Colgate-Palmolive Company (CL) — Q3 2019 Earnings Call Transcript

Thanks, Paula. Good morning, and welcome to our third-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 2018 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 Noel Wallace, President and Chief Executive Officer; and Henning Jakobsen, Chief Financial Officer. I will begin with some thoughts on our performance before discussing our updated 2019 guidance. We'll then open it up for Noel's Q&A session. The third quarter marked a further step in our plan to return to sustainable organic sales growth. Throughout 2019, we have focused on innovating around the core of our business, driving growth in adjacent segments, and expanding our availability in faster-growing markets and channels. Along with higher levels of consumer-facing spending, these strategies are paying off in broad-based growth across our businesses. Q3 marked the third quarter in a row where we delivered a combination of both volume and pricing growth on an organic basis. Volume was up in every division, and pricing was positive in every division except for one. Our revenue growth management strategies are driving pricing growth as we focus on premium innovation. On a geographic basis, we saw organic sales growth in five of our six divisions. Importantly, we returned to organic sales growth in Asia Pacific, including delivering organic sales growth in the Greater China region. We drove a good combination of developed market growth, plus 3.5%; and emerging market growth, plus 6%. And from a category standpoint, we again delivered organic sales growth across all four of our businesses: Oral Care, Personal Care, Home Care, and Pet Nutrition. In order to drive this growth, we continue to invest behind our businesses. Total advertising spending was up nicely in the quarter. In particular, I would point to Hill's where a significant increase in spending over the past few years behind our purpose-driven marketing has been a key driver of the organic sales growth. We were also pleased to close the Filorga transaction on September 19th, continuing the expansion of our Personal Care portfolio into skin health, although we point out that Filorga's results from the acquisition date through quarter end were immaterial to our results of operations and were not included in our Q3 results. On the sustainability front, we received recognition from the Dow Jones Worldwide Sustainability Index, taking the lead in our industry sector for the first time. Back in September, Noel discussed our new recyclable toothpaste tube. We are currently in production, and it will be on the shelf under the Tom's brand in November. Moving to our Q3 results. Our net sales grew 2% in the quarter. We delivered 4.5% organic sales growth, with 3% unit volume growth and 1.5% favorable pricing. This was partially offset by a foreign exchange impact of minus 2.5%. On a GAAP basis, our gross margin was even with Q3 2018. Excluding the impact of our Global Growth and Efficiency Program, it was down 20 basis points year-over-year. Pricing was a positive 70 basis point impact to gross margin in the third quarter, while our productivity programs drove a 240 basis point benefit. This was offset by a 310 basis point drag from raw materials inflation, which included foreign exchange transaction costs. Other, primarily mix, was unfavorable by 20 basis points. Our stronger growth in emerging markets relative to our developed markets business put some slight pressure on our gross margin. On an absolute basis, advertising investment was up 7% year-over-year. On a percent of sales basis, advertising was up 50 basis points year-over-year. Excluding charges resulting from our Global Growth and Efficiency Program and advertising spending, our SG&A expenses were up year-over-year in the third quarter on an absolute basis but down as a percent of sales, as we were able to offset higher compensation and other costs with savings from our productivity programs. On a GAAP basis, diluted earnings per share of $0.67 were up 12% year-over-year in Q3. Excluding charges resulting from our Global Growth and Efficiency Program in 2019 and 2018, acquisition costs in 2019 and a charge related to U.S. tax reform in 2018, diluted earnings per share were down 1.5% to $0.71. Our free cash flow through the first nine months of 2019 was $1.9 billion, which was up 3% versus prior year. Taking a quick look at the divisions. North America net sales grew 1.5% in the quarter, driven by 1% pricing growth and 0.5% volume growth. There was no FX impact in the quarter. Our performance in e-commerce, where we continue to see strong share growth and other non-measured channels, was partially offset by declines in food retail. We also remain very pleased with the performance