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

Thanks, Vicki. Good morning and welcome to our First Quarter Earnings Release Conference Call. This is John Foschee, 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 Web site, 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 Web site. 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 a 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 growth 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 gap 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 to sales, benefiting from our Productivity programs. On a gap 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 .5% organic sales growth in the quarter, with 2% volume growth and .5% pricing growth. We saw strong sales growth in toothpaste in the quarter, driven by Colgate Total SF, Colgate White, Colgate Essentials, and Toms 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 L to MD and PCA skincare businesses we acquired during Q1 of 2018. These brands are delivering very strong growth across a number of channels, including professional, D to C, and e-commerce. Europe's net sales were down 7% in Q1, driven by negative foreign exchange. Organic sales were up .5% in the quarter, as volume growth of .5% was mostly offset by negative pricing of 1%. While categories in Europe remain sluggish, our market shares were up or flat in seven of ten 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 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 SanX body wash business. In France, SanX's body wash share is up more than 100 basis points year to date behind SanX 0% and the SanX Physiologic brand. Latin America. We are pleased with our acceleration in organic sales growth in Latin American Q1. Net sales declined .5% in the quarter, as .5% negative foreign exchange more than offset .5% volume growth and .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 Extract toothpaste line, our Colgate Guard franchise in pharmacies in Brazil, and the Colgate SlimSoft Advanced Toothbrush. Net sales in Asia Pacific were down 8%, driven by negative foreign exchange of 5.5%, a .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 MaxFresh and Colgate Bedshakti franchises. In order to drive penetration of Bedshakti, we recently gave away 30 million samples at the Aard Kummela Festival in India. Our Africa Eurasia business showed solid underlying business momentum in Q1, despite the negative impact of foreign exchange. In Q2, 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 Maradol regimen, toothpaste, toothbrushes, and mouth rinse in the pharmacy channel in Turkey in the first quarter. We also launched Pamal of Mycelar Care, Shower Gel, and 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 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 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 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 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 2% 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%, both on a gap 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 gap 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, Sean, 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 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 Meridon to select markets, and importantly expanding skincare 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 Maitea Paola speak about that at Cagney, and those changes are under way 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 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.

Thank you. And the 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. Once again, if you'd like to ask a question, press star one. And we will take our first question today from Lauren Lieberman with Berkeley's. Please go ahead. Great. Thanks. Good morning.

No, I'm curious if we could talk a little bit about market shares, just market shares and oil 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 in 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 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 past forward and some of the greater growth mindset you're putting in play? Thanks.

Sure. Sure. Thanks, Lauren. And, you know, 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, you know, 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 deal 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 will have a significant premium in both those markets, which where it has a sizable share will launch in the second quarter. 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.

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

Thank you. Good morning. So I had a question on your – hi. I had a question on your pricing in the quarter. I guess I'm wondering why it's slow 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? Essentially, do you expect pricing to accelerate in the future or remain constant at current levels? Thanks.

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 had talked about in the fourth quarter that two-thirds would roll through from 18 to 19. We have a third to go, and we're quite confident that we will generate the pricing that we set out for ourselves on the year. Certainly at the current spot rates, if spot rates change, we'll certainly have to look 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 Equivali shares, as John mentioned, we downsized. So the price per ounce is up about 16 percent, and the total toothpaste franchise in the U.S. is up 8 percent. So price is holding, and more to come as we move through the balance of the year.

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

Hi. Good morning. 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? Thanks.

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 at 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 we'll start to see that turn in the back half of the year.

And we'll go to Andrea Texera with JPMorgan.

Thank you. Good morning. So my question is on North America organic volumes and a follow-up on the Colgate Total Weigh Lounge. So on North America, you called out on the prepared remarks that the benefit from ELTA, MGE, and PCA can now include in organic growth. Can you give us like kind of a sort of magnitude, not of magnitude of that lounge, that inclusion on the organic growth? And also on the Colgate Total Weigh Lounge, thinking about specifically Latin America with Brazil in terms of the timing of the lounge. Will all the volume of the Weigh Lounge 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 lumpness on the volume as we progress through the quarters. Thank you.

Thanks, Andrea. So again, good growth in the first quarter out of North America. We're not going to break it out, but suffice it to say, you know, all the key elements of the North America business grew in the first quarter. We were particularly pleased with Toms and Main, which had another significant growth following sequential growth over the last three 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 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.

We'll go to Ali Dabaj with Bernstein.

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

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 realize 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 to 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 in 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 in a brand like Colgate Total, which is an existing brand in the U.S. at 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've 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 four weeks on Colgate Total, the consumption is up 14 percent and our share is up one 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.

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

Great. Thanks, Hino. Hey, so as you talked about in the open, you're arguably managing a larger number of growth priorities today versus history. And I guess what I'm wondering is 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 the core Colgate or Oral Care franchise returns to market-leading growth. But around that, as you talked about, you've got the expansion into naturals, you're broadening the reach of brands like Elmex, investing in e-commerce, stepping up support for professional skincare, and obviously driving hills 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 any thoughts if you can do it all organically, or are you increasingly open to M&A in support of those initiatives? Thanks.

