Colgate-Palmolive Company (CL) — Q3 2018 Earnings Call Transcript

Thank you. Good morning, and welcome to our third quarter earnings release conference call. This is John Faucher, Senior Vice President for Investor Relations. Joining me this morning are Ian Cook, Chairman and Chief Executive Officer, and Henning Jakobsen, Chief Financial Officer. 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 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.

Good morning, everyone. This is Ian, and I’d like to make some introductory comments. In our previous quarterly earnings call, we discussed our focus on innovation and growth in channels where consumers shop, as well as our commitment to advertising and improving efficiency. However, today I will concentrate on what has been a challenging and disappointing quarter for us. We faced challenges on two fronts. First, foreign exchange rates moved sharply against us, particularly in our large Latin American division. Secondly, we experienced rising commodity costs, with underlying materials increasing over 8% and oil prices climbing 46% quarter-on-quarter. As John will elaborate shortly, our margin from raw and packing materials this quarter had a negative impact of 390 basis points on gross margin. We anticipate continued pressure from both material costs and foreign exchange in the fourth quarter. This is why we made pricing adjustments in the third quarter, as we highlighted in the second quarter. Pricing will remain a vital focus for us moving forward, as indicated by some recent comments from our competitors. The disappointing aspect of this earnings report is our weak top-line performance. While six divisions show growth, Brazil in Latin America and China in Asia have shifted our top-line from positive to negative. Let’s start with Brazil, where the macroeconomic situation is volatile, including lingering effects from the trucker strike in the second quarter and ongoing uncertainty surrounding elections. Categories in our main businesses turned negative in the third quarter in both volume and value. Although we implemented pricing early as promised, we have not yet seen retail prices rise or competitors follow our lead. As noted earlier, there is often a delay between when we raise prices and when competitors respond, resulting in a negative volume impact due to our pricing decisions. We reported a lesser negative impact from the trucker strike compared to some competitors, which might have influenced our third quarter performance as well. Our market shares remain steady, up year-to-date while absorbing the effects of our pricing actions. Our forward plans are unchanged; we remain committed to our pricing strategy and expect inflation to return to our categories. We are launching new premium products, including OrthoGard and PerioGard in the pharmacy channel, which are off to a good start, and elmex is just beginning to ship. Our Naturals lines in toothpaste and personal care are also entering the marketplace. As previously announced at Barclays, we will relaunch our core Total business worldwide starting in the first quarter, particularly in Brazil where it has a 17% market share, which should positively impact growth. While we have a more cautious outlook for Brazil compared to others, there are signs of improvement as the declines we experienced in the third quarter seem to be easing. Now, China presents a different scenario. We remain optimistic about China, where there is growth in the category and our volume share has stabilized at 34%. Our value share, which is slightly lower, highlights an area of opportunity because of two trends: premiumization of categories, driven by local brands, and significant changes in consumer behavior and shopping environments due to the rise of e-commerce. To respond to the premiumization trend, we have introduced premium Naturals offerings. We are running online initiatives such as the successful Dare To Love toothpaste campaign that will be repeated for the upcoming shopping events. Elmex, along with electric toothbrushes and in-home whitening products, are also launching at premium prices. As noted previously, we have increased prices across more than half of our business, particularly on the Darlie and Colgate brands. As we target the premium tier, this has impacted our volume. We are starting to see our pricing impact in the direct trade, which is now influencing our consumption levels positively. However, it has yet to impact the indirect trade due to evolving consumer behaviors. We are working through inventory to facilitate this adjustment in our longtail distribution network, though it will take time to fully resolve. Turning to the other areas of our business, we believe our focused strategies are driving consistent growth in North America, despite promotional pressures on toothpaste in the region. Hill’s is recovering well, led by a strong U.S. performance. Europe continues to experience growth even in a low-growth environment. Africa and Eurasia have rebounded from distributor challenges and are seeing growth for multiple quarters, and while India is seeing slow volume and pricing improvements, market share is beginning to recover due to our innovation and advertising efforts. We remain dedicated to a pricing focus and anticipate improving pricing moving forward, despite possibly being slightly ahead of competitors. As announced at Barclays, the relaunch of our Total business will have a significant global impact starting in the first quarter of 2019. These are the key points I wanted to address about Brazil, China, and the rest of our business. I will now hand it over to John.