of our skin health businesses, Elta MD and PCA Skin. Our focus in North America continues to be on the premiumization of our Oral Care portfolio through innovation. Colgate Total SF and Colgate Optic White drove pricing growth in the quarter, and we have further innovation to come in the next few quarters, particularly on Optic White. Europe posted a 5% decline in net sales, with organic sales flat and foreign exchange minus 5%. Growth in Northern Europe behind the relaunch of Colgate Total and our whitening brands was offset by weakness in Western Europe, where the retail environment continues to be difficult. As with North America, we expect significant premium innovation to drive improved price mix going forward, as we have a full calendar of naturals innovation in the first half of 2020. Latin America net sales were up 3%, as 4.5% volume and 3.5% pricing were only partially offset by 5% negative foreign exchange. Our 8% organic sales growth was broad-based, as we saw organic sales growth in every hub for the third quarter in a row. While Brazil benefited from the year-ago comparison, which included some impact from the trucker strike, the underlying business remains solid and pricing was up nicely, driven by premium products like Protex Face and Colgate Total 12. Net sales in Asia Pacific were up 2.5%. Volume growth was 2%. Pricing grew 1%, while foreign exchange was minus 0.5%. Organic sales growth of 3% was our first positive result in six quarters. Importantly, we delivered organic sales growth in the Greater China region in the quarter, driven by improvements in both volume and pricing. While the China improvement in the third quarter was ahead of our expectations, we remain laser-focused on executing our plan to return the business to sustainable profitable growth through improved go-to-market capabilities, China-specific innovation, and improved brand marketing. Asia-Pacific growth was led by toothpaste, particularly our naturals portfolio and Colgate anti-cavity toothpaste. The Africa/Eurasia division delivered 5% net sales growth in the quarter, its best result in several years. Organic sales growth of 6% consisted of 4% pricing growth and 2% organic volume growth. FX was a 2% drag on net sales growth, while our newly established joint venture in Nigeria was a 1% benefit to net sales and volume growth. The organic sales growth in Africa/Eurasia was consistent across all hubs and we are particularly pleased with our strong performance in Eurasia in the quarter where our focus on faster growth channels like discounters is paying off. Momentum on our pet food business continued in Q3, as Hill's delivered 8.5% net sales growth and 10% organic sales growth. Hill’s' 6.5% volume growth was their best result since 2006. Pricing was positive at 3.5%, while foreign exchange was negative at minus 1.5%. Our core innovation strategy continues to deliver robust growth in North America and is now beginning to pay off internationally as we rollout the Science Diet relaunch around the globe. In August, Hill's partnered on NBCUniversal's annual Clear the Shelters Pet adoption campaign in the U.S. This year's campaign was its most successful ever, with over 160,000 pets adopted over the course of the campaign, an increase of 57% versus last year's program. Hill's earned over 9,000 displays, which helped drive the strong U.S. volume growth in the quarter. Moving on to guidance. We continue to expect net sales to be flat to up low-single-digits. We have raised our organic sales growth target to plus 3% to 4%, with the full-year growth rate roughly in line with year-to-date growth. We now expect our full-year gross margin to be down slightly on both a GAAP basis and excluding the items referenced in the earnings press release. We do expect gross margin to be up year-over-year on both a GAAP and non-GAAP basis in the fourth quarter. We would expect advertising as a percent of sales for the full year to be fairly consistent with the year-to-date level. We now expect our full-year 2019 tax rate to be between 24% and 24.5%, both on a GAAP basis and excluding the items referenced in the earnings press release. Our previous guidance was for 25% to 26%. This change includes the recent reduction in corporate taxes in India. As mentioned on the Q2 call, we will moderate our share repurchase activity for the next several quarters in order to return to a leverage ratio more in line with our ratio before the Filorga transaction. Based on current spot rates, we expect the GAAP earnings per share to be down low-single-digits for the year. Excluding the items referenced in the earnings press release, we still expect earnings per share to decline mid-single-digits for the year. And with that, I'll turn it over to Noel for the Q&A. Paula?

