Colgate-Palmolive Company (CL) — Q4 2018 Earnings Call Transcript

Thanks, Loren. Good morning, and welcome to our fourth quarter earnings release conference call. This is John Faucher, Senior Vice President for Investor Relations. 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. Joining me this morning are; Ian Cook, Chairman and Chief Executive Officer; Noel Wallace, President and Chief Operating Officer; and Henning Jakobsen, Chief Financial Officer. Ian and Noel will start off with their thoughts, while I will cover our Q4 results and 2019 guidance.

Good morning, everyone. It's Ian. Let me first wish you all a belated happy and healthy 2019. And let me start my introductory comments where we started the press release. We are pleased with the improvement in organic sales in the fourth quarter, plus 2% on top of plus 2% in the fourth quarter of 2017, and you will recall that the 2% in the fourth quarter of 2017 was the highest quarter that year. Said a different way, on a two-year stacked basis, we accelerated from 1% in the third quarter to 4% in the fourth quarter. So we entered 2019 with momentum. I think our intense focus on innovation, sustained advertising and product expansions in new channels and markets is beginning to pay off. You may recall that our biggest problem businesses 12 months ago are now the ones growing the fastest. Hill's, four quarters of accelerating growth, driven by Prescription Diet which is the backbone of the business and the line that creates the recommendations from the best, a strong U.S. business and our continued high growth in e-commerce. And as you will hear later from Noel, there is big news coming on the other half of the Hill's business, Science Diet in 2019. Africa/Eurasia, we cycled through our distributor issues. We're focused back on driving distribution and advertising support and we're back to growth and India now posting continued healthy organic sales growth, driven by innovation, Vedshakti, which is building distribution and continuing to build market share. On a national basis Vedshakti is now up to 1.7 shares, seven months of continuous share growth. And in the modern trade where distribution obviously builds quicker; and trial, and therefore share growth is faster, Vedshakti is now up to 4.4% market share five months of share increase. And several other markets are on plan and expectation that we discussed in the third quarter are all generally doing better. Mexico and Brazil, we saw sequential improvement which helped drive Latin America to positive growth. We are taking pricing as we said we would and we are sticking with that strategy. In the case of Mexico, we have seen that market become somewhat less promotional and the category growth is coming back. In Brazil, the category growth is still modest and the heightened promotional activity we had mentioned before continues, so we balance our business in Brazil, responding where we need to but sticking to our underlying strategy of taking the necessary pricing. China; sequential improvement as we said, but still negative. Consumption continues to look fine and the pricing is working its way slowly to consumers. We expect to see continued sequential improvement in the first half and return to growth in the second half of this year. And finally a market often discussed in these calls, the U.K. where we are seeing strong growth driven by increasing market share which in turn is being driven by our premium business in the U.K. And that's before the impact of the Total re-launch in the U.K. And in the U.K. the Total brand is a 16-share substantial business. However, life is not perfect and we have had two markets affected by specific issues. In Europe we had the disturbances caused by the Gilets Jaunes or the yellow vests. And that in fact was a headwind to European organic growth of some 40 basis points. As you see yourselves in the news, while the disturbances are still there they are more subdued than they were during the fourth quarter. And here in the United States, we saw a little bit of slowing in terms of category growth. We were preparing to bring Total to the marketplace in the first quarter and therefore working shelf inventory down a little to make for an easy transition. But the biggest headwind in North America was one-time very specific and entirely mechanical and that was the shift of a major promotional activity from 2018 to 2019 from a shipments point of view and that happened later in the quarter which resulted in a 120 basis points shift from fourth quarter organic into the first quarter of 2019. And the final comment I'll make on 2018 is that, as we have been saying for a while as planned, we laid on pricing. And we believe it is paying off despite the expected volume impact. We are beginning to see some competitors follow suit. The Mexico/Brazil contrast is relevant in that case, but as one has to say on pricing, it is early days and we will see how the markets evolve and what the competitive reaction is. So let's turn to 2019. Our intense focus on innovation and bringing our products to new channels and markets supported by a meaningful increase in advertising continues. The innovation grid we have in 2019 is uniquely and especially strong, particularly on some scale core businesses in addition to many of the adjacencies that we have in our portfolio. This is the opportunity to accelerate our growth which is why we have guided to the 2% to 4% organic growth increase. And Noel will talk in some detail about the growth plans that we have in 2019. The area I want to talk about for 2019 is our continued focus on pricing and that is for two reasons. One is a continued focus on premiumizing our portfolio. And the second is offsetting underlying costs including the transactional impact of foreign exchange. So, if I take a step back and just give you a view on the underlying commodity cost trends on our business, for 2018 the overall increase in underlying commodity costs was 7%. In the third quarter as we told you, it was 8%. In the fourth quarter, it was 9% and for 2019, our plan calls for a 6% increase in underlying commodity costs. Now obviously given the shape of 2018 and as John will reaffirm in his prepared remarks. The cost headwinds will be higher in the first half of 2019. Foreign exchange for 2019 which brings the transactional costs on top of the underlying commodity costs for the year, we expect to be in the 2% to 2.5% range. Now importantly and pleasingly, over two-thirds of our 2019 pricing is either rollover pricing from 2018 or pricing already accepted as part of the significant re-launches of the Total business and the Hill's Science Diet business. In other words, already accepted and in place. And the net result of that scenario for 2019 is that we expect our gross profit to increase by 30 to 50 basis points. So, those are the framing remarks I would like to put on 2019 and simply, we're pleased it is a unique opportunity to accelerate the growth of our organic top line. And as some of you may recall, in the second and third quarter calls in response to questions, we emphasized the fact that we were building a plan in 2019 that would reflect the quality and depth of activity we have. That's what we've done and we have confidence in that plan. So, here's Noel to give you a little bit more on growth.

