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Edited Transcript of CL earnings conference call or presentation 26-Apr-19 3:00pm GMT

Q1 2019 Colgate-Palmolive Co Earnings Call

NEW YORK May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Colgate-Palmolive Co earnings conference call or presentation Friday, April 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Faucher

Colgate-Palmolive Company - SVP of IR

* Noel R. Wallace

Colgate-Palmolive Company - President, CEO & Director

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Conference Call Participants

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* Ali Dibadj

Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst

* Andrea Faria Teixeira

JP Morgan Chase & Co, Research Division - MD

* Bonnie Lee Herzog

Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst

* Jason M. English

Goldman Sachs Group Inc., Research Division - VP

* Kaumil S. Gajrawala

Crédit Suisse AG, Research Division - MD & Research Analyst

* Kevin Michael Grundy

Jefferies LLC, Research Division - Senior VP & Equity Analyst

* Lauren Rae Lieberman

Barclays Bank PLC, Research Division - MD & Senior Research Analyst

* Mark Stiefel Astrachan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Robert Edward Ottenstein

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Global Beverages Research

* Stephen Robert R. Powers

Deutsche Bank AG, Research Division - Research Analyst

* Steven A. Strycula

UBS Investment Bank, Research Division - Director and Equity Research Analyst

* Wendy Caroline Nicholson

Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome to today's Colgate-Palmolive Company First Quarter 2019 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com.

Now for opening remarks, I'd like to turn the call over to Senior Vice President of Investor Relations, John Faucher. Please go ahead, sir.

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John Faucher, Colgate-Palmolive Company - SVP of IR [2]

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Thanks, Nikki. Good morning, and welcome to our first 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 Table 6 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 start off with a review of the quarter and our full year 2019 outlook. Noel will then provide a few quick thoughts before we open it up to Q&A.

Our net sales declined 3% in Q1. We delivered 3% organic sales growth with 1% unit volume growth and 2% favorable pricing. This was offset by negative foreign exchange impact of 6%.

We know that there is still work to do, but we are pleased with the further improvement in organic sales growth in the quarter as we believe our strategies to reaccelerate growth are beginning to bear fruit.

Importantly, the composition of the growth gives us comfort that we are returning to a more sustainable trajectory. On an organic basis, we delivered both volume and pricing growth for the first time in over 2 years with volume and pricing growth in all 4 of our categories: Oral Care, Pet Nutrition, Personal Care and Home Care.

We delivered geographically balanced organic sales growth with emerging markets and developed markets both up 3%. And we delivered breadth in our organic sales growth with more than 75% of our hubs delivering organic sales growth in the quarter.

Our focus on driving the core through innovation, attacking adjacent segments and expanding the availability of our brands in new and higher growth channels and markets is beginning to pay off. Coupled with our increased brand support, we are optimistic that we can continue to deliver against the expectations for 2019 that we laid out on the fourth quarter earnings call.

On a GAAP basis, our gross profit margin was down 130 basis points year-over-year. Excluding the impact of our Global Growth and Efficiency Program, it was down 110 basis points year-over-year. For the quarter, our 200 basis points of pricing provided a 70 basis point benefit to gross margin. Raw materials cost, including foreign exchange transaction cost, were a 320 basis point drag on gross margin year-over-year.

Our productivity programs led by our Funding the Growth initiative provided a 150 basis point benefit to gross margin. Other was a 10 basis point drag. On an absolute basis, advertising investment was up 3% year-over-year. On a percent of sales basis, advertising was up 60 basis points year-over-year with increases on a percent of sales basis in every division.

Excluding charges resulting from our Global Growth and Efficiency Program and advertising spending, our SG&A expenses were down year-over-year in the first quarter on an absolute basis and as a percent of sales, benefiting from our productivity programs.

On a GAAP basis, diluted earnings per share of $0.65 were down 10% year-over-year in Q1. Excluding charges resulting from our Global Growth and Efficiency Program, diluted earnings per share were down 10% to $0.67. Our free cash flow in the quarter was $534 million which was up 7% versus Q1 2018.

Taking a look at the divisional results. North America delivered 3% net sales growth and 3.5% organic sales growth in the quarter with 2% volume growth and 1.5% pricing growth. We saw strong sales growth in toothpaste in the quarter driven by Colgate Total SF, Colgate Optic White, Colgate Essentials and Tom's of Maine. Club and e-commerce delivered particularly strong toothpaste growth this quarter. The Colgate Total relaunch is proceeding in line with our expectations as Total's market share is up year-over-year since the launch.