So, Noel, question on the gross margin and for John as well. How do we think about what caused the weakness in Q3 in gross margin sequentially from the last quarter and what changes, if anything, to drive the positive inflection in Q4 and into next year? Thank you.

Sure. Thanks, Steve. We are disappointed with the gross margin in the third quarter. Several unexpected factors contributed to this. The sales mix, as John mentioned, with more growth from emerging markets affected the margin negatively. We saw significant and extraordinary growth in the Hill's business, which we are very pleased about, but the shift toward Science Diet over prescription diet did compress margins a bit. Additionally, raw material costs and foreign exchange rates were slightly worse than anticipated as we entered the quarter. Overall, we faced a few surprises. We are concentrating on premiumization and accelerating growth funding in the fourth quarter. Ensuring the right mix across regions will be our focus going forward. We are confident that fourth quarter margins will rebound as we conclude the year.

Thank you for that. I was wondering if you could discuss the trends in North America. I understand that Nielsen data doesn’t capture the complete picture of your Oral Care business. However, based on this quarter's results, it seems like we are still more focused on price mix rather than volume. Could you share some insights on the progress of the Total relaunch? What trends are you observing regarding repeat purchases, and is there a possibility that the pricing for that brand has been pushed too far? Thank you.

Thanks, Lauren. Yeah, let me talk broadly on Colgate Total. Obviously, we're really pleased with the relaunch. Our shares are up on a global basis versus where they were pre-launch. As you know, we took a 10% price increase on that business globally. Particularly as it relates to the U.S., we took a 20% price increase on that business. There has been some elasticity that we've seen come through. Our share is down about three-tenths of a share point versus where we were before we started the relaunch. A little bit disappointing, we expected it to be flat to up. We're in the midst of looking at our messaging and ensuring we get that corrected as we continue to accelerate investment behind that business moving forward. But pleased given the significance of the price increase that we're slightly down, but more importantly, we'd like to see that turn around as we get some of the go-to-market and some of the marketing plans sharper in the balance of the year. But globally, pleased, as I mentioned, the fact that we've gotten a 10% increase and we're growing share is real progress for us. And we'll continue to put the investment behind that business as we move through the balance of this year and into the first half of next year. It's consistent with our strategy to get the core businesses moving and we'll look to relaunch some other core businesses in 2020. We will start to outline that as we move into the first quarter press release. Some of the excitement that we have on some of the innovation coming down that will come with more pricing as you would expect and more premiumization. All-in-all, I think we're pleased with Colgate Total overall. The U.S. was a bump this quarter for sure. We were expecting a little bit more. It's been a tough promotional environment in the U.S. Other channels, non-tracked channels continue to do well, but not as well as we had in the second quarter, so a bit lumpy in that regard. We're very focused in the U.S., specifically on premium innovation and getting that right as we move into 2020. Our revenue growth management principles that we're starting to embed across the entire commercial organization, we see the discipline coming behind that. And we're quite optimistic that we'll see gross margins continue to improve as we move through the balance of 2020 and we'll see the shares come back as we start to put the premiumization strategy in place.

There was significant top-line performance in the pet segment this quarter. I'm curious about how this compares to your initial plans and how it might impact your future outlook, if at all. Additionally, when do you expect to see a profit improvement in that business in line with the top-line growth? Following up on Steve's question regarding Strycula, I understand the challenges regarding gross margin this quarter. However, how might this quarter shape your goals for realistic gross margin targets for 2020? It seems that 2019 marks the fourth time in five years where Colgate has started the year with expectations for substantial gross margin improvement only to end the year either flat or declining. While I acknowledge the macroeconomic pressures, there appears to be a consistent trend. How do you plan to ensure that you don't set overly ambitious goals in 2020 that may require adjustments midyear? Thank you.

Thanks, Steve. Let me first address Hill's. It was an extraordinary quarter for the Hill's business. The Science Diet relaunch, which is currently focused on the U.S., is being rolled out globally. We're excited about the future prospects there. The U.S. had an exceptional quarter, especially with Science Diet. Our efforts to drive core growth, increase advertising, and optimize pricing and distribution have paid off. We experienced a 14% increase in farm and feed this quarter due to a heightened focus on emerging channels. Our e-commerce market share grew by 0.8 percentage points, and our pet specialty market share also increased by 0.8 percentage points. This all points to sustainable growth ahead. We anticipate continued growth in the pet category, with significant innovation in our prescription diet products expected in 2020, which will enhance our margins. We were slightly surprised by the gross margin and the rise in raw material costs for vitamins and agricultural products this quarter. The business has implemented price increases early in the quarter for both the Science Diet and prescription diet products to offset these costs and improve gross margins moving forward. Overall, we're very pleased with Hill's performance, which is sustainable and broad-based, and we have promising news regarding the international expansion of Science Diet and innovations in our prescription diet. Regarding your margin question, our strategy remains focused on driving core businesses through price increases and innovation, while ensuring we get our adjacencies right. We're pleased with how our portfolio around skin health is developing, which will contribute to long-term margin growth. We're exploring adjacent segments, particularly products with natural ingredients and those addressing sensitivities and gums worldwide, which should drive channel expansion into pharmacies where we currently have less presence. We have substantial growth opportunities in that channel, which will enhance gross margins going forward. While we're disappointed, we understand our history involves consistent gross margin improvement. We're dedicated to improving productivity in our P&L to achieve that. As our top-line continues to grow, which we have been focusing on this year, we expect our gross margins to follow suit as we progress through 2020.