Thanks, Ian and good morning everyone. As Ian mentioned in his opening remarks, our number one priority is to accelerate organic sales growth. So, this morning I'm going to discuss three key areas of focus to improve our organic sales performance for 2019 and beyond. You'll hear from me more on this at CAGNY, but I want to provide some initial thoughts to you today. First, we're driving the core of our business to innovation and improved brand building. Second, we're using innovation to grow in adjacent categories and product segments. And third, we're expanding the availability of our products to distribution to new markets and new channels. Let me start with growing the core. As you know we have big core businesses that represent the majority of our sales and are the key driver of Colgate status as one of the most penetrated consumer brands in the world. It is important to keep these core businesses vital and growing through innovation, strong marketing support, and the right consumer messaging. You will see significant innovation against our core in 2019 including the Colgate Total relaunch which is the biggest news we've had this brand in its more than 20-year history. With this introduction, we are reinventing the multi-benefit category that Colgate created. We're invigorating the anchor brand and driving consumer engagement, trial, and market share. It's not easy taking a great formula and making noticeable improvements, so we're excited to bring this breakthrough technology to market this year. The new Colgate Total improves upon the previous version providing several new benefits; including a sensitivity benefit across all variants, instant neutralization of odors associated with bad breath, the ability to seek and fight bacteria for enamel protection, and new cooling agents for lasting freshness. Importantly, the added benefits allow us to take pricing which should help us drive our global value shares higher, particularly, in key markets like the U.S. and Brazil. And as you would expect, we would support this launch with a new increase in brand-building activity. In the U.S. we expect to generate significant consumer awareness with a record number of in-store displays and advertising that we developed specifically for this year's Super Bowl. The rest of the world would also see a significant increase in advertising and trade activity. And Colgate Total is not the only core innovation you'll see from us this year. 2019 also marks the relaunch of our Hill's Science Diet business with new SKUs hitting the stores in the U.S. in the first quarter and rolling out globally over the next 12 months. Our Science Diet sales and market share performance has accelerated over the past several quarters behind improved advertising and higher spending levels, distribution gains, and continued strength in e-commerce, the relaunch allows us to build on recent successes. The Science Diet relaunch includes upgrading the recipes and improving the cable shakes. And for pet parents, we've completely redesigned our packaging graphics in a way that will enhance their shopping experience and give them a greater understanding of the Hill's brand purpose. We believe this relaunch also provides us with the opportunity to increase pricing. We're very excited to build on Science Diet's strong momentum from 2018. So it's vital to have a healthy core, which includes some of our most important brands. Still, we know we need to continue to innovate into faster growing adjacent categories and segments. You have heard us talk a lot about Naturals and by the end of 2018, we had Naturals offerings in toothpastes in 79 countries. We continue to expand our Natural offerings in toothpaste based on local insights with the launch of charcoal variants across many countries with encouraging early results. As Ian mentioned, our Colgate Vedshakti line in India continues to see solid share performance with seven straight quarters of sequential share improvement. In the modern trade, which is Vedshakti's strongest channel, the franchise achieved a 4.4 share in the fourth quarter. In Germany, we're excited about the launch of Meridol Cure for this quarter. We developed a formula that allows us to combine Meridol's strong therapeutic heritage with natural ingredients to improve gum health. Naturals is also a key area of focus in personal and home care. We continue to be pleased with the performance in the Sanex brand with a 0% line is a key factor in driving growth and we've expanded this line into the U.K. We're also expanding our Palmolive Vel Rosita Personal Care line across Latin America and are launching new body wash and hand soap lines including Palmolive Play in Europe. In Home Care, we're launching under the Ajax brand a number of household cleaner variants using natural ingredients like essential oils, baking soda, and citronella. So we've covered how we're driving the core and expanding into adjacent growing segments. Now I want to focus on how we are pushing even more aggressively into faster growth channels and expanding the geographic footprint of our brands. We are launching Elmex and Meridol in the pharmacy channel in new markets this year. We're also expanding the distribution of our professional skincare businesses PCA Skin and EltaMD in spas and dermatologists where we're seeing strong growth. One of the most exciting programs we have in place for this year is the launch of Hill’s to Home, a new e-commerce platform that allows pet parents to purchase prescription diet products directly from their veterinarian to arrive for home delivery. The pet parents initially sign up for their program through their vet, who enters the appropriate Prescription Diet food recommendation. This new system allows us to maintain the key relationship between Hill's, our vet partners, and pet parents while still providing a convenient home delivery, which is crucial in this category. By enrolling the pet parents in that subscription-based program we also increased compliance with prescriptions, which leads to better health outcomes for their pets and importantly a higher ROI for Hill's. Another area of our business, we're looking at our e-commerce and direct to consumer partners with Hubbell and bond based shave club to further build our capabilities in digital, e-commerce, and direct-to-consumer which will allow us to expand our offerings and strengthen our consumer relationships. For example, in the fourth quarter we launched at-home whitening kits to our e-commerce platform in China. So this is our focus. Drive the core, growing adjacencies in new product segments and expand into new channels and markets. I hope this gives you a better understanding of our plans and priorities to invest to accelerate organic sales growth in 2019 and beyond. Now I'll turn it over to John.

