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 simulcast live at www.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 Poche, Senior Vice President for Investor Relations. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and our most recent filings with the SEC, including our 2017 annual report on Form 10-K and subsequent SEC filings, all available on Colgate's website, for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in Tables 8 and 9 of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website. Joining me this morning are Ian Cook, Chairman and Chief Executive Officer, Noel Wallace, President and Chief Operating Officer, and Henning Jakobsen, Chief Financial Officer. Ian and Noel will start off with their thoughts while I will cover our Q4 results 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 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 17 was the highest quarter that year. Said a different way, on a two-year stacked basis, we accelerated from 1% in the third quarter to 4% in the fourth quarter. So we 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 U.S. business and our continued high growth in e-commerce. And as you will hear later from Noel, there is big news coming on the other half of the Hill's business, science diet in 2019. Africa, Eurasia. We cycled through our distributor issues. We're focused back on driving distribution and advertising support, and we're back to growth. And India, now posting continued healthy organic sales growth, driven by innovation, , which is building distribution and continuing to build market share. On a national basis, VAT Shakti 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, VAT Shakti is now up to 4.4% market share, five months of share increase. And several other markets are on plan and expectation that we discussed in the third quarter or generally doing better. Mexico and Brazil, we saw a sequential improvement which helped drive Latin America to positive growth. We are taking pricing as we said we would and we are sticking with that strategy. In the case of Mexico, we have seen that market become somewhat less promotional and the category growth is coming back. In Brazil, the category growth is still modest and the heightened promotional activity we had mentioned before continues, so we balance our business in Brazil, responding where we need to, but sticking to our underlying strategy of taking the necessary pricing. China, sequential improvement as we said, but still negative. Consumption continues to look fine and the pricing is working its way slowly to consumers. We expect to see continued sequential improvement in the first half and return to growth in the second half of this year. And finally, a market often discussed 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 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. area I want to talk about for 2019 is our continued focus on pricing. And that is for two reasons. One is a continued focus on premiumizing our portfolio. And the second is offsetting underlying costs, including the transactional impact of foreign exchange. So if I take a step back, and just give you a view on the underlying commodity cost trends on our business. For 2018, the overall increase in underlying commodity costs was 7%. In the third quarter, as we told you, it was 8%. In the fourth quarter, it was 9%. And for 2019, our plan calls for a 6% increase in underlying commodity costs. Now, obviously, given the shape of 2018, and as John will reaffirm in his prepared remarks, the cost headwinds will be higher in the first half of 2019. Foreign exchange for 2019, which brings the transactional cost on top of the underlying commodity costs for the year, we expect to be in the 2% to 2.5% range. Now, importantly and pleasingly, over two-thirds of our 2019 pricing is either rollover pricing from 2018 or pricing already accepted as part of the significant relaunches of the total business and the Hill's science side 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 reprise, 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.