Thanks, Ian. Our net sales declined 3% in Q3 as flat volume and 1% favorable pricing were offset by 4% negative impact from foreign exchange. Excluding the benefit from our recently acquired professional skincare businesses EltaMD and PCA Skin, volume was down 1.5%, driven by the issues in China and Brazil that Ian discussed. On a GAAP basis, our gross profit margin was down 100 basis points year-over-year. Excluding the impact of our Global Growth and Efficiency Program, it was down 120 basis points year-over-year. For the quarter, our 100 basis points of pricing provided a 50 basis-point benefit to gross margin. Raw material costs, including the impact of foreign exchange transaction costs, were a 390 basis-point drag on gross margin year-over-year. Our productivity program, led by our funding-the-growth initiative, provided a 220 basis-point benefit to gross margin, while there was no impact from other in the quarter. On an absolute basis, advertising investment was down year-over-year in Q3, driven by foreign exchange. On a percentage to sales basis, advertising was up 10 basis points year-over-year. Despite the challenges we faced in certain markets, we continue to invest in advertising our brands to drive brand equity and to build awareness to drive trial for our innovation. Excluding charges resulting from the Global Growth and Efficiency Program, the remainder of our SG&A expenses were down year-over-year in Q3 on an absolute basis but up as a percent of sales. Excluding the headwind from increased freight, logistics, and warehousing costs, our overhead expenses were down in the quarter on an absolute basis and as a percent of sales as we continue to see benefits from a productivity program. On a GAAP basis, diluted earnings per share of $0.60 were down 12% year-over-year in Q3. Excluding charges resulting from our Global Growth and Efficiency Program and a provisional charge related to U.S. Tax Reform, diluted earnings per share were down 1% at $0.72 as we benefited from a lower tax rate. Now, I’ll take a quick run through the divisions. We’ll start off with North America. Net sales in North America increased 8% in the quarter with our recent professional skincare acquisitions contributing 6%. The North America division posted its fourth straight quarter of organic sales growth with organic sales growth of 2% as we continue to see a nice combination of volume and pricing growth. We saw continued strength in unmeasured channels like e-commerce and club stores. Year-to-date, our market shares are flat or up in 8 of our 12 categories in the United States with strong gains in manual toothbrushes, liquid hand soap, and cleaners. The toothpaste category in the United States continues to see high levels of promotion, particularly through electronic couponing, although we have maintained market leadership. As Ian discussed last quarter, we have made adjustments to our promotional plans in reaction to what we are seeing in the marketplace. Latin America had a difficult Q3, driven by a combination of foreign exchange headwinds and category declines in Brazil. Latin American net sales declined 13% in the quarter as volume was down 6%, pricing was up 2.5%, and foreign exchange was negative 9.5%. Our pricing improved in the quarter as we look to offset continued raw materials inflation, as well as the impact of transactional foreign exchange, given recent weakness in currencies like the Brazilian real and the Argentine peso. Outside of Argentina, we generally have not seen similar pricing moves from some of our competitors. We will remain disciplined and rational in regards to pricing as we expect inflation to accelerate going forward. We delivered both volume and pricing growth in Mexico in the third quarter. Although we continue to see heightened levels of promotion in several categories, particularly bar soap, dish soap, and toothpaste. Moving to Europe. Net sales in Europe were down 0.5% in Q3. Organic sales were up 0.5% with positive volume growth, partially offset by negative pricing. Foreign exchange was minus 1% for the quarter. The UK posted strong volume growth in the quarter, which led to market share gains in Q3. We are particularly pleased with the performance of our premium business in the UK as Colgate Total and Colgate Max White toothpaste continue to gain share. Our UK business should be further bolstered by the continued rollout of our Colgate Natural Extracts toothpaste line, including our latest offering of Charcoal plus White. Sanex continues to grow market share in the body wash category behind the Sanex Zero percent line as well as the Sanex physiologic line, which is bringing high-end premium priced pharma trends into the mass channel in what continues to be a difficult pricing