Thanks, Noel. In order to leave time for some Q&A, I will forgo the normal divisional review and simply discuss the Q4 financials and then our 2019 guidance. Our net sales declined 2% in Q4. The 0.5% unit volume growth and 2.5% favorable pricing were offset by a negative 5% impact from foreign exchange. Our recently acquired professional skincare businesses EltaMD and PCA Skin contributed 1% to net sales and unit volume growth in the quarter. On a GAAP basis, our gross profit margin was down 70 basis points year-over-year. Excluding the impact of our Global Growth and Efficiency Program, it was down 100 basis points year-over-year. For the quarter, our 250 basis points of pricing provided a 110 basis point benefit to gross margin. Raw material costs, including foreign exchange transaction costs, were a 490 basis point drag on gross margin year-over-year. Our productivity program, led by our Funding the Growth initiatives, provided a 280 basis point benefit to gross margin. On an absolute basis, advertising investment was up 2% year-over-year in Q4, with increases across every division except Latin America, which was impacted by foreign exchange and reductions in spending in Argentina related to the recent devaluation. On a percent to sales basis, advertising was up year-over-year in Q4. Excluding charges resulting from our Global Growth and Efficiency Program and advertising spending, our SG&A expenses were down year-over-year in Q4 on an absolute basis, but up as a percent of sales, driven by the continued increases in logistics costs. The remainder of our overhead costs were down on an absolute basis and flat as a percentage to sales, benefiting from our productivity programs. On a GAAP basis, diluted earnings per share of $0.70 were up 89% year-over-year in Q4. Excluding charges resulting from our Global Growth and Efficiency Program and the charge related to U.S. tax reform in 2017, diluted earnings per share were down 1% at $0.74. Looking to 2019. As stated in the press release, based on current spot rates we expect net sales to be flat to up low single digits with organic sales growth of 2% to 4% and a negative impact from foreign exchange. Based on current spot rates, for the full year we expect gross margin to be up year-over-year on both a GAAP basis and excluding charges related to our Global Growth and Efficiency Program. We expect the benefits of pricing and our productivity programs to offset an overall increase in raw material costs, which include the impact of transactional foreign exchange. We are assuming that raw material prices increase from current levels. In order to support innovation that Noel discussed, we plan that advertising will be up meaningfully in 2019, both on an absolute basis and as a percent of sales versus 2018. We will continue our efforts to drive greater effectiveness and efficiency in our advertising spending by improving the impact of our advertising, shifting advertising dollars into higher ROI media, and reducing non-working media expenditures. We expect our full year 2019 tax rate to be between 25.5% and 26.5%, both on a GAAP basis and excluding charges related to our Global Growth and Efficiency Program in 2019 and 2018 and charges related to U.S. tax reform and the benefit from a foreign tax matter in 2018. On a non-GAAP basis this is an increase versus our 2018 tax rate. Based on current spot rates, we expect GAAP earnings per share to be down low single-digits for the year. Excluding charges related to the Global Growth and Efficiency Program in 2019 and 2018 and charges related to the U.S. tax reform and the benefit from a foreign tax matter in 2018, we expect earnings per share to decline mid-single digits for the year, which includes a negative impact of translational foreign exchange. While we feel good about the programs we have in place for 2019 as Noel discussed, we feel it is prudent to factor in uncertainty in global economies, exchange rates, and the competitive environment. I would also highlight that we expect foreign exchange and raw material headwinds to be higher in the first half of the year. And with that, I'll turn it over to Ian for Q&A.