In the U.S., we took pricing through a downsizing, and this should lead to a shorter repurchase cycle which should accelerate unit growth going forward as consumers come back more quickly.

North America also benefited from the strong growth in the Elta MD and PCA skin care businesses we acquired during Q1 of 2018. These brands are delivering very strong growth across a number of channels, including professional, D2C and e-commerce.

Europe's net sales were down 7% in Q1 driven by negative foreign exchange. Organic sales were up 0.5% in the quarter as volume growth of 1.5% was mostly offset by negative pricing of 1%. While categories in Europe remain sluggish, our market shares were up or flat in 7 of 10 categories.

We delivered strong volume growth in Northern Europe with the U.K. and Scandinavia both up on the back of the Colgate Total relaunch. We have reintroduced Colgate Total in Scandinavia and it is driving strong incremental market share gains in that region. We also launched meridol Pur in several markets in Europe in Q1 which brings our top therapeutic gum offering into the naturals space at a premium price.

In personal care, we continue to drive significant share gains behind the Sanex body wash business. In France, Sanex's body wash share is up more than 100 basis points year-to-date behind Sanex Zero% and the Sanex physiologic brand.

Latin America. We are pleased with our acceleration in organic sales growth in Latin America in Q1. Net sales declined 4.5% in the quarter as 10.5% negative foreign exchange more than offset 2.5% volume growth and 3.5% pricing growth in the quarter. Importantly, the growth was broad-based as we delivered organic sales growth in every hub. We are particularly pleased with the sequential improvement we saw in Brazil in the quarter versus Q4 2018 as we delivered both pricing and volume growth. Encouragingly, category trends in Brazil do seem to be better, although the market remains very promotional. Our recent innovations in oral care are paying off nicely as we are seeing market share gains for our Colgate Natural Extracts toothpaste line, our Colgate Gard franchise in pharmacies in Brazil and the Colgate Slim Soft Advanced toothbrush.

Net sales in Asia Pacific were down 8% driven by negative foreign exchange of 5.5%, a 2.5% decline in volume and flat pricing. Our results in China remain challenged by the difficult steps we are taking to reorient our portfolio in an oral care category that is rapidly premiumizing and shifting into e-commerce. As we indicated in January, we still expect trends to improve in the second half of the year. Encouragingly, we saw strong growth in both volume and pricing in India with growth coming on both the Colgate Max Fresh and Colgate Vedshakti franchises. In order to drive penetration of Vedshakti, we recently gave away 30 million samples at the Ardh Kumbh Mela festival in India.

Our Africa/Eurasia business showed solid underlying business momentum in Q1 despite the negative impact of foreign exchange. FX was a 13% drag on sales growth in the quarter, offsetting 7% pricing growth and flat volume. Our Eurasia hub delivered a strong mixture of pricing and volume growth in the quarter driven by Russia. Our North Africa, Middle East, Turkey hub also delivered volume growth in the quarter despite significant pricing to offset foreign exchange. In order to help continue this momentum, we launched the full meridol regimen, toothpaste, toothbrushes and mouth rinse, in the pharmacy channel in Turkey in the first quarter. We also launched Palmolive Micellar Care shower gel in Russia this past quarter, taking advantage of a big personal care trend.

And finally, Hill's. Our strong growth at Hill's continued in Q1. Growth was led by the United States with particularly strong growth in e-commerce, pet specialty and farm and feed. Internationally, our growth was very broad-based. We delivered both volume and pricing growth in Canada, Europe, Australia, Asia and Latin America.

As we discussed at CAGNY, Q1 marked the beginning of our relaunch of our Science Diet brand with the new packaging on shelf as we speak. Initial response has been positive as Science Diet market share trends continue to increase year-over-year in Q1. The relaunch will continue across the globe through the first half of 2020.

We have also significantly exceeded our subscription target for our Hill's to Home service which allows pet parents to realize the benefits of home delivery while maintaining contact with the veterinarian.

Moving on to full year guidance. We continue to expect net sales to be flat to up low single digits. We continue to expect organic sales to be up 2% to 4%. Based on current spot rates, for the full year, we still 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 includes the impact of transactional foreign exchange.

We expect our advertising spending to be up notably year-over-year on both an absolute basis and as a percent of sales. We would expect advertising as a percent of sales for the full year to be fairly consistent with the Q1 level.

We continue to 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 the charge related to U.S. tax reform and the benefit from a foreign tax matter in 2018.

