Colgate-Palmolive Company

Good day and welcome to today's Colgate-Palmolive Company fourth quarter 2018 earnings conference call. This call is being recorded and is being final cast live at .colgatepalmolive.com. Now for opening remarks, I would like to turn the call over to Senior Vice President and Investor Relations, John Fasche. Please go ahead, John.

Thanks, Lauren. Good morning and welcome to our fourth quarter earnings release conference call. This is John Fasche, Senior Vice President for Investor Relations. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and our most recent filings with the SEC, including our 2017 annual report on Form 10K and subsequent SEC filings, all available on Colgate's website, for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in Tables 8 and 9 of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website. Joining me this morning are Ian Cook, Chairman and Chief Executive Officer, Noel Wallace, President and Chief Operating Officer, and Henning Jakobsen, Chief Financial Officer. Ian and Noel will start off with their thoughts while I will cover our Q4 results in 2019 guidance.

Good morning, everyone. It's Ian. Let me first wish you all a belated, happy, and healthy 2019. And let me start off my introductory comments where we started the press release. We're pleased with the improvement in organic sales in the fourth quarter. Plus 2% on top of plus 2% in the fourth quarter of 2017. And you will recall that the 2% in the fourth quarter of 2017 was the highest quarter that year. Set a different way, on a two-year stacked basis, we accelerated from 1% in the third quarter to 4% in the fourth quarter. So we enter 2019 with momentum. I think our intense focus on innovation, sustained advertising, and product expansion to new channels and markets is beginning to pay off. You may recall that our biggest problem businesses 12 months ago are now the ones growing the fastest. Hills, four quarters of accelerating growth driven by prescription diet, which is the backbone of the business and the line that creates the recommendations from the vets. A strong US business and our continued high growth in e-commerce. And as you will hear later from Noel, there is big news coming on the other half of the Hills business, science diet in 2019. Africa, Eurasia, we cycled through our distributor issues. We're focused back on driving distribution and advertising support and we're back to growth. And India, now posting continued healthy organic sales growth driven by innovation, which is building distribution and continuing to build market share. On a national basis, Vetchakti is now up to 1.7 shares, seven months of continuous share growth. And in the modern trade, where distribution obviously builds quicker and trial and therefore share growth is faster, Vetchakti is now up to .4% market share, five months of share increase. And several other markets are on plan and expectation that we discussed in the third quarter or generally doing better. Mexico and Brazil, we saw sequential improvement, which helped drive Latin America to positive growth. We are taking pricing as we said we would and we are sticking with that strategy. In the case of Mexico, we have seen that market become somewhat less promotional and the category growth is coming back. In Brazil, the category growth is still modest and the heightened promotional activity we had mentioned before continues, so we balance our business in Brazil responding where we need to but sticking to our underlying strategy of taking the necessary pricing. China, sequential improvement as we said but still negative. Consumption continues to look fine and pricing is working its way slowly to consumers. We expect to see continued sequential improvement in the first half and return to growth in the second half of this year. And finally, a market often discussed on these calls, the UK, where we are seeing strong growth driven by increasing market share, which in turn is being driven by our premium business in the UK. And that's before the impact of the total relaunch in the UK and in the UK, the total brand is a 16 share substantial business. However, life is not perfect and we have had two markets affected by specific issues. In Europe, we had the disturbances caused by the gilets jaunes or the yellow vests and that in fact was a headwind to European organic growth of some 40 basis points. As you see yourselves in the news, while the disturbances are still there, they are more subdued than they were during the fourth quarter. And here in the United States, we saw a little bit of slowing in terms of category growth. We were preparing to bring total to the marketplace in the first quarter and therefore working shelf inventory down a little to make for an easy transition. But the biggest headwind in North America was one time very specific and entirely mechanical. And that was the shift of a major promotional activity from 2018 to 2019 from a shipments point of view and that happened later in the quarter. And that was a 120 basis points shift from fourth quarter organic into the first quarter of 2019. And the final comment I'll make on 2018 is that as we have been saying for a while, as planned, we led on pricing and we believe it is paying off despite the expected volume impact. We are beginning to see some competitors follow. The Mexico-Brazil contrast is relevant in that case but as one has to say on pricing, it is early days and we will see how the markets evolve and what the competitive reaction is. So let's turn to 2019. Our intense focus on innovation and bringing our products to new channels and markets supported by a meaningful increase in advertising continues. The innovation grid we have in 2019 is uniquely and especially strong, particularly on some scale core businesses in addition to many of the adjacencies that we have in our portfolio. This is the opportunity to accelerate our growth which is why we have guided to the 2 to 4% organic growth increase. And Noel will talk in some detail about the growth plans that we have in 2019. The area I want to talk about for 2019 is our continued focus on pricing and that is for two reasons. One is a continued focus on premiumizing our portfolio and the second is offsetting underlying costs including the transactional impact of foreign exchange. So if I take a step back and just give you a view on the underlying commodity cost trends on our business. For 2018, the overall increase in underlying commodity costs was 7%. In the 2019, our plan calls for a 6% increase in underlying commodity costs. Now obviously given the shape of 2018 and as John will reaffirm in his prepared remarks, the cost headwinds will be higher in the 2019. Foreign exchange for 2019 which brings the transactional cost on top of the underlying commodity costs for the year, we expect to be in the 2 to .5% range. Now importantly and pleasingly over two thirds of our 2019 pricing is either rollover pricing from 2018 or pricing already accepted as part of the significant relaunches of the total business and the Hill's science diet business in other words already accepted and in place and the net result of that scenario for 2019 is that we expect our gross profit to increase by between 30 and 50 basis points. So those are the framing remarks I would like to put on 2019 and simply reprieve it is a unique opportunity to accelerate the growth of our organic top line and as some of you may recall in the second and third quarter calls in response to questions, we emphasize the fact that we were building a plan in 2019 that would reflect the quality and depth of activity we have. That's what we've done and we have confidence in that plan. So here's Noel to give you a little bit more on growth.