Hi, good morning guys.

Good morning, Dara.

So, Ian and Noel obviously highlighted the strong innovation pipeline on the call numerous times with Total and Science Diet as well as all the other products. Can you help quantify that for us, how much of the top line growth this year you're expecting to come from innovation? How different is that than a typical year? And obviously, you're assuming a large increase in A&P spending in 2019 in your guidance, can you give us a bit more detail on where exactly that's going to be focused? Is it mainly just the innovations or given such a large magnitude are there other base geographies or product categories you're focused on? And then last, what gives you the confidence behind the payback from that? And we did see a big ad increase in the back half of 2017 in organic sales growth that accelerated in 2018 and would imagine innovations a bigger part of the answer, but what's giving you confidence in the payback from higher spend in terms of top line growth? Thanks.

Thank you for your question, Dara. Let me address them one by one. What sets 2019 apart is the scale of innovation in what Noel refers to as the core businesses. We've mentioned Science Diet before; this is the first time we are bringing it up in this context. We’ve previously discussed Total, a global brand with a seven-share. Science Diet represents nearly half of our Hill's business, and it won't be the only large-scale initiative you'll hear about in 2019. This is a shift from conventional innovation cycles. Additionally, as Noel pointed out, we have efforts focusing on Naturals across our portfolio and a wide range of what I would consider regular innovation within the business. The key distinction is the focus on large-scale core revitalizations, which feature excellent technology and strong consumer acceptance, and we now know that Total has proven to be a highly effective advertising vehicle. Regarding your second question, I think it's essential to emphasize this point. Over the last couple of years, we’ve discussed the importance of sustaining our advertising investments for two main reasons: to keep our brand equity relevant and to support continuous advertising amidst various distractions and changes. In 2019, the advertising investments we are allocating towards these scaled innovations will be additive, meaning we will maintain our advertising support for our existing equity while also increasing our advertising efforts to boost awareness and encourage trial, which can lead to repeat purchases and build a self-sustaining cycle of growth. We specifically need to drive trial for our new scaled products. That’s the focus of our advertising strategy. Importantly, in the case of Hill's, this will be largely digital. Big picture-wise, that’s our approach, and we are confident in the returns we expect in terms of growth and market share from these innovations. These initiatives have taken time to develop, and we believe they will drive significant changes in our business going forward. In other words, they will create an inflection point for the company’s growth, which should continue well beyond 2019. That’s where our confidence lies.

Good morning everyone, and a belated Happy New Year to you. There’s a lot we could discuss, but I want to concentrate on Total, as it seems to be a significant focus for you right now. When speaking with investors, there is some skepticism about whether this can truly make an impact. Typically, new and improved offerings don't create significant change. It appears that many of the market share leaders in critical categories are succeeding through unique benefit platforms instead of universal bundles like Total. Could you share what fuels your optimism and what the investment community might not fully understand? Additionally, you haven't discussed the removal of triclosan from the formula as part of the upgrade benefits. Is that because it is not significant, or does it offer advantages such as expanding appeal to consumers or markets? Thank you.

Yes. Jason, there is innovation every year and we see a barrage of labels that say new and improved. But frankly like most things in life there's new and improved and new and improved. And this we view as the biggest breakthrough since we came with the original Total product. It has been many years in the making in terms of delivering the claims that Noel has mentioned in delivering the flavors that have as much indeed better appeal than the existing flavor which in a taste business is something you have to be very focused on. And most importantly, the consumer has reactivated in all of our testing, interestingly not just consumer testing, but in market testing that we did if you will under the radar with no advertising, but at significantly higher pricing, because of the quality of the product and the consumer response is very good. And that is why I made the point about the quality of the advertising as well. So, we know we have a quality product. We do see it as a breakthrough. We have been working with dental professionals since the fourth quarter of last year to convey the richness of studies we have behind the product. And we now have advertising that we know is persuasive and motivating and got through with customers. And on top of that, we are getting extraordinary support from our retail partners in terms of shelving and in terms off-shelf display to generate the trial of the product. And that's why I'm sort of distinguishing the scale of these core relaunches. This is not sort of couple of blue dots in and call it new and improved. So it's a big difference and it's why we are investing through all of the stakeholders involved in the brand that it is a breakthrough which is incremental investment, because trial builds over a two year period for a new product so the time is now. Now triclosan we are in different. We were quite clear when we spoke about this relaunch at Barclays last September that the new formula would replace the existing formula that contains triclosan that happens to be because we have a better product today than we had with the old product. And that was a great product and we stood behind that product all the time from a scientific point of view. This just happens to be a better product and that's where we are moving to.