Based on current spot rates, we expect GAAP earnings per share to be down low single digits for the year. Excluding the charges related to the Global Growth and Efficiency Program in 2019 and 2018, and the charge related to U.S. tax reform and the benefit from a foreign tax matter in 2018, based on current spot rates, we expect earnings per share to decline mid-single digits for the year. We would note that the consensus EPS estimate is in the middle of that range.

And with that, I will turn it over to Noel for his thoughts before the Q&A.

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [3]

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Thanks, John, and good morning, everyone, and thank you for joining us on the call today. I found it appropriate to begin by framing 3 strategic areas of focus for our company that I believe will be critical to our ongoing success and we certainly started to see transpire in the first quarter.

That first area of focus is how we're thinking about organic sales growth. No question that to deliver long-term revenue growth that's sustainable, we need to be more aggressive about going after growth, and we're going after growth differently. As you'll recall on the fourth quarter call and at CAGNY, I spoke about some of our growth mindset.

Specifically, we're driving the core with brands like Total and Science Diet. Remember, these are big brands, big brands with a global penetration in many countries around the world. And we're bringing that to market through significant new innovation and superior product and formulations. We're also bringing that alongside significant brand building along those businesses with real brand purpose that resonates with consumers in a different way.

Second, we're going after adjacent categories and product segments like naturals which is doing very well for us; therapeutics by expanding elmex and meridol into select markets; and importantly, expanding skin care and continuing to focus our investment on opening new doors and channels with that category.

Third, we're expanding the availability of our products through distribution and new markets, being very thoughtful in that regard, but we see opportunities in new channels, particularly in channels like e-commerce, which is key to our continued growth moving forward. We're very pleased with the growth in e-commerce in the first quarter which was up 28% versus the year ago period. So more to do and more to come, and we're certainly focused on those areas.

Our second key area of focus is to simplify our processes and our structures around the world. We recognize that we need to change in order to respond to a rapidly changing marketplace in terms of our ease and how consumers are shopping. For example, we're revamping our innovation process to dramatically reduce the time to market. You heard Maria Paula speak about that at CAGNY. And those changes are underway beginning in Latin America, and we'll begin to roll those out around the world as we move into the balance of the year.

Third area of focus for us is using data and looking to digitize the organization very differently. We know that data can enable faster growth and faster decision-making. We know that data drives further ROI in media, and we know that data-driven marketing has far better return on investment than the way we're spending today. We also know that we can use data to improve our assortment in e-commerce.

In the area of digitization, some exciting things coming down the pipeline for us to drive productivity across the organization. We're going to change from our SAP system that we started in 1994 to the upgraded SAP S/4HANA which we think is going to simplify our processes significantly around the world, drive more standardization and better reporting and decision-making from all of that. So you begin to see a lot of this unfold as we move into the balance of the year, and we're pleased to see some of that taking hold in the first quarter of this year.

So before I jump into Q&A, I wanted to take a moment to thank the 35,000 Colgate people for supporting me during this important transition over the last year. I'm extremely proud to lead, to listen and to learn from that extraordinary team. And I know with their drive and continued commitment and our focus on growth, we will build a future to smile about. And it's those people that I want to extend a special thanks to Ian Cook for the past 12 years of his extraordinary leadership as CEO of this company. He has transformed this organization in many ways and we'll be forever grateful for his leadership. And I especially want to thank him for his wise counsel and mentorship over the last 6 months as he prepared me for this new role.

So with that, let me turn it over to the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question today from Lauren Lieberman with Barclays.

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Lauren Rae Lieberman, Barclays Bank PLC, Research Division - MD & Senior Research Analyst [2]

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Noel, I'm curious if we could talk a little bit about market share. Just market share in oral care have been an important metric for the business, the health of the business and so on and like a badge of honor, frankly. And this quarter, top line certainly improved sequentially. But shares are down versus, I think, where we talked about them at the end of January, both globally and in some key markets like Brazil, Mexico, India. So can you just talk a little bit about that, how you're thinking about market share in particular, when you'd expect that to turn as you think about the path forward and some of the greater growth mindset you're putting in play.