Hey. Good morning, folks. Thanks for slotting me in. I appreciate it. I'm going to build off of both of those points, real quick on pet. I see your incredibly strong numbers and congrats on that. I also see Nestle strong numbers on its legacy premium brand coming out of the U.S. It does beg the question of whether or not we're seeing a broader market movement, pivoting back away from grain-free to some of the products you're offering and Nestle's offerings as well. I'd love it, if you could comment on that, particularly in the wake of the DCM concerns out there? And then coming back to gross margin real quick. I hear you on the mix components, but I'm nonetheless really surprised when we delve into North America and see 220 basis points of gross margin compression. Despite sort of an easy comp, sequentially your margins eroded a lot more in that market. Inflation pressure stepped up a lot, which seems to defy the broader cost curves we're looking at. And frankly, it leaves me a bit confounded. And I'd love it, if you could delve deeper there and just to illuminate what's happening there so we can better understand it?

Certainly, let me address the question about Hill's first. DCM has clearly had an effect. There has been a notable return to products like ours, which are grounded in science and have built significant trust over the years. As John pointed out, we've shifted a considerable amount of our advertising to focus on our core mission, which has enhanced our credibility and resonates well with consumers and pet owners, leading to growth. We also recognize that we are positioned at a premium price point. In the broader market, we've observed competitors moving towards grocery, which we believe presents an opportunity for us to further distinguish ourselves and ensure long-term sustainability for our business. Our innovation pipeline is strong and ambitious, and we're confident about pricing strategies. I anticipate that our business will continue to perform well. Now, regarding North American margins, we were certainly disappointed with the quarter's results. Both volume and pricing fell short of our expectations. The mix worked against us this quarter, influenced by channel, sizing, and category factors. We had challenges from all three aspects and need to address that. Our team has implemented plans for the fourth quarter to rectify this as we enter the 2020 budget planning. Additionally, manufacturing costs were unexpectedly higher, but we are managing that and will tackle it in 2020. We expect to see improvement in North America in Q4, although there may still be some headwinds as we work out the channels and sizes. However, we believe that, similar to the overall business, margins will strengthen in the fourth quarter. In other areas, our promotional lifts have not met expectations, partly due to a more competitive landscape with smaller brands. We plan to increase our spending, especially in digital, where we can gain an advantage, which we hope will lead to faster growth for our larger brands. We are actively addressing these issues and are not satisfied with our performance. As we move forward in North America and continue to bolster our skin business, we believe this will be beneficial for margins in the long run.

Hi. Just following up on that. First, on the skin care business, you've got three acquisitions. It sounds like you're pleased with each of them. It sounds like that each kind of fell a different niche. But can you comment on sort of any further appetite there? Do you feel like you kind of are where you want to be in skin with those three different businesses? But then my bigger question first, really just a follow-up. My bigger question is, you talked about maybe expanding the sort of relaunch initiative or program like you have with Total and Hill's this year, into some new categories next year. So bottom line, I'm wondering will operating margin go up next year? I care less about gross margin. I care more about how much you plan to spend on marketing? Thank you.

Thanks, Wendy. Yes, on your second question, we're not going to guide yet on 2020 as we get into the first quarter. We will give you deep transparency in terms of how we're thinking about margins and operating margins. But overall, if you take where we've been historically, I think you can interpret that we would obviously like to see all those moving in the right direction. Specifically, on the skincare, as you said, we're really pleased. I just returned from a two-week trip around the world meeting with some of the Filorga people, welcoming them into the Colgate family both in Europe and in China. And I was deeply excited from what I saw from a quality of talent standpoint, from the plans they have in place, from the growth they are delivering, and the significant gross margins that they have on those businesses. The plans are solid. They're focused in terms of areas that we believe we can win in and where they believe they can win in on the Filorga business. So, I'm pleased they’re not trying to stretch themselves into different areas. They're very focused on the pharmacy channel. They are very focused on online and obviously building their travel retail business out, which is exciting. On Elta and PCA, again, terrific growth in the quarter for the business and we're now looking at the 2020 plans in terms of how we want to expand those businesses, which will be exciting. Obviously, the margins allow us to have a lot more flexibility as we move forward and the growth in the category looks terrific. So overall, we're quite pleased with what we have. Never say never, but our focus is to continue to accelerate the growth on those businesses from a top-line and a bottom-line standpoint.