Great, thanks, good morning.

Good morning, Lauren.

Good morning. I was hoping you could talk a little bit about drivers of toothpaste global category growth sort of comparing maybe the last five years versus what you see coming maybe over the next five sort of thinking about the units market penetration usage versus premiumization. Because it sounds like you've been talking consistently about premiumization that's been a biggest trend in some of your major markets. But I also feel like it's not that long ago that you were still highlighting sort of the actual market penetration usage opportunity. If you could talk a little bit about the balancing of the sort of last five years looking forward and how you're thinking about that as part of your strategy will be great?

Yes, Lauren, that's a great question. It's not exclusive. One trend we're seeing is that the marketplace's value growth is accelerating due to premiumization. This occurs in two ways: first, successful businesses improve, which creates more value for consumers and enhances brand value. Second, we see numerous smaller brands in niche segments priced at a premium. We can look at examples like Vedshakti and Tom's of Maine, both of which are performing well as unique brands. When we discuss premiumization, we're referring to both aspects. We're not solely focusing on Total. Additionally, we recognize the opportunity for market penetration. As I've mentioned before, our volume share remains high; one out of every two tubes of toothpaste worldwide is a Colgate tube. While we aim for premiumization, we also want to ensure accessibility of our products. Our higher volume share can be attributed to our approach when entering new markets, where we established a portfolio that includes entry price points accessible to even the most rural consumers. Furthermore, we've implemented programs like Bright Smiles, Bright Futures in those emerging markets. Recently, we've ramped up our initiatives across Africa. I want to emphasize that while we are investing in innovation, we are also increasing our investment in market penetration because we view it as crucial for sustainable growth over time, given the average use of toothpaste globally. These two goals are not mutually exclusive. Our focus on innovation is significant for 2019, but it does not mean we are diminishing our efforts to enhance market penetration.

Yes, thanks. Good morning everyone.

Good morning Nik.

Good morning. Thank you, Noel, for your insights on your focus areas. I would like both you and Ian to address the 2% to 4% growth outlook for 2019. Could you provide some perspective on the different contributors to that range? Specifically, how significant will the product relaunches be compared to the potential from untapped markets and distribution opportunities? A bit more clarity on the factors driving the 2% to 4% would be appreciated. Additionally, what are your expectations for overall category growth in 2019? Thank you.

Yes, I think if we take the categories and you look around the world, we're in a place where you see Europe still flat to 1%, you see North America north of 2%, and you see the emerging markets in that 4% to 6% range. When you take it all together you're talking about 2%, 2.5% underlying category growth rates. Now if I come back to what's going to drive the shape of that 2% to 4%, I'm not going to break down the scale versus the underlying business is because we are doing a lot of smart things on all of the other businesses that we have. But it is the combination of those that give us the confidence in that 2% to 4% spread, particularly entering the year of the encouraging 2% in the fourth quarter.

Great. Thank you very much. A question on the implied reinvestment this year, I guess, I'm just looking for a little bit more clear specificity if I could. On how much of that is envisioned to go into A&P versus into new capabilities that may not be considered advertising but might touch up in base level SG&A things like as it relates to digital and e-commerce or the Naturals push? Because there's a fair amount of reinvestment implied in the guidance and I'm just trying to figure out if that is truly 100% A&P or there if it's spread across broader SG&A? Thank you.

Yeah. A good question, Steve. A large part of it is A&P – a large part of it is A&P. When you start breaking down SG&A you're also going to see that we have logistics in our SG&A and that has topped out reasonably high at the end of this year. And if it continuous at the same level when you look at the fourth quarter that will be a component of the increase – an in SG&A. And yes you're right to the extent that digital is requiring personnel and locations and capabilities that might get picked up elsewhere in SG&A. We have also been putting that in place and that underlies Noel's comment about extending into those areas. So you're going to see a bit of logistics predominantly A&P and then also a little bit in the overhead area supporting our continued push into the digital space.

Thank you. Good morning.

Good morning, Bonnie.

Hi. I had a few questions on your guidance. I was hoping you guys could help bridge the GAAP between your long-term EPS growth target and then your EPS guidance this year between I guess capital spending the higher tax rate and the FX headwinds? And also is this higher level spending a new norm for you and really what's necessary for you guys to drive faster growth in this environment? And finally you're forecasting operating margin contraction this year, but do you anticipate the contraction to be less than it was last year?