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [3]

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Sure. Sure. Thanks, Lauren. Overall, we have seen significant growth, first of all, in untracked channels, particularly in the U.S., where we saw double-digit growth in a lot of those untracked channels which we're very encouraged about. If I stay within North America, the toothpaste shares are flat. We obviously introduced Colgate Total in the middle of February. We saw a significant competitive response. And we responded accordingly, but we weren't going to be overly aggressive in order to drive share. Bear in mind that we're in this for the long term. This is a marathon, not a sprint with the launch of Colgate Total. It's not like introducing a new product. We have existing shelf space and existing penetration. It's a big brand. And we're looking to continue to drive trial and repeat throughout the year. So the way we've structured and strategized our media spending over the year is to continue with high investments quarter-on-quarter through the balance of the year. And we think in the end that will generate sustained growth for the business.

Moving on to some of the other markets. Our value shares and volume shares in Mexico are actually flat. We're slightly down in Brazil, and that was due to some aggressive promotion from the competitive environment. Recognize that the Colgate Total launch, which have a significant premium in both those markets where it has a sizable share, will launch in the second quarter. Our volume shares on balance are only down 30 basis points so we feel quite comfortable with where we are particularly given the activity and most of the Total spending coming in the year to go.

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Operator [4]

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We'll take the next question from Bonnie Herzog with Wells Fargo.

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Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [5]

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I had a question on your pricing in the quarter. I guess I'm wondering why it slowed sequentially. And then I'm also curious about this for your emerging markets, where I assume you would have been taking more pricing for FX. And then could you update us on your plans for any future pricing or essentially do you expect pricing to accelerate in the future or remain constant at current levels?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [6]

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Sure. Thanks. Thanks, Bonnie. We were actually very pleased with the balance of organic growth in the first quarter. Obviously, both volume and pricing up. We had good pricing in the fourth quarter as you point out and likewise, good pricing in the first quarter. So coming off of that, we're quite pleased. Some of the pricing is still yet to come. We talked about in the fourth quarter that 2/3 would roll through from '18 to '19. We have 1/3 to go. And we're quite confident that we will generate the pricing that we set out for ourselves on the year. Certainly, if the current spot rates, if spot rates change, we certainly have to take more pricing, but we're quite comfortable with where we are and how that's flowed through.

Specifically on Total, we're very pleased from the fact that we've seen pricing stick everywhere we have launched Colgate Total. Coming back to the U.S., our equivalized share, as John mentioned, we downsized so the price per ounce is up about 16% and the Total toothpaste franchise in the U.S. is up 8%. So price is holding and more to come as we move through the balance of the year.

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Operator [7]

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And the next question will come from Wendy Nicholson with Citi.

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Wendy Caroline Nicholson, Citigroup Inc, Research Division - MD and Head of Global Consumer Staples Research [8]

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Just following up on China specifically. Could you tell us exactly how much volumes were down in China? And I know you're going through a big repositioning of the brand and the product assortment in that market. But can you sort of give us some timing on that? When should we expect to see stronger numbers? Are there specific new products coming out or new advertising or anything like that? So when do you think we turn positive in China?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [9]

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Sure. So China came in as we expected in the quarter. We had, I think, communicated in the fourth quarter call that we expected China to turn in the back half. And that's exactly the timing that we're still looking for. Some significant changes in investment going into China as we speak. We are looking obviously to get the portfolio structured appropriately. We're getting the structure in the organization and putting resources where we think the growth will come in that business moving forward. So we're making some investments in the business in the short term that we believe will drive sustainable growth in the long term for our business, which will be -- we'll start to see that turn in the back half of the year.

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Operator [10]

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And we'll go to Andrea Teixeira with JPMorgan.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [11]

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So my question is on North America organic volumes and a follow-up on the Colgate Total relaunch. So on North America, you called out on the prepared remarks that the benefit from Elta MD and PCA Skin now included in organic growth. Can you give us like kind of a sort of magnitude, an order of magnitude of that launch -- of the relaunch that's included on the organic growth? And also on the Colgate Total relaunch, thinking about specifically Latin America with Brazil in terms of the timing of the launch. Will all the volume of the relaunch be shipped during the second quarter? You had some of that done in the first quarter. So I'm trying to see if there is any lumpiness on the volume as we progress through the quarters.

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [12]

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Thanks, Andrea. Again, good growth in the first quarter out of North America. We're not going to break it out. But suffice it to say, all the key elements of the North America business grew in the first quarter. We were particularly pleased with Tom's of Maine which had another significant growth following sequential growth over the last 3 quarters. So that's doing well. The sell-in on Total performed well. Obviously, as you point out, PCA and Elta were added into the organic growth, not a significant portion, but we were very pleased with the progress on that business that we've seen thus far. So overall, a good performance in North America across a well-balanced organic growth in all of their categories and their core businesses.