Great. Thank you very much. I was wondering if we can return to Oral Care. You mentioned that you were very pleased with the Colgate Total relaunch. I was wondering, first, if you can give us a sense of how much kind of global sales are up for that franchise? And then perhaps go into a little bit more detail globally on how you're doing with therapeutics? How are Elmex and Meridol doing? What markets they've been gaining traction in and maybe how much those are up? And then touch on naturals, particularly in countries that there have been issues and opportunities in China, Russia, and India? Thank you.

Yes, we won't comment specifically on the sales numbers. However, I can share that the organic growth of our toothpaste in the quarter was the highest we've experienced in six quarters, which is fantastic for us. We noticed significant acceleration in growth as we launched Colgate Total across Latin America. In our two largest markets, Mexico and Brazil, we have seen considerable success with the rollout of Colgate Total. Our premium segment share in toothpaste is increasing in both Mexico and Brazil. Market shares for Colgate Total in Brazil have risen by about 1.5, and in Mexico by approximately 0.5. Overall, these figures are encouraging and are pushing more of our business into the premium category. We're satisfied with the performance of Colgate Total. As for your second question regarding pricing, I can't recall what you asked me, Robert?

On Elmex and Meridol, and then also on the naturals?

Thank you. Yes, Elmex has been launched in Latin America, specifically in Brazil, and the business is performing well. We introduced it in the pharmacy channel with toothpaste, toothbrushes, and mouthwashes, where we are experiencing significant growth, particularly in toothpaste and toothbrushes, although mouthwash sales have been slightly weaker. Additionally, we launched Elmex online in China, achieving about a 0.6 share point, which is a solid result considering the competition in that market. We also launched in the NAMET region, which continues to do well. In Turkey, the Meridol brand has been performing excellently, as we mentioned in our second quarter call, and it is helping us achieve market leadership alongside Colgate. Overall, we are satisfied with the progress and are actively considering which key markets to expand into in 2020.

Hey, everyone. I have a broad question to consider. We notice that among your competitors, there has been some difficulty with pricing, particularly during a significant innovation rollout with Total and commodities that should have facilitated price increases. However, it seems to have been more challenging for you than for others. What do you think accounts for this difference? Is there a specific competitive dynamic in the category, such as Sensodyne's parent company preparing to go public in the next couple of years? Additionally, you have previously insisted that your investments are sufficient and that 2019 was more of a reinvestment year rather than the start of a multi-year investment period. Based on what you have observed so far—considering the competitive dynamics in the category and the ROI on promotional spending you just mentioned—do you have any concerns about your earlier statement regarding the absence of a multi-year reinvestment phase for Colgate? Also, do you anticipate needing to increase reinvestment further in 2020? Thanks.

So, let me address the pricing question first, Ali. We are very satisfied with the pricing; over the last two years, we've experienced four consecutive quarters of sequential growth in this area, which is fantastic for us. In the highly competitive environment we operate in today, achieving this pricing not just on Colgate Total but across our brands is a significant accomplishment. Our focus on core business, delivering genuine value to consumers and retailers, and successfully maintaining price increases shows that our strategy is effective, and we intend to continue with it. Regarding your second point on advertising and investment, we recognize the importance of continuing to invest in our business to accelerate market share growth globally. We have a strong pipeline of upcoming innovations, and we'll be supporting major core relaunches. However, our current priority is improving gross margins and enhancing productivity across the profit and loss statement. This focus will shape our financial outlook for 2020, particularly in utilizing operating margins, both from a gross margin perspective and a business operations standpoint to finance the advertising necessary for driving top-line growth.

Great. Thanks. Good morning. First, regarding the Optic White innovation in North America, I assume that it’s smaller than the Total relaunch. Can you share what other strategies you plan to implement in the market to counterbalance the higher base? Additionally, about the advertising, you've been increasing your advertising budget for four consecutive quarters now. Organic growth has been consistently improving. However, how do you plan to enhance the return on your spending? Some markets and brands, like Hill's, have really excelled, and while you mentioned improvements in China, North American growth has now slowed. Is there a need to possibly increase investment even more aggressively moving forward, or what will improve the ROI on that? Thank you.