Yes. Again, thank you for the single question. I think the most important focus in 2019 is to continue progress on accelerating growth off an encouraging fourth quarter. And I think two things to say, you kind of really asked two questions; one is what happens longer term from a return point of view; and the other was is this cost of doing the business. So let me kind of break the two. And we're not going to get into discussions about 2020, because it's too much uncertainty between now and then in terms of what could happen with foreign exchange, raw materials and other factors. Our spending this year is dictated by the amount of activity that we have on our core businesses as well as the other opportunities that Noel talked about. And we believe that this level of support and the quality of the innovation should drive an improvement in our organic sales growth in that 2% to 4% range. That will of course leave us in a better position as we enter 2020 and beyond. And if our plan evolves the way we are expecting, raw material pressures will lessen in the second half as will foreign exchange which should lead to a sequential improvement in our earnings growth rate and bring us into 2020 with good momentum. And that will set us up for 2020 and beyond. Now if you flip it the other way and say is this investment behind growth or is this simply the cost of doing the business, you can kind of step back from that question as well. And I think it's been clear that for the past several years, one could say since the financial crises growth has been more challenging. And what can happen and we have observed does happen is that when growth is challenging that people are willing to pay more for it and you see that in our categories and you sometimes see and we have seen and we have commented about competitive activity that is more in the trade spending area to drive volume rather than build brands. So that said, we're not spending more because we have to, but because we have innovation and marketing programs that are worth spending on now. Now one thing I would say and I should have said in response to an earlier question, one encouraging aspect at this time is that pricing appears to be getting better. I had talked about you have seen the pricing we got in the fourth quarter. I talked about the rollover pricing and the Total and Hill's pricing that is already set at over two-thirds of our pricing in 2019. So, if we move into an environment where pricing is positive and you're hearing similar commentary from many in our space, and competition happens in the advertising line not above the net revenue line then marketing and innovation will win out not price promotion. And I think we view that as a good thing for the future.

Morning Ali.

Good morning, Noel. It's nice to have you on the call. I appreciate the increase in investments for 2019, but I want to inquire whether it's sufficient. Earlier, you mentioned that the investment isn't a necessity but rather driven by the strong innovation and other factors you have in place. I would like to clarify if you believe this is enough, considering you're still losing global market share, particularly in emerging markets. You recently noted 4% to 6% growth in the emerging market category, while your growth stands at 1.5%. From your press release, it's evident that when there's a lack of mission and market share gains, it implies you are either not gaining or are losing ground in markets like Mexico, Brazil, Russia, India, China, and possibly South Africa. We appreciate your strategy of launching Elmex and Meridol and exploring new channels in different regions to support the Colgate brand. The innovation is promising, but typically those efforts take time to yield results, often spanning several years rather than being a quick fix. Tying back to a previous question, it seems there's only a modest increase in ad spending for this year. Do you anticipate this to be a one-time boost in advertising and promotions, or will you need to escalate your spending to potentially over 11%, 12%, or even 13%? We believe such an increase could be necessary in the coming years to sustain growth, as historically, recovery in this industry isn't a quick process; it usually involves several years of strategic investment. So, I’d like to ask again, is this enough? Will we hear more about your reinvestment plans moving forward? Yes, as usual a very well-framed question. I think the answer has to be that we believe it is because that is the plan we have put together and the way I think I would frame it; I tried to capture it a little bit in the answer to the previous question. There is a difference between to your point innovation in niches that do take time to grow. We're very pleased with Vedshakti, but it's taking time to build. We know we have a winning product. We will be patient and we will be successful. So, again, I come back to the difference here is you're taking scale businesses. You're making significant relaunches with better quality product perceivable to the consumer and you are focusing your investment on generating trial. When you generate the trial, our data says we will get elevated levels of repeat and that becomes a virtual cycle. If these businesses, as we plan and expect them to do, drive growth and market share, then as you progress through the year, you come out of 2019 in a very good place, growth reestablished, scale businesses to your point about market share with growing market shares and then you enter 2020 in a very different place with an activity array that will be different, strong. Clearly 2020 has been worked upon for a while and we’ll decide based on that activity plate what is the necessary level of investment. But it'll be driven by the activity that we have and based on our planning it will be driven by activity on a 2019 that sees us get back to a stronger rate of growth.

Thanks good morning everyone.

Hi Kevin.

Hey good morning Ian. Question on cost structure, as we know it's not uncommon to see companies lean in a bit harder on cost savings in an effort to fund some of the stepped up reinvestment when we see the EPS reset kind of years, but that wasn’t outlined this morning. We didn't see an expansion of the Global Growth and Efficiency Program or step-up and savings expected from funding the growth. So while I don't want to put words in your mouth, presumably there's a certain level of comfort with what the company has already outlined. So I can appreciate sensitivity on the topic, but one, was that a consideration as you were building the plan with what looks like it's going to be about 100 basis points of hurt to the P&L in the year? And then two on that topic maybe perhaps just provide an update on how you see opportunity on this front with respect to cost savings? Thank you for that.