environment in Europe. Moving to Asia Pacific. Net sales in Asia Pacific were down 7.5% in the quarter, driven by volume declines and foreign exchange pressures. As been discussed, inventory reductions in China were the biggest contributor to the weak performance. We continue to be encouraged by the improvement in the performance of our India business. We continue to deliver volume growth with positive pricing despite high levels of competitive activity. We are encouraged with the market share performance of our Swarna and Cibaca Vedshakti toothpaste lines. As we see further distribution gains and continue to invest in advertising, we expect our share in the Ayurvedic segment of the toothpaste category to continue to grow. We also launched a new herbal offering in Thailand this quarter, Colgate Naturals Panjaved, further expanding our portfolio in that country in the higher price Naturals segment. In Africa/Eurasia, positive pricing growth in Q3 was partially offset by slightly negative volume growth. Net sales in the Africa/Eurasia division decreased 6%, primarily due to a high-single-digit negative impact from foreign exchange, driven by weakness in the Russian ruble and Turkish lira. We took additional pricing in the quarter to help offset raw material inflation and foreign exchange transaction costs. We continue to be encouraged by the return to growth of our Sub-Saharan Africa business, which continues to improve following the distributor issues we dealt with in late 2016 and 2017. Year-to-date, our toothpaste share is flat or up in 13 of 18 markets. And we are particularly pleased with our share performance in Turkey where the Colgate brand is closing in on the market leader. And we’ll finish up with Hill’s. Hill’s delivered 1.5% net sales growth in the quarter. Volume grew for the third straight quarter, driven by the United States, which also delivered strong pricing growth. We were further encouraged by a rebound to volume growth in emerging markets, despite some additional pricing we put in place over the past few quarters. The U.S. continues to be led by the Prescription Diet business which has seen share growth in the vet channel as well as online. We’re also seeing share gains in the Science Diet business, with our market shares in pet specialty continuing to improve year-over-year. To help continue the improved momentum on time Science Diet, Hill’s was excited to sponsor NBCUniversal’s fourth Clear The Shelters program, which is designed to boost pet adoption. This year has been the most successful ever with over 1,200 shelters participating and more than 100,000 pets adopted. We also grew share gains with our Hill’s Bioactive Recipe dog food, which uses Hill’s knowledge of dog’s biology and genes to respond to select ingredients so that dogs can get the most out of their food. Now, I will turn to our outlook for the balance of 2018. As stated in our press release, based on current spot rates, we expect net sales for the fourth quarter to be down low single digits due to foreign exchange, with low single-digit organic sales growth. We expect the additional pricing taken during the third quarter to flow through, and we expect less of an impact from destocking in the fourth quarter. Based on current spot rates, for the full year, we expect gross margin to be down year-over-year on both the GAAP basis and excluding the impact of our Global Growth and Efficiency Program. The continued increase in raw material costs including the impact of transactional foreign exchange will continue to pressure gross margin. We now expect that advertising will be flat on both an absolute basis and as a percentage of sales for the full-year versus 2017. This change is due to some of the macro headwinds in markets like Argentina as well as some divisional mix issues. However, the media portion of advertising is projected up on an absolute basis for the full-year versus 2017 as we continue to invest behind our brand. And within that, spending continues to shift from non-working media to working media, as we drive efficiencies within our marketing budget. On a GAAP basis, we still expect our tax rate to be between 26% and 27%. Excluding the impact from our Global Growth and Efficiency Program, charges related to U.S. Tax Reform, and the benefits from a foreign tax matter in 2018, we now expect our tax rate to be around 25% for the full year. Based on current spot rates, we expect GAAP earnings per share to be up double digits for the year. Excluding charges related to the Global Growth and Efficiency Program, charges related to U.S. Tax Reform, and the benefit from a foreign tax matter in 2018, we now expect earnings per share growth to be 3% to 4% for the year. And with that, we’ll open it up for questions.