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

Thanks,

Noel.

In order to leave time for Q&A, I will forego the normal divisional review and simply discuss the Q4 financials and then our 2019 guidance. Our net sales declined 2% in Q4. The .5% unit volume growth and .5% favorable pricing were offset by a negative 5% impact from foreign exchange. Our recently acquired professional skin care businesses, ELTA MD and PCA Skin, contributed 1% to net sales and unit volume growth in the quarter. On a gap basis, our growth profit margin was down 70 basis points a year over a year. Excluding the impact of our global growth and efficiency program, it was down 100 basis points a year over a year. For the quarter, our 250 basis points of pricing provided a 110 basis point benefit to gross margin. Raw material costs, including foreign exchange transaction costs, were a 490 basis point drag on gross margin year over year. Our productivity program, led by our Funding the Growth initiative, provided a 280 basis point benefit to gross margin. On an absolute basis, advertising investment was up 2% year over a year in Q4, with increases across every division except Latin America, which was impacted by foreign exchange and reductions in spending in Argentina related to the recent devaluation. On a percent to sales basis, advertising was up year over a year in Q4. Excluding charges resulting from our global growth and efficiency program and advertising spending, our FG&A expenses were down year over a year in Q4 on an absolute basis, but up as a percent to sales, driven by the continued increases in logistics costs. The remainder of our overhead costs were down on an absolute basis and flat as a percentage to sales, benefiting from our productivity program. On a gap basis, diluted earnings per share of 70 cents were up 89% year over a year in Q4, excluding charges resulting from our global growth and efficiency program and the charge related to U.S. tax reform in 2017, diluted earnings per share were down 1% at 74 cents. Looking to 2019, as stated in the press release, based on current spot rates, we expect net sales to be flat to up low single digits, with organic sales growth of 2 to 4% and a negative impact from foreign exchange. Based on current spot rates, for the full year, we expect gross margin to be up year over year on both a gap basis and excluding charges related to our global growth and efficiency program. We expect the benefits of pricing and our productivity program to offset an overall increase in raw material costs, which includes the impact of transactional foreign exchange. We are assuming that raw material prices increase from current levels. In order to support the innovation that Noel discussed, we plan that advertising will be up to $1.5 million in 2019, both on an absolute basis and as a percent of sales versus 2018. We will continue our efforts to drive greater effectiveness and efficiency in our advertising spending by improving the impact of our advertising, shifting advertising dollars into higher ROI media and reducing non-working media expenditures. We expect our full year 2019 tax rate to be between .5% and 26.5%, both on a gap basis and excluding charges related to our global growth and efficiency program in 2019 and 2018, and charges related to U.S. tax reform and the benefits from a foreign tax matter in 2018. On a non-gap basis, this is an increase versus our 2018 tax rate. Based on current spot rates, we expect gap earnings per share to be down low single digits for the year, excluding charges related to the global growth and efficiency program in 2019 and 2018, and charges related to U.S. tax reform and the benefits from a foreign tax matter in 2018. We expect earnings per share to decline mid-single digits for the year, which includes the negative impact of translational foreign exchange. While we feel good about the programs we have in place for 2019, as Noel discussed, we feel it is prudent to factor in uncertainty in global economies, exchange rates, and the competitive environment. I would also highlight that we expect foreign exchange and raw materials headwinds to be higher in the first half of the year. And with that, I will turn it over to Ian for Q&A.