In terms of the relaunch of Colgate Total in Latin America, we just started shipping at the end of the first quarter with most of the activity and all of the investment to come in the second quarter. So I would say a portion in the first, most to come in the second as we move forward.

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Operator [13]

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We'll go to Ali Dibadj with Bernstein.

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Ali Dibadj, Sanford C. Bernstein & Co., LLC., Research Division - SVP and Senior Analyst [14]

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Hey, I'm just trying to contextualize some of the discussions so far and the quarterly results and a little bit more broad. And you've done that a couple of times, but I want to continue on that theme. The big debate I think is, are you spending enough? That's the one I hear the most. And so if you look at the quarter's results, you could argue that they're consistent with that concerning narrative, right, we're not spending enough to turn the ship. The sequential pricing, i.e. probably more trade spend, more promo this quarter to get more shelf space. There was clearly a lot of the inventory load, right? So that pricing that you guys talked about on Colgate Total, for example, in North America, a lot of those inventory loaded in, elmex and others. A&P was up, maybe not quite as much as I thought it might be, but up, which I guess is good. But all this, all this activity so far and we still see those market share issues in the U.S. and Mexico, Brazil, Russia, India, China. I mean U.K. looked a little bit better, but there's still some pressure. And by the way, I do wonder in the U.S. what the sell-out was versus the sell-in. Certainly doesn't look great on the tracked channel. So I guess I'm just trying to get underneath this idea of, should we just be more patient to see those turn? I think that's your messaging. But should we just be more patient to see this stuff turn and so you're 100% confident that you're actually spending enough. And so this concern about another rebase can happen around the corner. We're not spending enough. That view is just, so far what you're seeing, going to be wrong?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [15]

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Thanks, Ali. A lot in that question. So let me try to step back for a moment and talk a little bit about our strategy. We realized to drive long-term, sustainable growth that we need to do things very thoughtfully and in a measured way. We've taken the advertising up as you well pointed out quite significantly in our view up in the first quarter. We will hold those levels through the balance of the year. And everything that we know about building brands, particularly brands as big and as scalable as Colgate Total, it's that continuity that really pays off in the long run. We don't look to a percent of sales. We look for, what do we need to do to create the right impressions and the right engagement behind a significant innovation like Colgate Total? And that's exactly what we're doing. We're going to continue to plod away with the plan that we have. We were very strategic and not necessarily spending all our money in the first quarter. We want to balance that over the year.

We're not buying shelf space. I heard you mention that. And a brand like Colgate Total which is an existing brand in the U.S. with a 10 share, that's a successful brand already. So what we're doing is basically trying to drive more velocity off the shelf. We're not necessarily increasing shelf. And we didn't necessarily see any of that in terms of shelf increases in the first quarter. So we got strong shares, strong shelf space, and we're going to continue to build on that.

I'll give you a little bit about consumption on Colgate Total. Obviously, as we move through some of the hot, competitive reactions in February and March, the last 4 weeks on Colgate Total, the consumption is up 14% and our share is up 1 point. So we're in a good position relative to what we're seeing there. And obviously, a lot of the work to come as we move through the balance of the year. In terms of advertising, we'll likewise see those increases come to bear as we roll it out particularly in big markets like Latin America.

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Operator [16]

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And the next question is from Steve Powers with Deutsche Bank.

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Stephen Robert R. Powers, Deutsche Bank AG, Research Division - Research Analyst [17]

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So as you talked about in the open, you're arguably managing a larger number of growth priorities today versus history. I'm wondering if you can talk more about how you're prioritizing them relative to one another. I'm sure the first order of business is ensuring that Colgate, the core Colgate oral care franchise returns to market-leading growth. But around that, as you talked about, you got the expansion into naturals. You're broadening the reach of brands like elmex, investing in e-commerce, stepping up support for professional skin care and obviously driving Hill's as well. And obviously, not all those initiatives are mutually exclusive. But again, how are you thinking about allocating relative investment dollars to each of them? If you had an extra dollar, which bucket are you most likely to add to? And then any thoughts if you can do it all organically or are you increasingly open to M&A in support of those initiatives?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [18]

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Thanks, Steve. So let me go back to a little bit about with regards to my upfront comments around how we're framing growth. As I talked about at CAGNY, we're really looking at 3 specific priorities. And in many respects, that would kind of prioritize how our spending will unfold through the balance of the year. Historically, we were very focused on line extensions and to a certain extent, growing in adjacencies. And we quickly recognize that we have to have a real balance. Colgate has big core businesses that are in many countries around the world that had significant leakage relative to share and were not driving the growth that we needed. Hence, our need to put real superior bundles behind the core in order to shore up the core. So when we balance that with increased innovation behind adjacencies like naturals, like therapeutics that we get the incremental growth moving forward. And that's exactly how we're going to prioritize it.

