finish up with Hill's. Hill's delivered 5.5% net sales growth in the first quarter. Volume growth at 0.5% was led by the United States, while pricing was up 1%. Foreign exchange was plus 4%. The United States volume growth was driven by continued strength in the prescription diet business, which is posting rapid growth in the online channel, as we highlighted at CAGNY. We are also excited about our new advertising campaign on our Science Diet brand in the U.S., which focuses on science being at the heart of biology-based nutrition. Now we'll turn to our updated outlook for 2018. As stated in our press release, we expect net sales growth to increase mid-single digits in 2018. Given the slower start to the year, we now expect organic sales to be up low single digits with sequential improvement in organic sales growth in the balance of the year, versus low to mid-single digits previously. On a GAAP basis, we expect gross margin to be up 75 to 125 basis points in 2018, excluding the impact of our global growth and efficiency program; we expect gross margin to increase up to 50 basis points for the year. Greater-than-expected increases in raw material costs are the primary driver of our revised guidance. As Ian mentioned on our last conference call, our forecast does assume that some raw materials, including oil, trends lower in the second half of this year from their current levels. Our funding the growth initiatives are off to a strong start this year; we anticipate FTG will help us offset much of the raw material inflation. As I mentioned previously, we also expect positive pricing in the balance of the year, which should provide a modest benefit to gross margin. We remain committed to consistent advertising across the year, and we expect digital to represent about 30% of our media spending this year. Both on a GAAP basis and excluding the impact from our global growth and efficiency program, we still expect our tax rate to be in the range of 26% to 27% in 2018. We expect GAAP earnings per share to be at double digits for the year. Excluding the charges related to the global growth and efficiency program, and the one-time provisional charge resulting from U.S. tax reform, we still expect earnings per share growth to be around 10%. And with that, we'll open it up for questions.

Thank you. Ian, I'd like to ask about the price increases that you embedded in guidance, so if you can explain how in the back-end of the year you're going to be able to raise prices given the elasticity we see in developed markets? Thank you.

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

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

Both, both. In the North American environment, I think you saw fairly substantial improvement from the fourth quarter to the first quarter in terms of our pricing. The same in Latin America. So we went from basically negative 1% to flat quarter-on-quarter. And we expect that progress to continue. We will be taking some of these price increases in parts of the world to offset that underlying commodity inflation. And on top of that, it is in the price measure; our innovation flow is more at the premium end which will drive value and margin.

That's great. Thank you, Ian.

Hey, good morning.

Hey, Dara.

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

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

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

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

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

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

Hey, good morning, folks.

Hi, Jason.

Thank you for allowing me to ask a question. I have a quick follow-up and then another question I’d like to combine. First, following up on Dara's question, I think you disagreed, Ian, with his claim that your market shares were weakening somewhat in emerging markets. In your prepared remarks, you certainly mentioned the momentum and strength in several of your largest developed markets. However, when we examine the market share data you provided, particularly for toothpastes globally, it appears to have declined year-on-year and is lower than the figures you reported for fiscal '17. How do we reconcile these two statements? My second question is about Hill's overall. The U.S. pet landscape has many moving pieces and competitive turbulence, which seems to echo previous experiences with P&G and IEMs, especially with General Mills' efforts regarding Blue Buffalo. This undoubtedly creates opportunities for your company. While I understand that the growth dynamics have shifted from pet specialty to online today, can we expect that some of this turbulence could once again present opportunities for your business, similar to past experiences?

Let me address the second question first and then return to the first. Regarding Hill's strategy and model, we have maintained a disciplined approach over the years. We operate two distinct businesses: a wellness line for general use and a prescription service for specific pet health conditions. We restrict our distribution to outlets that provide advisors to assist consumers in making an informed choice, particularly in the case of prescriptions, which require a vet's recommendation. E-commerce works excellently for us, allowing us to reach pet owners who are very focused on their pets' health. Given the scientific quality and clinically proven benefits of Hill's products, along with our strong ties to the veterinary community, we are committed to fully leveraging any opportunities that arise. While it's challenging to predict outcomes, we will do our utmost to succeed. Regarding global market shares, while our dollar share has seen a modest decline, our volume share has remained relatively flat year-on-year. Some of this pressure is attributable to Latin America, as we opted out of certain promotional activities. What we are observing now in emerging markets indicates progress, with improvements in four of the five largest markets compared to the previous quarter. We believe that the plans we have implemented are making headway, and we will continue to advance these efforts for the remainder of the year.

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

Let's start with North America. There isn't anything significantly different in the business mix as we enter this year. The two main factors to consider are the year-on-year comparison, which reflects a weak third quarter last year due to a slowdown in categories and associated inventory destocking at retail. Now, we've seen a rebound in category growth that began in the fourth quarter, which is now at a reasonable 2% underlying growth rate. We have high-quality innovation planned for the year, and we are gaining market share because of that innovation and our investment in quality advertising. It’s fair to say that the first quarter benefits from year-on-year comparisons, but we don’t have any concerns regarding the underlying strength of the business for our plans over the remainder of the year. Regarding local competitors in emerging markets, this is a journey. When we started discussing naturals, we mentioned that these products are priced at a premium. We have created some interesting bundles, and while we refer to naturals generally, our offerings differ globally to cater to local market preferences. We are making progress, but it will take time. In the broadest sense regarding M&A, consider our past acquisitions like Tom's of Maine or the elmex brand in Europe, which held a strong position in the Germanic countries. If there are quality assets, Tom's and Gaba fit that definition as they represent local brands. Our relationship with Darlie in Asia also exemplifies a local brand in this context. This approach is certainly in line with our strategy. Interestingly, the Elta business, which is one of the personal care companies we acquired, has developed a strong e-commerce presence in China. We are also learning valuable skills in building direct-to-consumer businesses online in China with imported products, so exploring further possibilities is still on the table.