Hey. Good morning. So, Ian, as you mentioned in your remarks, you talked to us previously about the plan to drive improving top-line growth in terms of innovation, ad spend, e-commerce focus, etc. And specifics of Brazil, China weakness were helpful this quarter. But, it feels like execution was, the changes you guys have made haven’t sort of been enough in light of this changing landscape. So, I’d love to hear sort of going forward from today how you manage the business differently. And, I’m focused on two areas. A, execution wise, are there things you could do differently going forward to sort of stay ahead of the competition in this changing channel landscape more than you had previously? And B, do you think you might need, at some point, to reinvest significantly behind some of these areas and increase the level of spend to get the payback you desire from a top-line standpoint? Thanks.

Yes. Thanks for the question, Dara. I think in terms of the way we are advancing the business, we think we’re focused on the right things. Innovation is clearly a way to reach today’s consumers and tomorrow’s consumers. And I think we have lots of examples of innovation that is connecting with those consumers. Interestingly, if we look at our market share data and household panel data we have, we see that our market shares with millennials are the same as our general market shares. In some geographies, actually, they are higher and growing. So, we think innovation is a big part of what we need going forward. And we have stepped into now changing the shape of our portfolio as part of that innovation. And that may be the transfer of a global brand to a new geography or a new retail channel, as we have described or indeed the development of a local brand, either in response to a competitor, like Vedshakti in India now transferred under a name pronounced so well by John into Thailand. And I think that will continue. And we’ve also experimented as we talked about the last time with a lot of new leading edge innovation, which will find its place in the world one day. We think advertising is an important piece of it. And we do believe in those geographies where we are now seeing a consistent rebound and correction from issues we faced earlier that it is the combination of the advertising and the innovation and indeed our go-to-market execution in the case of Hill’s with e-commerce. So, that is making the difference and that is sustainable going forward. And finally, I would say, in changing the shape of the portfolio, think about the addition of PCA and Elta to our Personal Care offerings, much more in the skin health area, much more linking to the recommendation model that we know so well from our oral and pet nutrition businesses. So, we think we have quite an array of freshness in what we are bringing to the consumer and are focused on the right areas in terms of where those consumers are making their purchasing decisions. And that will continue. And again, I would like to stress the journey undertaken to get to the relaunch of Total next year, which will be a big shift in a core business in our overall portfolio. As regards for significant reinvestment, I think, given our commitment and our mindset towards growth, we certainly when we give you our guidance on 2019, will reflect the stance that we have taken. But, I must say, our portfolio of activity coming into 2019, only of which Total is public right now is quite rich. And we will certainly invest at a level that we deem appropriate to drive the top-line of the Company while making sure that we are taking the pricing and achieving the value necessary with the premiumization of our innovation to continue to build margin and offset commodity costs that we have certainly seen this year. So, simple summary, Dara, I would say, we will do what is right to continue our focus on recovering growth momentum in next year.

Thanks. I just want to get a better understanding of why you expect organic sales to get better in Q4? First, is it coming more from developed or emerging markets? Because the developed markets comp, it does get a fair bit more difficult. But, I’m also not entirely sure what’s going to drive emerging markets better because broader expectations for China to slow down, so the retailer really destocking are actually managing to a new lower level. And in Brazil, you had mentioned the market volatility and that seems unlikely to abate as well. So, while you’re spending more, it doesn’t seem to have really driven much volume at this point, at least for this course. So, just if you elaborate on Q4 that would be great. Thank you.

Thanks, Olivia. A lot of questions there. Now, of course, when you take pricing, depending on the competitive context, you often see volatility in volume. We have experienced that before. And I guess, the point we are articulating is that given the inflationary pressures, pricing will be necessary and we will continue to focus on that going forward. As to the fourth quarter, I mean John commented on it. We do expect to see less destocking, whether that is from China or Brazil. And that will of course be a factor. We do expect our developed market performance to continue, given we think the benefit of the innovation and the advertising driving that. And we see that continuing in the fourth quarter. So, I guess, in simple terms, it is improvement from where we are in the emerging and a continuation of the developed. In China specifically, we do believe it’s destocking, not putting inventory to a new level. The category is still growing mid-single digits in China. And although e-commerce generally, as others have said, has slowed in its compounding rate of growth as e-tailers take less inventory at the front end, it still continues to be a very high contributor to growth in China and other geographies.

Hey, everyone. I have two questions. The first one is straightforward. I'm curious about the pricing in Argentina, which I believe is around 2% of sales; I've heard inflation rates there are between 30% and 50%. Is that the accurate figure to consider? It seems like there's some influence from Venezuela that might be artificially boosting your organic pricing. I'd like to clarify that point. Now, moving on to a broader topic.

Ali, you disappeared.

Hello. Can you hear me?

You came back. I didn’t catch anything on the second. Please start the second again.

Okay. Thank you. Thank you for that. So, the second one is, very helpful commentary at the outset, Ian, about externalities and clearly some really tough ones around packaging costs and transportation costs, FX, destocking all the sort of stuff. And I agree with that some of your peers as well. But I am still struggling to find, accepting all those externalities, is there anything you know Colgate didn’t do right? Is there anything, as you look introspectively that you said gosh, we just didn’t do this right? Are there mistakes? Because the environment is tough, it is tough for everybody, and we’re seeing market share losses still for you and a lot of things that are kind of different than some of your peers. So, I am trying to understand, as you look at yourself, what did you do wrong? Thank you. I hope you heard those.