Relative to M&A. Certainly, there's a lot of activity out there. We're still going to be extremely thoughtful on how we approach M&A. We've obviously done some great M&A over the last couple of years, specifically PCA and Elta, which we're very excited about. As those assets become available, we will think through them very carefully relative to their strategic fit in the business and what they bring. And if we find the right value, we will certainly go after them.

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Operator [19]

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And we'll go to Olivia Tong with Bank of America.

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Olivia Tong, BofA Merrill Lynch, Research Division - Director [20]

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I want to talk a little bit about the balance. You talked a lot about the balance between developed markets versus emerging markets performance, volume versus price. So as you progress through the year, how do you think about that? Because I would assume that -- you talked about some of the pricing that you're planning to do in some of the markets. 1/3 of it still hasn't rolled through. So I would assume that price becomes a bigger component of that. Do you think that volume then sort of turns a little bit and just your overview on the balance between all those different factors.

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [21]

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Sure. I think at the heart of a lot of that good balance this year, particularly between emerging and the developed world, was the fact that we're starting to see some of the categories turn in the emerging markets which is particularly encouraging for us given our footprint. So moving forward, we will continue to see that balance of pricing and volume moving through the balance of the year. The innovation will support the volume. The innovation will support the premiumization that we're going after, particularly as we see Total and the Science Diet business, which is just now going into the U.S. and will roll out through the balance of the year start to take hold. So we'll continue to see the right balance as we move forward, keeping the investment there will help drive that.

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Operator [22]

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Next is Kevin Grundy with Jefferies.

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Kevin Michael Grundy, Jefferies LLC, Research Division - Senior VP & Equity Analyst [23]

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So Noel, my question is on industry growth rates relative to your organic sales growth guidance of 2% to 4%. So at this point, where would you peg industry growth in total as you roll up your business and your geographies relative to the 3% organic growth in the quarter? How has that changed, if at all? Since 4Q, you sound more upbeat on emerging markets which is obviously a good thing. And then for us, is it fair that we should expect an acceleration in your organic sales growth over the next couple of quarters as year-over-year comps ease and more spending goes into the marketplace and it seems like emerging markets are in a better place?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [24]

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Sure. The categories, as you mentioned, and we've seen a tick up particularly in emerging. We're modeling organic -- excuse me, we're modeling category growth rates in that 3% to 5.5% depending on the market around the world. In the developed world, somewhere between flat to around 2.5%. We've seen a little bit of tick up in the U.S. Europe continues to move sideways. But the U.S., we've seen a little bit of acceleration there. So we think relative to our guidance on the 2% to 4%, we're well positioned or the categories are. And if Latin America and particularly Africa continued to accelerate or hold at their current levels, that would bode well for us. But we've said that before. Let's get a couple of more quarters underneath us relative to those categories and we'll go from there.

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Operator [25]

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We'll now go to Bill Chappell with SunTrust.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

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Noel, first, just a clarification. You had said to Bonnie's question, you came into the year 2/3 of pricing and still 1/3 to go. Are we still 1/3 to go or did you do a fair amount during first quarter? And then the second just on Hill's. Can you give us a little more color on the strength and maybe from a market share perspective we don't get to see. And then so much of the channels are untracked, it's kind of hard to understand exactly where you're getting it. Is it from emphasis from the specialty channel coming back or is it just the vet channels doing well or just kind of help us, give some more color why it's doing better.

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [27]

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Sure. Let me take the pricing question first. Yes, we're about right. We're right where we thought we'd be. About 2/3 of the business we're seeing roll through and 1/3 to go. And we've got some pricing that's going into place starting in the second quarter. So we're quite comfortable with that in terms of how that's going to roll through the balance of the quarters in '19.

Hill's is a great story. I come back to a lot of the fundamentals of our strategy which is driving the core, working on adjacencies and particularly expanding into new segments and new retail environments. And Hill's ticks those boxes extraordinarily well. We obviously had great growth in the fourth quarter, a really strong start to the year relative to what we're seeing. The Science Diet relaunch just now going into the market, as I mentioned, in terms of the full impact of the new packaging and the new formulations, which as I mentioned at CAGNY will be coupled with increased pricing. And the media investment behind that business, particularly in North America, will now start to go into the market in the second quarter.

