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Colgate-Palmolive Company (CL) Management Discusses Q2 2013 Results - Earnings Call Transcript

Colgate-Palmolive Company (CL) Q2 2013 Earnings Call July 25, 2013 11:00 AM ET


Bina H. Thompson - Former Vice President of Investor Relations

Ian M. Cook - Chairman, Chief Executive Officer and President


Joe Lachky - Wells Fargo Securities, LLC, Research Division

William Schmitz - Deutsche Bank AG, Research Division

John A. Faucher - JP Morgan Chase & Co, Research Division

Alice Beebe Longley - The Buckingham Research Group Incorporated

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Olivia Tong - BofA Merrill Lynch, Research Division

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Ian J. Gordon - S&P Capital IQ Equity Research

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

Michael Steib - Crédit Suisse AG, Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

Lauren R. Lieberman - Barclays Capital, Research Division

Javier Escalante - Consumer Edge Research, LLC

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division


Good day, everyone, and welcome to today's Colgate-Palmolive Company Second Quarter 2013 Earnings Conference. Today's conference is being recorded and is being simulcast live at www.colgate.com. Just as a reminder, there may be a slight delay before the question-and-answer session begins due to the web simulcast.

At this time for opening remarks, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Bina Thompson. Please go ahead, ma'am.

Bina H. Thompson

Thank you, Sarah. Good morning, and welcome to our second quarter earnings release conference call. With me this morning are Ian Cook, Chairman, President and CEO; Dennis Hickey, CFO; Victoria Dolan, Corporate Controller; and Elaine Paik, Treasurer.

This conference call will include forward-looking statements, and these statements are made on the basis of our views and assumptions as of this time and are not guarantees of future performance. Actual events or results may differ materially from these statements. So for information about certain factors that could cause such differences, investors should consult our most recent annual report on Form 10-K filed with the Securities and Exchange Commission and available on our website, including the information set forth under the captions Risk Factors and Cautionary Statements on Forward-looking Statements.

This conference call will also include a discussion of non-GAAP financial measures, which differ from our results prepared in accordance with GAAP. We'll discuss organic sales growth, excluding foreign exchange, acquisitions and divestitures. We will also discuss gross profit, gross profit margin, SG&A, operating profit, net income and earnings per share, excluding the impact of certain items described in the press release. And a full reconciliation with the corresponding GAAP measures is included in the press release and is posted in the For Investors section of our website at www.colgatepalmolivecom.

We're delighted with our second quarter results, which continue the broad momentum we saw in the first quarter. Our simple financial strategy has again stood us in good stead. We increased our gross profit margin, while at the same time, reducing our overhead expenses. This allowed us to increase our advertising to drive the top line and still increase operating profit, both on a dollar basis and as a percent of sales and of particular note with our 70-basis-point increase in advertising as a percentage of net sales versus the year-ago period, the largest increase in 3 years.

Our advertising ratio was up in every division and allowed us to support a very robust innovation program. As Ian mentioned in the press release, our new product pipeline is full, so that should bode well for the remainder of the year. And you'll hear about some exciting upcoming launches as I review the divisions.

In addition to a healthy P&L, our balance sheet is solid and our cash generation strong. As Ian remarked, our Global Growth and Efficiency Program is proceeding smoothly, as well as our ongoing Funding the Growth program, and both these initiatives provide substantial savings opportunities so that we can continue to invest in the business.

So let's turn to the divisions, starting with North America. We're very pleased with our continued strong results in this region. As referenced in the press release, we have good market share progress with increases across several categories. Of particular note was our launch in May of Colgate Total Advanced Pro-Shield mouthwash. As we told you last quarter, this has been introduced with a regimen concept and displayed with a companion toothpaste and toothbrush under the same brand name. Across the country, we had record regimen displays in-store. And in June, just 1 month after launch, we had over 5 share for Total mouthwash, with an overall mouthwash share of 8.4%.

As you would expect, we had a very robust integrated marketing support plan, which included television, sampling, in-store activity, digital and PR campaigns. In addition, we implemented a strong professional plan with both large pumps and small patient samples in dentist offices. Our field consultants communicated the product benefits, such us 12-hour antibacterial protection even after eating and drinking, with clear, impactful sales materials. Our share of Colgate Total toothpaste also benefited from the strong display activity, increasing from 10.5% prelaunch to 11.5% post-launch.

New product activities continue in this quarter. In the toothpaste category, we are launching Colgate MaxFresh Cool Scrub and Colgate Sensitive SmartFoam with Whitening. Colgate MaxFresh Cool Scrub builds on the strong franchise that the MaxFresh brand holds in the fresh breath segment. The freshening segment is large and appealing to young consumers, particularly in the 18- to 24-year range. This new variant has micro scrubbers for a freshness you can feel. During brushing, vigorous silica particles provide a micro scrubbing sensation as they gradually diminish. The packet sales calls out the benefit with a tagline, "Destroys bad breath bacteria from teeth and tongue."