Today's question and answer session will be conducted electronically for the telephone audience. If you would like to ask a question, you may do so by pressing the star or asterisk key followed by the digit one on your touchtone telephone. We also ask that if you are listening to the conference on the internet that you please turn down the volume on your computer speakers when asking a question. Please limit yourself to one question. Once again, if you would like to ask a question, press star one. We'll take our first question from Dara Mosinian with Morgan Stanley.

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

Thanks for the one question, Dara. So let me take them in turn. You know, what is not typical about 2019 is the scale innovation on what Noel is calling the core businesses. Now we have mentioned Science Diet before. This is the first time we have mentioned Science Diet. We mentioned Total before, which is a seven share global brand, and Science Diet, as I say, is nearly half of the Hill's business, and these will not be the only scale businesses you will be hearing about in 2019. That is different from traditional innovation cycles. On top of that, as Noel said, we have the adjacent work that is underway on naturals across the portfolio and quite a broad array of what I would call normal innovation on the business. So the big difference, and I'm not going to break out in a quantification sense, but the big difference is scale business, scale core business relaunches with, by the way, terrific technology, terrific consumer acceptance, and we know now with Total, terrific advertising vehicles that have tested extraordinarily well. To your second point, and again, I think this is an important point to make. One of the reasons we talked over the last couple of years about sustaining advertising investment is you need to do two things. You need to maintain the relevance of the equity of a brand, which means maintaining continuous advertising support behind a brand in a world with lots of distractions and change. In 2019, the advertising that we are putting behind these scale innovations is incremental advertising. So we're maintaining advertising support on the equity and we're adding advertising to drive awareness and trial, which gets repeat and then builds into a virtuous cycle of continuous growth. But we need to get trial of products that are new, but a scale of products. So that is the focus of the advertising and within that, you obviously have the continued shift to digital in the case of Hills. It's all digital. So you have those executional intricacies, but from a big picture point of view, that is the approach. And we're confident in the payback in the sense of the expectation we have for growth and market share on those innovations, which as we have said, have taken a long time to bring together. And we think we'll step change the business going forward, in other words, create an inflection point for the growth of the company that based on the quality of products will continue beyond 2019. So that's the confidence.

We'll take our next question from Jason English with Goldman Sachs.

Hey, good morning folks and belated happy new year to you as well. Geez, it's early, lots of ground I guess we could cover, but I'm just going to focus on total because clearly it's a big focal point for you right now. As we step back and as we talk to a lot of investors, there's some degree of skepticism on whether or not this can really move the needle. New and improved propositions don't usually move the needle in a big way. And it seems like many of the market share gainers in your key categories are winning on distinct benefit platforms rather than universal benefit bundles such as total. So can you give us a sense of, or can you give us a little more specificity on what drives your enthusiasm and what maybe the investment community may not be appreciating? And then related to this, you haven't really mentioned the removal of triclosan from the formula as part of the grade platform benefit. Is that because it doesn't really matter or is there a benefit that comes with that too, whether it be a broadening aperture to a quarter consumers or markets, et cetera? Thank you.

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

We'll take our next question from Lauren Lieberman with Barclays.