Sure. Thanks, Olivia. So on the North America question, they've got a great pipeline behind Optic White in terms of some of the innovation coming, which will include premiumization. As you can imagine that, likewise, we'll be looking at premiumization around the world on Optic White. In fact, we have introduced a 20-pound toothpaste behind Optic White in the UK to give you a sense of the boldness of how we're thinking about some of the premiumization strategies. Likewise, when you take the trend towards natural ingredients in the U.S., you'll see expansions across the Colgate portfolio as obviously a step-up on our Tom's of Maine business as well, which we think will be important in terms of driving more premiumization in the North America business and driving more share growth. Relative to pricing and what we need in advertising around the world, listen, let me come back to revenue growth management and how we're trying to embed that across the world, across the commercial organization. We talked about it a bit. But as I travel, I'm getting more encouraged by the fact that it's taking on deep commercial ownership. So historically, we would take pricing and the directive for that came out of the marketing organization. Now, we're taking our GM across the entire commercial enterprise and holding everyone accountable for delivering pricing opportunities moving forward, not just the marketing folks. So, this is going to be a shared responsibility to really go after how we drive ASP, which will ultimately bode well, I think, for the margin. And the spending that we'll need around the world to continue to fund the opportunities that we have. So, on the advertising and the P&L dynamics for 2020, we will come back to you in the first quarter and give you a lot more clarity on how we're thinking about things. The return on investment, we'll see really coming through as we continue to focus on these big core businesses, which we need to get turned around. And that's where we're going to get the best return on investment, putting a lot more support behind data analytics, particularly in the digital space where we have the ability to really cultivate learning in terms of what's working, what's not. And that will obviously improve our ROI as we move forward.

Noel, question on North America and specifically the competitive environment currently and looking forward. So in a context overall, there is a consensus view that industry participants have been relatively rational from a pricing and promotion perspective over the past 12 months with pricing that was put into place in the fall. But as the industry starts to cycle this pricing and with commodity headwinds now less onerous than they have been, it would be great to get your updated thoughts on the promotional environment and specifically the potential for competitive intensity to pick up your, potentially, the detriment of the profit pool. So, any thoughts there would be helpful? Thank you.

Yes, the global environment has become more rational, especially in North America. The exception is Brazil, where we've encountered some unusual pricing that doesn't make sense. In North America, many of our competitors are collaborating with the trade, all aiming to enhance category value. It's essential that our innovations are premium and contribute to growing category dollars, benefiting everyone involved. Over the past six to nine months, there has been a slight uptick in some smaller brands as the trade promotes them. Looking ahead, I believe that as the big brands refine their digital strategies and focus on data-driven marketing, there will be more opportunities to strengthen our connection with consumers, which is crucial in competing with smaller brands. Overall, the competitive landscape is rational, and while there is a bit more competition from smaller brands, promotional lifts are not as high as before. It's reassuring that we don't anticipate an increase in sales on promotion. We need to get our innovation and premiumization right in North America to succeed.

I would like to follow up on the situation in Mexico, as well as in all of Latin America. We’ve definitely heard from some of your peers and multinational companies that there is a slowdown occurring. Can you share what you are observing in this key market? Additionally, how do you plan to manage pricing as we approach next year, considering all the other questions raised today?

Sure. So, let me take the two big markets, Brazil and Mexico. I'll take Brazil first. Brazil, obviously, up versus where we were last year, a little slowdown in the third quarter, but the consumer continues to be pretty robust there. Our business was up double digits in the third quarter. Obviously, a slightly easier comp versus where we were with the trucker strike, which partially hit us in the third quarter last year. But again, as I look at Brazil, and quite frankly, Latin America, good pricing, good volume, following good pricing that we took in the second quarter of 2019. So after aggressive pricing, we saw volume come back very nicely across the region. And we think that really bodes well for the underlying health of Latin America, specifically Brazil looks pretty good. Mexico, on the other hand, a little softer. We saw a little softness in the quarter versus what we've seen in the first half of the year. I think there is some uncertainty in terms of politically and economically where things are going there. Our strategy is the same. We're focused on premiumization. As I mentioned earlier, the total business is performing exceptionally well in that market. We're pushing naturals, natural ingredients into the portfolio as well. We've seen that as a significant ASP premium to the market. We are pushing sensitivity in that market. We have seen some nice growth on that as well. So overall, it's a premiumization strategy across the region. But as we see some of the markets slow, specifically Mexico, we will dial that up.