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 Cagney, we're really looking at it through three 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 recognized 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 we're 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 come 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.

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

Thanks. Good morning. 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. A third 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. Thank you.

Sure. You know, 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.

Next is Kevin Grundy with Jefferies.

Thanks. Good morning. Hi, Kevin. So, Noel, my question is on industry growth rates relative to your organic sales growth guidance of 2 to 4 percent. 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 percent 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 comp season, more spending goes into the marketplace and it seems like emerging markets are in a better place. So thank you for that.

The categories, as you mentioned, 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 percent, depending on the market around the world. In the developed world, somewhere between flat to around 2.5 percent, we've seen a little bit of a 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 where the categories are. And if Latin America and particularly Africa continue 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 more quarters underneath us relative to those categories and we'll go from there.

We'll now go to Bill Chappell with SunTrust.

Thanks. Good morning. Hi Bill. Noah, first, just a clarification. You had said to Bonnie's question, you know, we came into the year two-thirds of pricing and still a third to go. Are we still a third to go or did you do a fair amount during first quarter? And then the second just on Hills, 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 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 is it just the VED channels doing well or just just kind of help us give us more color why it's doing better?

Sure. Well, let me take the pricing question first. Yeah, we're about right. We're right where we thought we'd be. About two-thirds of the business we're seeing roll through and the third to go. And we've got some pricing that's going into place starting 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. Hills is a great story. You know, 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 Hills 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, that Cagney 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. The 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 Hills 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.

We'll go to Robert Ottenstein with Evercore ISI.

Great. Thank you very much and nice start to the year. I'm wondering if we could drill down a little bit more into what's going on in Brazil. And so a couple of sub-points. Perhaps if 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, Miradel in Brazil, how that's going. Do you need more investment there or 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. Thank you.

Great. Thanks, Robert. So again, good results coming out of Brazil. We were pleased, particularly given that we generated both volume and pricing in Brazil in the quarter, which was terrific to see. Relative to the promotion environment, yeah, 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 a point on the business. We're still at a 72 share, came out of our Colinos, our Soriso brand, which is our secondary brand because of the deep discount and we saw some from our competitors. That being said, our instinct is that will particularly be driven by a 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 a point so far in that channel, but lots more to go. The investment's there. We ring-fenched 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 sheet. We're looking forward to the balance of the year.

Next is Jason English with Goldman Sachs.

Hey,

good morning, folks.

Thank you for the question. Sticking on the topic of going a little bit deeper into 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 four Q to one Q. How should we expect that to trend through the remainder of the year?

Thanks, Jason. So, you know, quickly coming back to China, not a lot more to add there. Obviously, it came in line with our expectations. The inventory stocking continues. We've made good progress in the fourth quarter, continued progress in the first. We're rebalancing, as I mentioned, some of our -to-market structures and how we take the product to market, particularly as it 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 cost, yeah, we saw a significant elevation of cost in the fourth quarter. A little bit better in the first quarter. We're in the range of four to six percent commodities in terms of increases moving through the gross profit line. And we expect that to abate as we move through and lapse some of the foreign exchange transaction impact that we had last year that occurred in the first half. And we'll 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 has given us confidence that we can continue to hold and increase gross margins moving forward.

We'll go to Camille Gargiola with Credit Suisse.

Hey, good morning, guys. 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, 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?

Sure. 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 a continued strong growth on the Hills 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.

Next is Stephen Strickula with UBS.

Hi, good morning, and congratulations on the new seat. Thanks, Steve. My question is, as you look across a portfolio after the work you guys have done the last few years, which three 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 parameter around your gross margin outlook for the year relative to what you did last quarter? Thanks.

So listen, on the categories, we love all our children equally in this case. Obviously, oil care continues to be a real focus for us. The first quarter organic that we delivered was largely driven by toothpaste and by Hills, and so we're very encouraged. But as John mentioned in his opening remarks, we have 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 oil care, personal care, and our pet food have always been our top three 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 some of the cost environment that we saw in the fourth and in 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 sign start 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.

And we'll go to Mark Astropan with Stiefel.

Thanks, and morning, everybody. I wanted to ask about specific learnings from PCA and ELBA or 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, doctor's offices and the like versus mass or other channels? And perhaps indulge me to kind of take that a step further. What gives confidence that you can have success in skincare more broadly, just given competitive dynamics in the market? And I'm kind of alluding to your comment about expanding on skincare going forward.

Yeah, thanks, Mark. You know, let me step back for a minute and give you a little bit of insight in terms of how we look at M&A, you know, not just simply from the economics and the growth aspects of those categories of businesses that we acquire, but more importantly, what are the core competencies and learning that they can bring into 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 esthetician 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. You know, moving forward, skincare is interesting to us. We've got two businesses that we're focused on right now. We'll continue to drive those moving forward. If we see other things come available that we think are interested in and we'll 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.

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.