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

Yeah. Yeah. Lauren, good question. It's not an exclusive thing. You know, one trend in the marketplace is that the value growth of the marketplace is accelerating because of premiumization. Premiumization happens in two ways. One is great businesses get better, create more value for the consumer and receive more value as a brand, which is the total story. The second is we see many smaller brands at premium pricing in niche segments in the category. And, you know, I talked a bit earlier about Ved Shakti. We could talk about Toms of Maine, which continues to grow quite nicely, which is a unique brand. We could talk about, again, about the charcoal variants that have been mentioned. So when we talk about premiumization, it's both of those things. We're not just talking about total. And we also are not forgetting the penetration opportunity in the world. I have said before on these calls that still our volume share is higher than our value share. One out of two physical tubes of toothpaste on the planet are Colgate tubes of toothpaste. And yes, we want the premiumization, but we also want the users of our product. And one of the reasons our volume share is higher is because when we entered markets, we made sure that we had a portfolio that had an entry price point that was available to the most rural market entry consumer we could find. And then behind that, we have put the Bright Smiles Bright Futures programs in those emerging markets. We have talked recently about the work we are doing across Africa, which has been stepped up substantially. And I would repeat, when we talk about investment, yes, we're putting investment behind the innovation, but we are also increasing the investment behind market penetration because we think that that is an important aspect of our sustainable growth over time, just based on the average use of toothpaste and the users around the world. So they're not mutually exclusive, I guess is the point. We have focused on the innovation because that is a big driver for 2019. But by no means does that mean we are reducing our effort on building market penetration.

We'll take our next question from Nick Modi with RBC Capital Markets.

Yeah, thanks. Good morning, everyone. Morning. I was just, thanks, Noel, for those comments about kind of where you're focused. Maybe both Noel and Neon, you can answer, when you think about the 2 to 4% for 2019, is there any way you can give us perspective on the weightings? Like, how important would the relaunches be relative to perhaps some of the white space opportunities, some of the distribution opportunities? Just providing a little bit more clarity around the drivers of that 2 to 4 would be helpful. And then maybe kind of what your expectation is for just general category growth for 2019. Thanks.

Yeah. Yeah, I think, you know, if we take the categories and you look around the world, you know, we're in a place where you see, you know, Europe still flat to 1%. You see North America north of 2%. And you see the emerging markets in that 4 to 6% range. When you take it all together, you're talking about 2, .5% underlying category growth rates. Now, if I come back to, you know, what's going to drive the shape of that 2 to 4, you know, I'm not going to break down the scale versus the underlying businesses because we're doing a lot of smart things on all of the other businesses that we have. But it is the combination of both that give us the confidence in that 2 to 4% spread, you know, particularly entering the year off the encouraging 2% in the fourth quarter.

We'll take our next question from Steve Powers with Deutsche Bank.

Great. Thank you very much. A question on the implied reinvestment this year. I guess I'm looking for a little bit more clear specificity, if I could, on how much of that is envisioned to go into A&P versus into new capabilities that may not be considered advertising but might instead show up in base level S&A, things like, you know, as it relates to digital or e-commerce or the naturals push. Because there's a fair amount of reinvestment implied in the guidance and I'm just wondering if it's a 2% A&P or if it's spread across broader S&A. Thank you.

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

We'll take our next question from Bonnie Herzog with Wells Fargo. Thank you, good

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

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

Our next question comes from Ali Dabaj with Bernstein.

Hey, morning, Ali. Morning, and Noel, nice to hear from you on the call. So, look, I'm glad you're filing increasing investments in 2019, but I do want to push you a little bit more on whether it's enough. A second ago, you said you're not doing it because you need to because you have stuff behind you, innovation, etc. behind you. So I want to push on whether you think it's enough because you're still losing global market share, the emerging markets in particular. You just mentioned a few questions ago, 4% to 6% EM category growth. You're at .5% if you look at your press release and the kind of tradition of when there's an omission in market share gains means you're not gaining or you're in fact losing, and that's Mexico, Brazil, Russia, India, China, maybe South Africa. And we like the strategy. We like that you're launching Elmax and Meridal and new channels and new geographies to help the Colgate brand out. We like the innovation, but usually that's kind of a long road. It's not a one-year type thing. And so with all that and to answer again to a previous question, tying it back together, feels like there's maybe 100 basis points or so increase in ad spend in 2019. Do you expect that to just be a one-time increase in ANP? Do you think you'll have to continue raising your spend to maybe something north of 11% or 12% or 13%? We certainly believe that might be a possibility over the next few years and that'll continue to weigh on growth because usually these, you've been in the industry for a long time. We've observed this for a while. It's not a one and done typically, right? It's usually a multi-year turnaround, multi-year investments. So just push you on that. Is this enough? Is this all we're going to hear in terms of a reinvestment here?