U.S. had a very strong first quarter. And again, I think it's driven by great market share gains, particularly in pet specialty. We obviously continue to have a very strong e-commerce business and holding shares there. And in terms of expanding into new channels, we've gone aggressively after the farm and feed channel which was growing and we were under-indexed. And we've seen incremental distribution and sales growth come from that. So all in all, really pleased with where Hill's is right now and particularly pleased given a lot of the Science Diet stuff is still to come in the U.S. And we'll start to roll that out in the balance of the world as we move into the second half.

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Operator [28]

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We'll go to Robert Ottenstein with Evercore ISI.

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Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Global Beverages Research [29]

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Wondering if we could drill down a little bit more into what's going on in Brazil. And so a couple of subpoints. Perhaps you can talk a little bit more about the competitive situation you mentioned, still very tough promo environment. Is there any visibility on that changing? And how do you expect to deal with that? Second, the rollout of the therapeutics, elmex, meridol in Brazil, how that's going? Do you need more investment there? Is it kind of going to be self-funding at this point? And I guess tied to that, how you're doing in the pharmacy channel?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [30]

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Great. Thanks, Robert. So again, good results coming out of Brazil. We are pleased particularly given that we generate both volume and pricing in Brazil in the quarter which was terrific to see. Relative to the promotion environment, yes, we saw some of our competitors go quite aggressive in the first quarter. We decided not to chase that with our business. It was interesting. The share loss that we saw in the first quarter which is roughly about 1 point on the business -- we're still at a 72 share -- came out our Kolynos, our Sorriso brand, which is our secondary brand because of the deep discounting. We saw some from our competitors. That being said, our instinct is that will particularly be driven by high promotional activity that we always see in the first quarter that we opted not to chase given some of the foreign exchange headwinds that we've seen in that market. And we think that will balance itself out through the remainder of the year.

Early days on elmex. We have rolled it into the pharmacy channel. The pharmacy channel is roughly 15% to 20% of the ACV in Brazil. Early news is really good on elmex in terms of driving incremental share in the pharmacy channel. We're up about 1 point so far in that channel but lots more to go. The investments there, we ring fenced it. It's an important strategic initiative for us. And we're optimistic that we'll continue to see particularly that channel grow as we move through the balance of the year.

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Operator [31]

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Next is Jason English with Goldman Sachs.

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Jason M. English, Goldman Sachs Group Inc., Research Division - VP [32]

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Sticking on the topic, but going a little bit deeper in some of the markets. Can you take us a little bit deeper into China, give us a beat on where you think your consumption is tracking and whether or not your net sales are still lagging on inventory reduction or whether or not that's been flushed out? And then a second question and sorry for piling on. Thinking about your gross margin trajectory for the year, cost inflation headwinds stepped down fairly sizably 4Q to 1Q. How should we expect that to trend through the remainder of the year?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [33]

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Thanks, Jason. So quickly coming back to China. Not a lot more to add there. Well, obviously, it came in, in line with our expectations. The inventory destocking continues. We made good progress in the fourth quarter, continued progress in the first. We're rebalancing, as I mentioned, some of our go-to-market structures and how we take the product to market, particularly results around the portfolio specifically. And that will unfold as we move through the balance of the year. So as I said, we expect to see sequential improvement moving through the back half of the year. And that is on schedule as we speak.

Relative to gross margin. So your question around costs, yes, we saw a significant elevation of costs in the fourth quarter, a little bit better in the first quarter. We're in the range of 4% to 6% commodities in terms of increases moving through the gross profit line. And we expect that to abate as we move through and lap some of the foreign exchange transaction impact that we had last year that occurred in the first half and will get better as we move through the balance of the year. So the answer to your question is, yes, we expect that to abate which is giving us confidence that we can continue to hold and increase gross margins moving forward.

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Operator [34]

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We'll go to Kaumil Gajrawala with Crédit Suisse.