Yes, thank you for your question. To address funding growth first, if we look at our gross margin roll forward, our funding growth savings in the fourth quarter were 280 basis points, compared to 250 basis points in the same quarter of 2017. We have set ambitious goals for 2019 internationally, and we often push beyond those goals. There is a strong focus on generating more from our funding growth program. Regarding the Global Growth and Efficiency Program, we extended it for an additional year and have incorporated several new initiatives that leverage progress in our three main areas: hubbing, shared service centers, and ongoing facility rationalization. We are also actively seeking new opportunities that haven't yet been included in our plans, and we will pursue them if we identify them. We have a clear strategy in place, and we are committed to continuing our aggressive search for improvements.

Thank you. My question is about your investments in e-commerce and direct-to-consumer. It sounds like there's not a significant increase in spending in this area, so I'm interested in how your strategy is evolving to capture more of our consumers. Specifically, with regular online initiatives, how much effort is going into changing formulations and packaging compared to adjustments in messaging, such as sidebar promotions? Additionally, could you provide more details on your direct-to-consumer initiatives? You mentioned Hill's to Home, but since you already have a strong presence with Hill's, what additional benefits do you see there? Also, how are you applying the capabilities you've developed with Hill's to other parts of your business? Thank you.

From an e-commerce perspective, one of the reasons we are collaborating with Hubble and Bombay Shave is to gain external insights into certain areas and techniques that we can experiment with. We are examining various e-commerce go-to-market strategies and will continue to expand our experiments moving forward. The importance of Hill's direct-to-consumer model lies in catering to a specific group of consumers who prefer the convenience of online shopping. However, for prescription products, a vet's recommendation is necessary, and many customers actively seek that recommendation. Currently, dedicated online shoppers cannot obtain this from their local vet online and must receive it in person. This setup allows us to maintain vet engagement while delivering the product in a manner that meets customer preferences. Our subscription model has shown that this approach enhances pet health, as it encourages pets to stay on their diets, thereby maximizing the benefits of the product.

Olivia, I'll add a bit more detail to that. We are definitely increasing our spending in digital. We are seeing a significant acceleration in digital as we move into 2019, similar to what we experienced in 2018, which we believe is impacting our e-commerce shares. Our e-commerce shares in the U.S. have increased by 60 basis points. In the toothpaste category, we are clearly the market leader with a five share point lead over our nearest competitor. In the competitive China market, our shares are flat this year, but we believe we are gaining valuable insights and plan to introduce new innovations in that market in 2019 to drive growth. Our largest e-commerce segment, Hill's, performed exceptionally well this year, with an increase of 50 basis points. We are very pleased with the progress that team has made in utilizing digital as their sole advertising medium, investing 100% in that area. This strategy is yielding positive results for both our e-commerce and brick-and-mortar shares. The success of the Hill's business has been consistent throughout the year, with our vet channel shares for Prescription Diet also up 60 basis points, and our Science Diet pet superstore business up 60 basis points as well. We believe the focus and insights we are gaining from our digital spending are effectively contributing to our e-commerce business.

Thank you very much. Could you provide more insights into your business and commercial activities in China? In your opening comments, you mentioned you anticipate improvements in the second half. What are the drivers behind that? Additionally, how is the Dare to Love program progressing with Alibaba? Are there any updates or initiatives with them? Also, could you discuss premiumization in China and Elmex? Thank you.

Yes. Well, thanks Robert. China, as we said, made sequential improvement, but continued to be down as we work through the very complicated destocking areas to get the substantial pricing that has been taken to the shelf. And yes, you're right, as we said earlier, we expect that to be a journey and whilst we expect to see sequential improvement in the first half of the year, we don't expect to return to positive growth until the second half. Share is holding okay. Consumption is holding in okay. Dare to Love was repeated with Alibaba this year, but the important new news was Elmex. And that product started on team with Alibaba and it's up to over one share point. So, a reasonably good start for a slow-build therapeutic product. And we're quite pleased with that. And as Noel mentioned, we'll be going with an at-home whitening offering in China online the same way that happens to be a high-growth area as well in China. So, a lot of plans in place. And we are just going to have the have the patience to work through it.

Hi, this is actually on behalf of Bill. Thank you for taking the question. We wanted to discuss the balance between volume and pricing, especially in emerging markets for the upcoming year. We understand that the volume decline was linked to pricing in the latter half of last year, but looking ahead, do you have any insights on the timing, considering competitive pricing actions, for when we might start to see volume growth in emerging markets, perhaps in the middle or later part of this year? Any additional information would be appreciated. Thank you.

Yes, as you said we were pleased with the pricing that we have taken. And as you rightly say, there is always an impact on volume. So, as we think about it for next year, the plan we have is to balance pricing and volume. And it would be fair to say that the recovery of volume at least in the emerging markets as you say is spread across the year. Said from a big picture point of view, it is pricing-led growth for the year, but there's a volume component.