Yeah, as usual, a very well-framed question. I think the answer has to be that we believe it is because that is the plan we have put together. And the way I think I would frame it, I tried to capture it a little bit in the answer to the previous question. There is a difference between, to your point, innovation in niches that do take time to grow. We're very pleased with FedChakti, but it's taking time to build. We know we have a winning product. We will be patient and we will be successful. So again, I come back to the difference here is you are taking scale businesses, you are making significant relaunches with better quality products perceivable to the consumer and you are focusing your investment on generating trial. When you generate the trial, our data says we will get elevated levels of repeat and that becomes a virtual cycle. If these businesses, as we plan and expect them to do, drive growth and market share, then as you progress through a year, you come out of 2019 in a very good place, growth reestablished, scale businesses, to your point about market share, with growing market shares, and then you enter 2020 in a very different place with an activity array that will be different, strong. Clearly 2020 has been worked upon for a while and we'll decide based on that activity plate, you know, what is the necessary level of investment, but it'll be driven by the activity that we have and based on our planning, it will be driven by activity on a 2019 that sees us get back to a stronger rate of growth.

We'll take our next question from Kevin Grundy with Jefferies.

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

Yep, thank you and fair question. You can rest assured, actually, if I take funding the growth first, you know, when you go through our gross margin roll forward, I know John did it in general, but our funding the growth savings in the fourth quarter were 280 basis points compared to 250 basis points in the fourth quarter of 2017. So you can rest assured that internally we have as challenging a goal in place for 2019 and suffice to say, we tend to push a little beyond the goals we have established. So there is no lack of focus on trying to generate more from our funding the growth program. On the global growth and efficiency program, you'll remember we extended it one year. We have a variety of new initiatives already baked in that take advantage of the steps we've been making in the three major areas, which is the hubbing, the shared service centers and a rationalization continuing on facilities. And of course, we are working very diligently to see if we can frame new, not yet in the plan, opportunities that we can add to those initiatives. And if we find them, we will certainly pursue them and we are certainly looking for them. So it was not absent. We have set a plan where we are, but we have not we are not stopping looking aggressively.

Our next question comes from Olivia Tong with Bank of America, Merrill Lynch. Thank

you. My question is around your investments in e-commerce and direct to consumer. Because while it doesn't sound like there's a ton of incremental spend on the development here, I was curious how your thought process is changing to capture a greater share of that consumer. So like on regular online, how much is focused on changing formulations, packaging, etc. versus a change in potentially the messaging around your posts, sidebars, things like that. And then can you elaborate a little bit more on your direct to consumer initiatives? You mentioned Hills to Home, but you're already big in Hills here. So is that is that, you know, where's sort of the incremental in that? What are you taking from Hills learning capabilities into the other parts of your business? Thank you.

The okay, well, let me, you know, from an e-commerce point of view, you know, one of the reasons and indeed, it was Noel that brought the partnerships in. One of the reasons we're partnering with Hubble and with Bombay Shade is to give us some external insight into these areas, techniques that we can experiment with. And so, yeah, we're exploring all of the different ways you can go to market from an e-commerce point of view. And we will continue to broaden what we experiment with going forward. And the Hills direct to consumer, the importance of that is that there are a certain group of consumers that prefer the convenience of shopping online. And yet for a prescription product, you need a VET recommendation and indeed, they often seek a VET recommendation. So if you're a you can't get that from your local VET online, you have to get it physically from that local VET. So this provides the capability to maintain the engagement of the VET and yet give the recipient of the product, the product delivered in the way they want. And we have found with our subscription modeling that of course that gives the pets actually better quality health in the sense that they will stay on the diet and get the full benefit of the product.

Olivia, maybe I'll jump in and just add a couple, a little bit of flavor to that. Obviously, we're increasing our spending in digital. We'll see a pretty substantive acceleration in moving into 2019, as we saw in 2018, which we think is certainly having an impact on our e-commerce shares. As you may have seen, our e-commerce shares in the US are up 60 basis points in toothpaste. We are clearly the number one player in that category with a delta of about five share points to our nearest competitor. Our shares in a highly competitive China market are flat this year and we, in our view, generate a significant amount of learning and we'll be looking to bring new innovation specifically to that channel in China in 2019 to accelerate that growth. And then our biggest e-commerce business, as you're well aware of, is our Hills business, which had a terrific year in e-commerce, up 50 basis points. And we're very, very happy with what the progress that that team is making in terms of how they're using digital, which as you may recall, is their only medium of advertising. They spend 100% in that area behind the business and we certainly see that paying off both in our e-commerce shares as well as our brick and mortar shares. The success of the Hills business throughout the year was sequential and the shares are supporting that. Coming back to that question, our VET channel shares, which are prescription diet, were up 60 basis points and our pet superstore business, which is science diet, were up 60 basis points. So again, we think the focus and the learning that we're getting behind digital spending and how that interacts and plays into our e-commerce business is well constructed.