Yes, I heard you clearly. Thank you. Regarding Argentina, it is not another Venezuela situation. In Venezuela, there was a disconnect between the official exchange rate and the operating rate. Argentina operates as a dollarized economy, and its exchange rate is stabilizing. Your statistics are also incorrect. Last year, Argentina accounted for about 1% of our sales, and now it is significantly smaller, around 0.5% of our sales. Essentially, when excluding Argentina, its contribution to our organic growth is negligible. To address your larger question, there are no significant issues emerging in Argentina; the exchange rate will resolve itself. I appreciate the constructive nature of your second question, as it acknowledges the challenges we face. If we were to be self-critical, it would be our slower progress on premiumization than desired. We are now fully focused on this area, which involves more than just adjusting the portfolio; it requires us to raise prices in our core businesses, presenting some challenges that we are addressing. However, our commitment to premiumization is well understood and is being acted on promptly across all markets. Additionally, during our Barclays presentation, we will introduce the Total relaunch, which leverages new technology to provide additional consumer benefits and presents a significant opportunity for value creation moving forward. That's how I would respond.

I just wanted to mention that it has been about six years since you launched the Global Growth and Efficiency Program. One thing that stands out to me about that program is how it expanded your productivity initiatives beyond just gross margin and into more SG&A areas. Over the past six years, even though there have been macroeconomic factors at play, top-line growth has slowed while you pursued this broader productivity strategy. Considering some of the savings you’ve achieved and the focus areas, I’m curious if there were instances where certain efficiencies might have had negative outcomes, such as hubbing being harmful in some respects. I'm wondering if it’s purely coincidental or if, as you reflect on the savings achieved in the last five to six years, you see any unintended consequences affecting growth. Thank you.

Thank you for your questions, Lauren. At the beginning of this journey, we took a cautious approach typical of Colgate. Our two main drivers were the implementation of an SAP enterprise-wide system, which connected us globally and facilitated the consolidation of administrative services in locations that could serve multiple regions. This connectivity provided visibility, enabling us to operate more cost-effectively and efficiently. While there are challenges with implementation, we believe there are no structural issues once established. Ultimately, this system allows us to extend more services to our global centers. Although we started carefully and have gradually built this up, we consider it a sound decision that is benefiting us now and will continue to do so in the future. We were particularly mindful of hubbing because our company's success relies on executing effectively on the ground, which demands agility, focus, and capabilities. We have prioritized maintaining both passion and the economic aspects of compensation to support this local focus. When we began hubbing, we based our approach on more than a decade of experience in a few regions, like the Nordic countries and Central America, allowing us to understand both the benefits and challenges. Hubbing can improve efficiency while also enabling us to bring in higher quality talent to address strategic issues affecting multiple countries, all while ensuring adequate resources are available locally to manage customer relations, consumer engagement, and brand development. In fact, in some regions, we've increased our local resources to maintain our connection with customers and consumers. From the start, our approach was solid, built on lessons learned over the years. The program has continued to evolve to ensure effective execution, and we believe this has been a wise choice for the company on multiple levels.

Thank you, and good morning. I want to discuss the competitive landscape, particularly in the U.S. and Europe. In the U.S., what trends are you noticing among competitors regarding couponing for oral care, especially within major categories? And in Europe, are you finally able to adjust after several quarters of negative pricing? Do you think you can now implement some pricing increases to achieve flat pricing going into 2019, or do you feel that consumers are still sensitive to prices there? Thank you.

Well, thanks for the questions, Andrea. I think we’ve been quite clear over the last couple of calls that we have seen elevated promotional activity, specifically in the United States. And as John commented this morning, with electronic couponing, as before, we have adjusted our plans for the balance of the year to be more competitive in that space. We obviously will be very attentive to what unfolds in the marketplace, going forward, as everybody I think now faces the commodity cost pressures that require some prudence in terms of pricing whether price increases or lower promotional activity. So, we haven’t seen any change yet but we will be attentive. From the European point of view, Europe has always been quite a challenged environment from a pricing point of view, and that has continued for several years. It is not a new phenomenon in Europe. And some of that has led to tensions with customers over the years. And we believe now we have our European business well-positioned in that European context. And as you intimate, obviously, our pricing negative was improving in the third quarter. And clearly, we will be very attentive to make sure we can continue that trend as we go forward.