Hi. Thank you for including me. Could you discuss Asia Pacific? It showed sequential improvement in the headline numbers but not on a two-year basis. Regarding volumes, it seems there was an increase and acceleration there. Is this related to the destocking in China and the improvement you mentioned for the second half? Is this in line with your expectations? Do you have any insights to share specifically about China or Asia Pacific? Thank you.

Sure. Thanks, Andrea. Yes, we're pleased. Obviously, as John mentioned, with Asia, it's a little ahead of our expectations. We saw growth across every one of our hubs. It was broad-based and strong in terms of volume and price. And we feel that the momentum we have across Asia will continue. The particular call out was China. Obviously, a journey to get here, and we feel the strategies we've put in place in terms of our go-to-market changes, our portfolio changes, how we're working across the different retail environments, particularly online and the structural changes that we made in that organization are all starting to pay off, as we saw China deliver its first positive organic since Q4 of 2017. So again, it's been a while to get there, but we feel we're in a very good place and we'll continue to see that growth accelerate as we move into the fourth quarter and as we look at the 2020 plans, we would certainly hope to see that business continuing to grow. We realize that a lot of our competitors are getting significant growth out of China, so this bodes well that we continue to see our business accelerate and the strategies that we've put in place are starting to work.

I have two questions. First, could you discuss your thoughts on sustainability regarding Hill's? Were there any advantages from the additional channel fill resulting from new product launches in the U.S.? Secondly, I’m a bit surprised about the gross margin situation you mentioned. You indicated earlier in the quarter that you expected some pressure and had anticipated taking pricing on Hill's. So, during our conversation at the end of July, how much did you know about this at that time? What level of visibility do you have now to expect improvements in the fourth quarter and beyond?

Let me start by discussing the sustainability of the Hill's business. Currently, that sector is performing very well. We're enhancing our in-store presence, largely due to the trade recognizing the brand's sell-ins and its significance to consumers, as reflected in our brand positioning, messaging, and product benefits. The pricing has remained stable. The pricing we discussed earlier was not implemented in the second quarter; instead, we executed a price increase in the fourth quarter. At the end of September, we implemented another price increase for both our Hill's Science Diet and prescription diet lines. The benefits from this will become more apparent in the fourth quarter as they reflect on our profit and loss statement. We're also in the process of launching the Science Diet business globally; we've begun in Latin America and are expanding into Asia, particularly Japan, and also Europe. The early results mirror what we observed in the U.S., which is promising for the sustainability of this business going forward. Additionally, we've significantly increased our focus on innovation within the prescription diet segment, and you'll see plans related to this unfold in 2020. While this past quarter was outstanding, I am not implying that we will achieve double-digit growth in the fourth quarter or in 2020, but we do anticipate solid growth along with margin expansion as we progress into 2020. Regarding the mix issue, this was unexpected for us. Historically, we've consistently seen a positive or neutral impact on our mix. However, this quarter, there were challenges related to geography and categories that we did not foresee. Initially, the quarter looked fine, but as time went on, it became more difficult. We are addressing these issues and having the necessary discussions with our teams. We also experienced more foreign exchange impact on our P&L than we had anticipated. We were optimistic after last year's strong foreign exchange challenges that we would see more stable conditions in this quarter. Fortunately, spot rates have improved, and we hope they will remain stable. The unexpected challenges we encountered arose from both mix and foreign exchange issues, as well as some costs related to raw packing materials.

No, thanks. Again, I appreciate the questions. We're on the gross margin discussion. 90 days through the quarter, we'll get that addressed moving forward. Obviously, the top-line sequential growth looks terrific for the business. It's broad-based across all of our categories, as well as both emerging and developed markets. As we look to the first quarter, we will come back to you with, obviously, a lot more specificity in terms of guidance for 2020. Let me again thank the 35,000 Colgate people who have worked so hard to deliver that sequential growth in the P&L, which looks terrific. And we look forward to continuing discussions as we move into the fourth quarter and first quarter call. Thanks so much.