Hey, good morning.

Hi, Kevin.

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

Yes. Our understanding of the slowdown in emerging markets is not that we view it as permanent. In the developed world, we have seen category growth rates rise to around 2%, which is an improvement from historically lower rates. In emerging markets, however, we observed a decline from mid-single digits to between 2.5% and 3%. This slowdown is largely driven by destocking, primarily due to pricing pressures from intense promotions. The underlying consumer usage remains consistent. If we analyze our global categories and geographic distribution, even if emerging markets stabilize at 3% and developed markets at 2%, our overall category growth rate would still be 2.5%. We expect that as emerging markets recover, we will have pricing opportunities, boosting the category's value and potentially increasing the underlying market growth rate beyond 2.5%. Regarding our advertising investment, we approach it from a bottom-up perspective, considering geography, activity, and product, resulting in a specific ratio rather than deriving it from the income statement. In the first quarter, our advertising was slightly below last year’s peak on a ratio basis, but still higher than last year's average, especially in key markets. We believe we are adequately investing in terms of share of voice and consumer engagement in these markets to leverage e-commerce. While we need to continue developing our natural offerings in emerging markets, the focus is more on enhancing our existing assets rather than significantly increasing investment dollars. A positive aspect of our innovation in emerging markets is that it targets the premium segment, presenting investment opportunities.

Hey, Guys.

Hey, Ali.

I'm still a bit unclear about the main issue facing Colgate. Even with the minor positives you've mentioned in the prepared remarks, and some confidence expressed, the results from the CAGNY conference were clearly below expectations, including our own. The situation is challenging. I understand the category growth can be blamed, but consistently, as you remind your competitors, when you hold over 40% of the category as one of the leaders, the message seems inconsistent with the numbers we're seeing. It seems advertising was expected to increase as a percentage of sales this year, but it's actually down. The gross margin was previously estimated at 50 to 75, and now it's up to 50, with commodity prices from CAGNY not changing much. Though FX has improved and should aid gross margins, we anticipated the top line would accelerate based on earlier discussions; instead, it's decelerating. Pricing is still a challenge with tougher comparisons ahead. We expected innovation to help, but dollar shares have declined in India, China, the U.K., Russia, and Mexico, where we hoped innovations would make a difference. This doesn’t feel like a temporary issue; it seems more concerning for the long term, which is troubling. Looking at the stock today, it seems like you managed to avoid a major crisis since investors are still attributing blame to factors beyond your control. However, many controllable factors aren’t performing as expected. Returning to the core question, I’m still puzzled about the root causes of these challenges. You can speak about individual efforts underway, but I struggle to identify the primary issues. Should investors continue to extend the generous benefit of the doubt to the stock that's been granted thus far, and why?

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

Olivia?

Hi. Can you hear me? Hello?

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

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

Yes. I believe North America's performance is heavily impacted by year-on-year comparisons. Last year, we saw a decline in categories as retailers were reducing their stock levels, which resulted in a mid-single digits organic growth decline. This year, however, the growth rates for the underlying categories have risen to about 2%, which is a healthy rate by developed world standards. We are increasing our market share in six categories and maintaining it in one more, supported by advertising efforts. In the fourth quarter, we responded to pricing challenges specific to certain categories, and we believe we have managed that situation intelligently and in a balanced manner. The underlying growth rate in North America is approximately 2%. As previously mentioned, we do not anticipate any changes to the underlying strength of our now re-established North American business. From an inventory perspective, retailers are continuing to reduce their stock levels, but in this quarter, it's happening more gradually compared to the first quarter of last year, when the categories experienced a decline. Nevertheless, the pursuit of efficiency remains a key focus, and we engage with retailers on this year after year.

Yes. Thanks. Good morning, everyone.

Hi, Nik.

I wanted to ask about culture. Colgate has traditionally been recognized as a thoughtful company regarding capital allocation and business strategy, often leaning towards a conservative approach. This has yielded high returns and margins, but the situation is shifting significantly, and the usual way of doing business doesn't appear effective anymore. I'm interested in your perspective as CEO on the company's culture, risk tolerance, and how you view these changes.

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

Good afternoon.

Hey, Bill. Good afternoon, yes.

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

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

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

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

Thank you.

Hey, Lauren.

So it was great; I wanted to just talk one thing we haven't touched on yet, which is and we don't talk about much, which is the personal care and home care businesses. I've just been wondering a little bit perhaps about I guess one kind of broad strokes like share performance in those businesses in emerging markets, if the competitive environment has changed for those at all? And then I guess also underlined that in Mexico when you talked about some of the competitive activity you chose not to participate in, what category that was in?

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

This is Ian. Thank you for joining the call. We look forward to reconnecting with you after the second quarter. Thanks.