I had a question on growth. You described this morning the slow category growth and you’ve mentioned this on the past few calls. But, I guess I’d like to understand, if category growth has in fact been getting worse. Have you noticed any change in the rate of growth versus Q2 or even 1H? And then, given the slow category growth, have you seen any change in the competitive environment in either the U.S. or emerging markets? And just like to hear if the promotional environment is rational. Thanks.

Thank you, Bonnie. Looking at our categories overall, if we consider a global perspective, Europe appears to be stable or slightly increase. In the U.S., growth is likely between 2 and 3 percent across all channels, which is an improvement compared to recent history. In Latin America, the situation is inconsistent due to economic instability. As we mentioned earlier, Brazil has experienced a clear slowdown in categories, both in value and volume, turning negative in the third quarter. In the Africa/Eurasia and Asia regions, we continue to see mid-single-digit category growth in the range of 4 to 6 percent. I would also note, as John mentioned today, that in Latin America, we have observed some areas with increased promotional activity. I hinted at this when discussing pricing, as some competitors may use leader pricing to capture a bit of volume temporarily. However, we believe that inflation will return, and the pressures from foreign exchange and commodity costs will compel competitors, especially in Latin America, to raise prices to counter these challenges. That is our outlook moving forward.

Hi. Two questions. So much of your commentary, Ian, is kind of what’s wrong in the marketplace, what’s changing with consumers, etc., and how difficult the external environment is. But I’m just shocked by your market share performance. I mean, the number that you give, it’s your own data for the oral care category, it’s just so bad. And I just don’t remember time it’s ever been so bad. I mean year-to-date, last year this time, it was 43.5 in toothpaste; now, it’s 41.9. I just don’t understand why maybe that isn’t more alarming to you because that doesn’t strike me as an external issue. It seems to me very much this is an internal issue. So, I’m surprised you are more kind of grabbing the bulls by the horns and saying holy crap, excuse me, holy moly, our market shares stink. So, that’s question number one. And then, question number two is, I mean I listened to the webcast when you were at Barclays and I thought you pretty clearly said you had your arms around the issues in Brazil, you had your arms around the issues in China. I thought you sounded pretty upbeat. And so, I guess my question is, did I misunderstand that, were you telegraphing that the third quarter was going to be a big miss to consensus expectations or did this come as a surprise to you at the end of the quarter? That’s it. Thanks.

Okay. Yes. Well, I guess, I’m not surprised you’re shocked. I’m surprised you’re surprised by my reaction. Let me come back to the market shares. The share you see there on a roll-up basis, the 41.9, on a year-on-year basis is down something like 130 basis points. The challenge with that, Wendy, and it’s been a challenge for frankly over the last five years is that there is an enormous foreign exchange component in that. And as the U.S. dollar strengthens, our extremely strong, for example, Latin American market shares become down-weighted, as part of that mix. So, there is a foreign exchange mix effect and indeed year-on-year our market share is in fact down less than half of that 1.3. Secondly, our volume share is down again, less than half; our volume share decline is about 0.3 on a comparable year-to-date basis. And indeed, from a volume point of view, 1 in 2 toothpaste tubes sold are under Colgate ownership around the world. Now that said, are we happy with any share deterioration? Answer, no, we are not. But we have said a few things. Number one, in some parts of the world, I think Mexico, we quoted up one-time earlier this year, when promotional activity, the point is being cash margin dilutive, we will not match. And when you don’t match, you lose market share. The same in the United States. And in Asia, it was a different matter. In Asia, it was local brands that we have had to meet. And recovering against those local brands is taking some time. But we are encouraged by the progress in India. And if I look at some of our major markets now around the world as the year unfolds, John mentioned the UK back to positive share; we are seeing positive share progression in Russia. We’re seeing recent shares up in Mexico. Because now the innovation that we are bringing, the consistent support of the advertising, frankly having to match some of the promotions to a certain extent are seeing us build back shares where we have been under share pressure. We are absolutely focused on that. And I don’t know what else to say other than I take the point, we understand the point, we are all over the point country-by-country, tracking it literally month-by-month and much to the pleasure of some week-by-week, depending on the geography. And we think again that the relaunch of Total at the beginning of next year and all of the oral care activity, we have behind that is another step in maintaining that focus. So, I will promise to be more excitable when I talk about market share in the future. As for Boston, yes, you didn’t hear right. And, maybe one needs to be a lot more emphatic in the delivery, but we were quite clear we thought in signaling. It was on the slides that foreign exchange was going to be a big headwind and that commodities were indeed ramping up aggressively, obviously influenced by the foreign exchange impact of transaction costs. So, my answer to your second part of the question is I guess I’m surprised you missed that.