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Kaumil S. Gajrawala, Crédit Suisse AG, Research Division - MD & Research Analyst [35]

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Noel, you mentioned e-commerce in various parts of your prepared remarks. Can you perhaps provide us a little more context what your share looks like online versus elsewhere and maybe what your margins look like online versus elsewhere? And then I think you said e-commerce was up 28%. Are you able to give some context on how much that contributed to organic growth?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [36]

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Sure, Kaumil. First of all, we're very pleased. Again, coming back to those growth strategies that I outlined earlier, expanding in new retail environments and getting our fair share, so to speak, is a real strategic focus for us. And e-commerce is an important area of that. As I mentioned, we were up just shy of 29% in the first quarter. Importantly, that was driven with a strong North America performance. Their shares were up 1.7 points on the Colgate franchise alone which was terrific and likewise driven by continued strong growth on the Hill's business. The softness we have is, to a certain extent, is in Asia. While the e-commerce shares are flat, we didn't see the growth that we were expecting there. And that's part of the turnaround strategy that we're looking to execute as we move through the back half of this year.

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Operator [37]

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Next is Steven Strycula with UBS.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [38]

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Congratulations on the new seat.

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [39]

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Thanks, Steve.

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Steven A. Strycula, UBS Investment Bank, Research Division - Director and Equity Research Analyst [40]

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So Noel, my question is, as you look across the portfolio after the work you guys have done the last few years, which 3 countries and category combinations do you think are the biggest revenue and profit dollar opportunity from an incrementality standpoint as we look forward the next few years? And a quick second part of that would be, is there any reason you guys haven't given a more defined perimeter around your gross margin outlook for the year relative to what you did last quarter?

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [41]

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So listen, on the categories, we love all our children equally in this case. Obviously, oral care continues to be a real focus for us. The first quarter organic that we delivered was largely driven by toothpaste and by Hill's. And so we're very encouraged. But as John mentioned in his opening remarks, we had positive organic across all the categories, which in our view is the quality and the composition that we're ultimately looking for. But from a prioritization, certainly, oral care, personal care and our pet food have always been our top 3 priorities, and we'll continue to focus on growth in that regard.

Your second question was around gross margins. Listen, as I've mentioned, not much more to add. We expect gross margins to be up on the year. We expect that some of the cost environment that we saw in the fourth and the first quarter to abate as we move through the balance of the year. We've got more pricing to come. And we obviously have the Total relaunch and Science Diet relaunch rolling out around the world. So we're comfortable with where we are now at the current spot rates and we'll see how that unfolds, but comfortable in terms of the outlook that we've given.

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Operator [42]

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And we'll go to Mark Astrachan with Stifel.

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Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [43]

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Wanted to ask about specific learnings from PCA and Elta. And I'm curious, do you think you can take those brands into other channels? How you think about differences of selling into specific specialty-type channels, doctors' offices and the like versus mass or other channels? And perhaps indulge me, kind of take that a step further, what gives confidence that you can have success in skin care more broadly just given competitive dynamics in the market? And I'm kind of alluding to your comment about expanding on skin care going forward.

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Noel R. Wallace, Colgate-Palmolive Company - President, CEO & Director [44]

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Yes. Thanks, Mark. Let me step back for a minute and give you a little bit of insight in terms of how we look at M&A, not just simply from the economics and the growth aspects of those categories or businesses that we acquire, but more importantly, what are the core competencies and learning that they can bring in to the larger enterprise across the company. And Elta and PCA fit those parameters just perfectly. Obviously, we love businesses with strong endorsement levels, Elta at the dermatology level, PCA at the aesthetician level. And we've learned from obviously what we've done in oral care and our vet business on how to successfully monetize that going forward.

Both those businesses have unique aspects to them. Elta has an incredible e-commerce business and an influencer model, particularly as they use digital very effectively. Likewise, PCA has a wonderful in-office strategy in terms of how they go to market there, particularly around their data-driven marketing that they use. So some great insights that we'll bring into the business and certainly leverage across other categories. And we continue to dial up the investment in those businesses given the great growth that we're seeing coming out of them at least initially in the first quarter.

Moving forward, skin care is interesting to us. We've got 2 businesses that we're focused on right now. We'll continue to drive those moving forward. If we see other things become available that we think we're interested and that will bring real value to the Colgate company, we will certainly go after those. But we're very focused on what we have right now, and that's how we're going to lay it out for the balance of the year.

So again, let me extend my thanks to the entire Colgate team. Obviously, a good quarter that we should be proud of. We all know there's a lot of work to do. We're very focused on growth. And let's get after it. We're in the second quarter as they say, and we'll be in touch with everyone on the call as we move through the balance of the quarter and into the third quarter. Thanks so much.

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Operator [45]

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And thank you very much. That does conclude our call for today. I'd like to thank everyone for your participation and you may now disconnect.