We'll take our next question from Robert Oddenstein with Evercore ISI.

Great. Thank you very much. Wondering if you could give us some more insights into your business and commercial momentum in China. I think in the opening comments, you said you expect to see improvement in the second half. So maybe some, what are the drivers for that? And then perhaps touch on how the, how the Dare, or I mean Dare to Love program is going with Alibaba. What are you seeing from that? Any more progress or initiatives with Alibaba? And also touch on premiumization in China and Elmex. Thank you.

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

We'll take our next question from Bill Chappell with SunTrust.

Hi, this is actually Grant on for Bill. Thanks for taking the question. Our question is just on the balance between volume and pricing, particularly in emerging markets this coming year. I think we kind of understand that the volume drag was due to that pricing in the back half of this past year, but kind of looking forward, any thoughts on the timing based on competitor pricing actions that maybe we'll start to see volume growth in the emerging markets coming middle of this year, back half of this year, kind of any color around that would be great. Thank you.

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

Our next question comes from Mark Astrochan with Stiefel.

Yeah, thanks. And good afternoon, everybody. One quick follow up and then just another question. On the China piece, I was surprised pricing wasn't higher in Asia pack, given the degree of pricing that you're taking in China. So it sounds like maybe there's some timing, some inventory work still to come. So that may explain it. But if you could just help on that, that would be great. And then, secondly, just I wanted to explore learnings from the professional skin care acquisitions from beginning of last year. And if you look at the numbers, it seems like they've actually been pretty, pretty successful, obviously, on a small base. I'm curious what learnings you've had from that. And whether you could take the professional skin care into or would take the professional skin care into retail skin care or other channels. Is that something that potentially you'd look to focus on? And kind of related to that, given all that we've heard today, a lot going on. So is that even something that's a priority at this point?

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

Our next question comes from Jonathan Sini with Consumer Edge.

How much do you think a below average macro environment is a way to think about restrained emerging market growth in 2018? In light of what at least look like similar forex and macro trends in 2009 or even 2015 when your own numbers were a little bit better, is there any way you can share to maybe parse what's secular from what's cyclical in emerging markets to be helpful? Thank you.

Well, I'm not a macro economist, so what we tend to focus on is consumer behavior. Obviously, the one where the lines crossed, if you will, was what we saw in Latin America with the lack of customary inflation, which we think, given the underlying commodity price pressures, is beginning to come back. I guess the other conclusion we have drawn is that, you know, Mexico seems to be six months ahead of Brazil, and while we stay very vigilant on Brazil, an optimistic view would see that perhaps follow the same curve. Beyond that, I wouldn't make any significant predictions. These are products that tend to be more fundamental usage products, and we have enough bandwidth in our portfolio to scale down and scale up depending the way the market grows. Even in Brazil, where the category has suffered, our market share has held up surprisingly well. Those are the only comments I think I'm informed enough to make.

We'll take our next question from Andrea Teixeira with JP Morgan.

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

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

And we'll take our final question from Steve Strykula with UBS.

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

Yeah, so I'll speak for John. The in terms of the actually the point of making the comment on the pricing was to suggest confidence that we will indeed realize all of the pricing given that more than two-thirds of it is already in place now and given what we know is the first half headwind in terms of raw materials and foreign exchange and given what we see and hear from competitors operating in similar spaces. So unless you hear otherwise, our intention was to convey confidence in our ability to deliver the pricing. And in terms of operating profit, as you know, we don't guide operating profit. We guide to gross margin and the EPS. And to your point on gross margin, if we realize the pricing and our funding the growth ambitions of the year, we are comfortable with our 30 to 50 basis points guide on gross margin. So I believe those are all of the questions. I thank you for joining the call and we look forward to talking with you in April.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.