Good morning, everyone. I want to focus on market share, specifically in one region. I appreciate the discussion about what's happening in Brazil and China. Europe was somewhat unexpected for me this quarter. While the overall numbers appear acceptable, Brazil's earlier figures also seemed fine, and we witnessed a rapid decline afterward. In your 10-Quarter report, you mentioned Europe as a strong market share area with consistent gains in the first half of the year. However, the year-to-date trend appears to be leveling off, indicating that you may be experiencing some market share loss in the third quarter. Can you provide more insight into this? The UK has strengths in certain areas; what are the weaknesses that have started to impact your market share there?

It’s a simple answer, Jason. It’s predominantly Germany. And again, without going into too much detail, it is customer related. And again, if I were going to focus on the period shares, the most recent period is beginning to return. It’s as simple as that.

Thank you, and good morning. I have a question about costs. You mentioned expecting similar cost pressures in the fourth quarter. Could you provide more details on any hedging strategies you have for costs, especially in emerging markets? What specific items are causing issues? Is it related to PET, oil, or transportation? Additionally, how long do you anticipate these pressures will continue?

Yes. Thanks, Caroline. For the third quarter, the commodity costs were up just over 8% and our logistics costs were up just over 5%. And yes, you heard correctly, we expect that to continue. And frankly, foreign exchange could be more negative for the balance of the year, and that would see transaction pressure on costs as well. So, we do expect the cost pressure for the balance of this year to continue. Yes, there is of course the effect of those materials that start life as oil. And we are seeing that as others are. Hedging, we tend to be light on hedging. Many of the raw materials we buy are in categories where you can hedge, and we do hedge our Hill’s business, materials against the formula on a rotational basis. But for most of the rest, we rely on our ability to price when we need to as the only logical and available offset to cost pressures.

Hey, thanks. So, I guess, maybe trying to tie a number of things that are running through my head together. I guess, last quarter, we talked a lot about the sense of urgency that’s been underpinning the recent initiatives. I think you did a good job at the time communicating that sense of urgency and distinguishing it from panic because that was the word you used. But at the same time, I think we’re now at least eight quarters into what has seemingly been a pattern of organic growth and gross margin pressures. So, I guess, the question is, if we strip away the macro challenges, which I acknowledge are severe, but is the message underneath at all that from here, you think Colgate needs to be more urgent, or is there a risk that recent urgency, whether it’s the push into e-commerce, the catch-up on premiumization, etc., could actually be compounding your problems? And I guess, if it’s not compounding your problems, is there anything incremental in your power to truly fast-track improvement, acknowledging the total relaunch, etc. But, is there anything significant in your power or is it more just the question of basic block and tackling over time, hopefully with a bit of macro relief? Thanks.

That's a very profound question. We need to be cautious with our language. There was a time when we faced challenges in a specific market. I won’t get into the details, but our initial reaction was calm. The market interpreted that as indifference. The next time we reacted with more emphasis on our focus, and the market perceived that as panic. My response is that we must concentrate on innovation and advertising, which are crucial for building brands and reaching consumers where they shop. It's essential for us to do everything possible to enhance our returns from this focus. Sometimes, the speed of progress isn't as fast as we would like, but ultimately, developing a strong brand is the correct strategy. If we find ways to grow our portfolio, like we did with PCA and Elta, we will certainly pursue that. Therefore, there's significant internal urgency attached to a clear focus on what we consider important, category by category, geography by geography, and retailer by retailer. I believe the total relaunch planned for the first quarter of next year will play a crucial role in advancing our oral care business and the company as a whole.