Thank you, and good afternoon everyone. I have a quick follow-up and then another question. Regarding the situation in China, I was surprised that pricing wasn't higher in the Asia Pacific region considering the pricing adjustments you're implementing in China. It seems there may be some timing or inventory issues still needing to be addressed, which could explain this. If you could clarify that, it would be helpful. Additionally, I wanted to discuss the insights gained from your professional skincare acquisitions made early last year. The numbers indicate that these acquisitions have been quite successful, albeit from a small base. I'm interested in what insights you've gained from this experience and whether you plan to extend the professional skincare line into retail skincare or other distribution channels. Is that something you're considering focusing on? Given everything we've discussed today, is this even a priority at this time?

Yes. Well thanks for the questions. Frankly, Mark, you answered your own first question. And that was what I was trying to imply by that these stocks are working through, so we are working the pricing to the consumer, but it is delayed as we work through the complicated inventory destocking. But I didn't know where you were going to go with the professional skincare business in terms of our learning. I think one thing we would say is that we obviously as Noel said expanding the portfolio in the geographies that we have which we think will continue to drive the strong growth of that business. The other thing I would comment at this stage in terms of the top line for North America you will remember that effective 2019 that PCA and Elta will now be incremental to the organic growth of North America which is a nice uptick for that business. As to the idea of retail, I think our thinking is we are likely to take the model and expand more products in the portfolio to other locations as a first step, but I wouldn't rule out retail at a point in time. But I don't think given all of the other things as you suggested we are focus on this year that 2019 would be the year that we would consider that.

Good morning. Thanks very much. So, how much…

Hi, Jonathan.

Hi. So, how much do you think a below average microenvironment if roughly the way to think about restrained emerging market growth in 2018 because in light of what at least look like similar FOREX and macro trends in 2009 or even 2015 when your own numbers were a little bit better? There's anyway you can share it or maybe parse what's secular from what's cyclical in emerging markets would be helpful? Thank you.

I'm not an expert in macroeconomics, but our focus is on consumer behavior. A notable change occurred in Latin America, where we observed a lack of usual inflation, which we believe is starting to return due to the underlying pressures from commodity prices. Additionally, we’ve concluded that Mexico appears to be ahead of Brazil by about six months. While we maintain a cautious outlook on Brazil, it's possible that it may follow a similar trend. Beyond that, I won't make any major predictions. Our products are primarily essential usage items, and we have the capacity in our portfolio to adjust based on market growth. Even in Brazil, where the category has faced challenges, our market share has remained surprisingly strong. Those are the main points I feel comfortable discussing.

Hi, thank you. Ian my question is a follow-up on China. So, you sounded optimistic that the high-teens price increase in China is working its way there. But can you break down the performance between direct and indirect channels? Are the volumes still declining in both direct and indirect? And if inventory has normalized in the indirect channel? And also more like a fundamental question about that could you also just explain a little bit more what's driving the indirect channel to be actively seeking out the lower price Colgate products considering the commentary about China generally premiumizing. So, any color on that would be helpful? Thank you.

Yes, interesting question Andrea. I think pricing generally moves to the direct trade more quickly than it does the indirect trade and we had made that point on the last call. And then when we talked about the destocking, I think we laid out quite clearly the fact that the distribution go-to-market now has become enormously complicated in terms of the multiple ways people can buy a product whether it's a direct, whether it's indirect, whether it's online, whether it's offline. And that is what created the complication compounded by the fact you have less visibility with the indirect channel than you do with the direct channel. So, it is the indirect channel, but remember the indirect channel in China still goes to modern trade outlets, supermarkets. So, it's that that's going to have to work its way through.

Hi, good afternoon. Ian you referenced a few times in the call so far that two-thirds of the price increases have already been secured. So my question is, if you by chance do not secure the other third of the intended price increases where would that place within the spectrum of your 30 to 50 basis points of gross margin expansion this year? And then John for guardrail purposes, how do you think about operating profit dollar transfer the full year since EPS will be down mid-single digits? Thanks.

Yes, I'll speak for John. The purpose of my comment about pricing was to express confidence that we will achieve all of it, as over two-thirds is already established. This is in light of the first half challenges related to raw materials and foreign exchange, as well as insights from competitors in similar markets. Unless stated otherwise, we aim to convey our confidence in executing the pricing strategy. Regarding operating profit, as you know, we do not provide guidance on that; we focus instead on gross margin and EPS. Relating to gross margin, if we successfully implement the pricing while supporting our growth plans for the year, we are optimistic about our guidance of 30 to 50 basis points on gross margin. I believe that covers all the questions. Thank you for joining the call, and we look forward to speaking with you in April.