Our new sensitivity toothpaste built on the insight that consumers understand that formulas with foaming technology have the capacity to get to tough-to-reach spaces while brushing to help provide sensitivity relief with the additional benefits of whitening and fresh breath. Colgate Sensitive SmartFoam provides 30% more foam than our existing sensitivity toothpaste, along with a maximum strength anti-sensitivity ingredient. It's also formulated with high-performance cleaning silica to remove surface stains and help keep teeth whiter. Additionally, this is an exciting opportunity as both the premium price sensitive and whitening segments are growing faster than the toothpaste category overall.

In toothbrushes, we're very excited about the launch of Colgate SlimSoft. This product was first launched in Asia and has garnered strong shares in several markets. In Hong Kong, for instance, it has a 15.6% year-to-date share, and in Thailand, almost 10%. The toothbrush has 17x slimmer tip bristles for a deep clean. The unique bristles provide a 6x deeper reach than end-rounded regular bristles. And the higher density bristles provide a unique feel, and the handle is flexible and ergonomic. As we told you in the press release, we recently achieved brand market leadership in manual toothbrushes, and this should help extend that leadership going forward.

Turning then to Europe/South Pacific. We're pleased with our results in this region, given the very challenging macroeconomic environment. As you well know, GDP growth rates are low to negative and unemployment is high, particularly in countries such us Spain, Portugal and Greece. Consumer confidence is low, and consumers are looking for value. While category growth is slowing, our market shares across Europe are doing well, with increases in toothpaste, toothbrushes, mouthwash and fabric softener. Two of our acquired businesses, GABA and Sanex, are also doing very well. Both now are fully integrated, and we continue to gain learnings and innovation ideas from these 2 high-margin businesses.

In toothpaste, we increased market share year-to-date in our 4 biggest countries: France, Germany, Italy and the U.K. And pleasingly, in the U.K., our share read for the last 2 periods was over 50% despite a highly competitive market.

In manual toothbrushes, we increased share in all but the U.K., where, although the share is modestly down on a year-to-date basis, we reached a record share of 33.6% in the most recent period.

We will continue to offer our consumers innovative products at all price points. We have some exciting innovation, providing added value at higher price points. Under the elmex brand, we are launching Colgate elmex Sensitive gentle whitening toothpaste, which provides effective protection and gentle care for sensitivity sufferers, with the additional whitening benefit.

And a new fabric conditioner, Soupline Perfect Glide, should help continue the good momentum we have seen across the region in this business. To lessen the chore of ironing, Soupline Perfect Glide has a unique formula with a polymer which allows for easier ironing while delivering an explosion of fresh fragrance.

Since I mentioned a moment ago, increasingly, the consumer is also looking for value. To that end, we're now relaunching our base Colgate toothpaste business across the region. The 6 variants, Colgate Cavity Protection, Colgate Triple Action, Colgate Anti-Tartar, Colgate Herbal Original White and Gums, will all have new modernized designs at affordable price points, an important initiative for a segment which still represents almost 30% of our business.

Similarly, in Personal Care, we're launching Palmolive Essential Body Wash. This line will be smaller sizes at a lower price, providing the value-conscious consumer with the affordable luxury of appealing fragrances, along with the quality assurance of the Palmolive brand.

Latin America. Latin America continues to deliver solid results with another quarter of strong organic sales growth. And as elsewhere, new product activity has been important driver of our business, and this is across all price points. In addition to the market share gains referenced in the press release, our market shares increased in underarm protection and bar soaps.

In Brazil, our toothpaste market share is up 80 basis points on a year-to-date basis to 71.7%, the highest level in 15 years, with the most recent read at 71.9%. Both higher-priced products such as Colgate Luminous White and value-priced products in the Sorriso range have contributed to the share gain. In Mexico, our share is still well over 80% at 81.5% on a year-to-date basis, with the most recent read at 82%. And we're now a market leader in manual toothbrushes in every country across the region, including Mexico.

Our share in Mexico was up 220 basis points year-to-date to 44.2%. In Brazil, we achieved a record 31.7% on a year-to-date basis, up 110 basis points. And we retrieved strong results, both in the premium segment in the modern trade, as well as in the indirect trade, where we have been driving distribution and visibility in a retail environment, which still represents 50% of the market.

In mouthwash, our market share across the region is up 30 basis points on a year-to-date basis, and we're now less than 3 points from the market leader, whose share has steadily declined over the last 4 years. In Mexico, we reached a record 23.6%, almost -- up almost 2 full points on a year-to-date basis, with the most recent share at 24.7%. A new smaller 16-millimeter [ph] size has helped to drive per capita consumption and category penetration.

We're continuing with our new product activity in the third quarter. As you know across the region, Colgate Luminous White toothpaste has met with great success. The whitening segment is the fastest-growing, and Colgate Luminous White is the #1 whitening brand in Latin America.

This month, we've launched Colgate Luminous White Advanced in Mexico. This toothpaste was developed from the insight that many consumers believe only a professional whitening treatment can provide visible results. It intensifies the whiteness of teeth 3 shades whiter with a unique formula that contains the same ingredients that dentists use. At the same time in Brazil, we're relaunching Colgate Luminous White Enamel Shine, with whitening accelerators in a gel formula that also delivers a shinier smile.