Question, Ian, I wanted to pivot to the U.S. pricing environment. Proctor said, they’re much more optimistic on its ability to take price. And at a high level, Proctor indicated U.S. retailers are now more receptive to pricing across categories. And that certainly wasn’t the narrative among investors earlier in the year. There’s a lot of uncertainty, which called into question brand strength and economic, most of these businesses, etc. And Proctor also indicated a plan to take price in oral care. So, the first part, can you comment on how you see the pricing environment shaping up across categories? Do you share Proctor’s view that there is a much broader receptivity to pricing that did not exist even a quarter or two ago, do you plan to follow Proctor’s pricing in oral care? Maybe talk a little bit about opportunities to take pricing elsewhere. Is it more conducive now as it seems to be? And then, lastly, I don’t expect you to guide, Ian, but margins down in North America 200 basis points year-to-date or something close to it. Should we expect to see margins improve looking out the next year in North America? So, thanks for all that.

Thanks very much, Kevin. I guess, as far as one can responsibly go on a call like this, which is a public call, I think a fair way to answer it is, I think it is fair to say that everybody in the industry understands that there are cost pressures. And all players in the industry are going to have to find ways that are consistent with their strategy and their relationships with their retail partners to do that. And that can be a combination of a lot of things from efficiency to revised promotional calendars to premium innovation to different promotional activity. And yes, indeed, to a price increase. And we obviously partner very closely with our key retailers here in the United States. And we are very attentive in working with them to bring value to consumers that they see and they think it’s good value to pay for. And that’s what drives our thinking in this space including the total relaunch coming next year. And I think we were one of the ones earlier than many, saying this commodity cost trend was real and the industry would need to be responsive. So, you can rest assured we will be both attentive and responsive.

I have two quick questions. First, regarding China, the destocking seems similar to what we experienced last year. I'm trying to understand if you see this trend continuing, with e-commerce growth leading to a yearly destock that impacts a specific quarter. Secondly, about the Total relaunch, should we expect a front-loaded marketing and advertising spend for this, or will it align with normal launch plans?

I think on China, a good question, Bill. No, I don’t think we’re talking about a once a year destock in China. I think the emergence of online created turbulence and destocking and has now complicated the distribution channels in China, particularly the indirect distribution channels. Because, candidly, some of the online players now have distribution systems themselves. So, retailers in the chain can buy from four or five different sources, which is very different than when the e-commerce phenomenon began in China last year. So, it’s a different impact now, really driven by us taking pricing now into a more complicated distribution structure and needing the pricing to equivalize and work its way through the system before we can get the new pricing on shelf with indirect customers. So, that’s a very different reason for the destocking. And as I said, this one is going to take a little bit of time in that indirect trade. But we expect it to get better from here. And when we talked about Total being the first quarter of next year, the way we signaled it at Barclays, Bill, was that the global rollout of this activity would begin in the first quarter of next year. So, that doesn’t say that all of the activity is happening in the first quarter. But yes, of course, when we do bring such an important initiative with such technology and greater value, we will be investing very diligently to make sure all stakeholders are aware of and get a chance to try the product.

Yes. Good afternoon. Thanks for squeezing me in. I’m going to try to ask the appropriate level of spend question in a different way. So, if we fast forward to 2019, I know you are not going to comment on sales guidance, but unless you say business accelerates towards even the low end of long-term target next year and if you extrapolate to your trends, perhaps that’s where you end up. So, if you get there, given the period share loss you had or issues had in certain key markets, how would you think about the appropriate level of spend? I mean, what does that mean to you? Are you more likely to want to protect the share that you’ve started to see improvement upon? Are you likely to think about things in a different way from an overall advertising spend? So, not necessarily that you need to rebase to get back to growth. But, let’s just say, you do get back to growth, how do you feel about protecting that relative to where you’ve come from?

Yes. Very good question, Mark. Look, we think about it, and what we’ve been trying to telegraph is that advertising builds brands over time. And so, our thinking from a growth point of view is to continue to support our equities and the core and base businesses behind those equities, and of course, build the awareness to generate trial of innovation. So, we will be deploying advertising, our thinking; we haven’t yet begun our budgeting process to what we can measure and regard as effective levels to do the job of maintaining the strength of the underlying equity and building awareness and trial for new products, including the shift to digital and not forgetting commitment to the consumption building programs that we have in the emerging markets, which deliver benefit over a longer period of time. So that’s the way we tend to think about it. And I would venture to say, as we work our way through our budgeting process, that will be the way we will think about it for 2019. So, thanks everybody for your questions. And I wish a good rest of the day. And we look forward to catching up with you the early part of next year.