Colgate-Palmolive Company

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

Thanks, Vicki. Good morning and welcome to our First Quarter Earnings Release Conference Call. This is John Fauché, 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 two years, with volume and pricing growth in all four 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 costs, including foreign exchange transaction costs, were a 320 basis point drag on gross margin year-over-year. Our productivity programs, led by our Funding the Growth initiatives, 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-to-sales basis, advertising was up 60 basis points year-over-year, with increases on a percent-to-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 65 cents 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 67 cents. 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, B2C, 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 remained sluggish, our market shares were up or flat in 7 of 10 categories. We delivered strong volume growth in Northern Europe, with the UK 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 Meridal Pure in several markets in Europe in Q1, which brings our top therapeutic gum offering into the natural 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 0% 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 Guard 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 Vetshakti franchises. In order to drive penetration of Vetshakti, we recently gave away 30 million samples at the ARD 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, Hills. Our strong growth at Hills continued in Q1. Growth was led by the United States. with particularly strong growth in e-commerce, pet specialty, and farming 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 Cagney, 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 continued 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 targets for our Hills 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 gap 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 to sales. we would expect advertising as a percent to 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 percent, 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.

Thanks, John, and good morning, everyone, and thank you for joining us on the call today. I thought it appropriate to begin by framing three 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 recall on the fourth quarter call and at Cagney, 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 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, it 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 in 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 were 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 Mighty Apollo speak about that at Cagney, 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 and media, and we know that data-driven marketing is 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 S4 HANA, 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. 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 six months as he's prepared me for this new role. So with that, let me turn it over to the questions.