In the mouthwash category, we're launching a new Colgate Plax 2-in-1 in Brazil. This product delivers clean and fresh breath and actually shows you how it works. It contains a unique dual-liquid formula that is activated by shaking and mixing the 2 liquids. Its electrostatic action removes particles from your mouth, and its antibacterial action fights bacteria that cause plaque and bad breath. So when you rinse out, you see the product work with what's in the sink.

In the Personal Care category, we're introducing Protex Men Power Shower Gel and Soap in September in Brazil. This builds on the Protex Men series launched last year, which is already the #1 variant in the rapidly growing men's body cleansing segment. Both bar soap and shower gel offered 10x more protection against odor-causing bacteria than ordinary soap, along with a high impact fragrance especially developed for the male consumer.

Turning then to Greater Asia/Africa. Excellent momentum continues in this region. A strong increase in gross margin allowed us to increase advertising substantially behind new products, resulting in strong organic sales and market share increases. As referenced in the press release, our toothpaste share has increased in many markets.

In India, our market share was up over 100 basis points to a record 54.2% on a year-to-date basis. We achieved gains both in the value and premium segments of the market. In China, our market share increased 90 basis points to 34.4% on a year-to-date basis. And in Russia, the launch of Colgate Optic White drove our share to 33.1% on a year-to-date basis, up 130 basis points, with the latest reading at 33.5%. We continue to grow our market-leading manual toothbrush share in India, up almost 3 points to 41.3%, with our latest read at 41.5%.

Recent programs focused on increasing our distribution in the rural areas of this vast market have contributed to this success. So we'll continue to launch new products in the balance of the year to help us continue to deliver solid results.

In the toothpaste category, we will be launching Colgate 360° Enamel, an incremental line extension to our Colgate 360° toothpaste range in China, which repairs and protects enamel through the reduction of erosion caused by bacteria.

In the manual toothbrush category, we will be launching Colgate 360° interdental in select markets. This line extension provides consumers with 4x more deeper reach due to its floss-tipped bristles. And of course, as with other Colgate 360° toothbrushes, it features a wraparound tongue and cheek cleaner.

In mouthwash, in Vietnam and China, we will be launching Plax Herbal Salt, which addresses local consumer desires for this key flavor profile while also delivering long-lasting fresh breath and reduce bacteria accumulation in the mouth. In both these markets, our mouthwash share is up strongly on a year-to-date basis, and this new product should help continue the trend.

In shower gels, we're very excited about the launch of Palmolive Gourmet Spa in Russia and Turkey, where we saw increased market share on a year-to-date basis in both markets. This new range has tempting aromas and wonderfully soft textures, encouraging the consumer to immerse herself in the ultimate indulging escape. It comes in the following variants: Enticing Chocolate Veil enriched with dark chocolate and cocoa bean extract; Tender French Vanilla with sweet vanilla extract; and Delicious Strawberry Smoothy infused with strawberry juice.

Lastly, Hill's. We're particularly encouraged with Hill's performance and the fact that we delivered volume growth 1 quarter ahead of schedule behind 3 important initiatives. Our new product activity across our brands has been very well received by the trade, the profession and the consumer.

Our first initiative, Ideal Balance, which started shipping in May in the U.S., has done very well. The placement in the naturals aisles in the pet superstores has been ahead of plan and should be completed by the end of August. Year-over-year consumption is up at both PETCO and PetSmart, and we've been working very closely with both retailers to drive results.

We've had a full marketing campaign, including TV and digital media, as well as a widespread consumer sampling program. In addition to the dry and wet dog and cat food, we added canine and feline treats in June to complete the line. And we're continuing our media investment in the third quarter, and we'll add more high-impact in-store displays in September.

The second initiative has been the relaunch of our Science Diet line. At the end of the quarter, we added 3 new cat products and 2 new dog products: Adult Grain Free cat, Adult Indoor Long Coat cat, Senior Indoor Age Defying Cat, Adult Grain Free dog and Senior Small and Toy Breed Age Defying dog. We anticipate that these will be in full distribution by the end of August. In-store support has included nutrition consultants who'll explain the particular benefit of each diet to the shopper.

Our third initiative is the launch of Prescription Diet Metabolic, both in the U.S. and overseas. This unique diet to help achieve weight loss in dogs and cats is doing well globally, exceeding all targets and budgets. The repeat rates have been excellent, and the launch is driving category growth in the U.S. and overseas. So we'll continue to focus on these very important new product initiatives in the third quarter, supported, of course, with the continuation of our comprehensive integrated marketing campaigns.

So in summary, we're very pleased with the continued momentum in our business around the world. Our new product pipeline is as full as it's ever been, and that should help continue to drive sales and market shares in both developed and emerging markets. Our simple financial strategy and sharply focused initiatives are serving us well. In addition, our Global Growth and Efficiency Program is on track to provide even greater opportunities for investment. Colgate people around the world are working hard to deliver our results, and we look forward to sharing those results with you as we go through the balance of the year.

So that's all I had for prepared remarks. Sarah, if we can open up the line to questions.

Earnings Call Part 2: