Colgate-Palmolive Company

good day everyone and welcome to today's Colgate Palmolive Company second quarter 2019 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 the Senior Vice President of Investor Relations, John Fauché. Please go ahead, John.

Thanks, Ebony. Good morning and welcome to our second 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 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 Noel Wallace, President and Chief Executive Officer, and Henning Jakobsen, Chief Financial Officer. I will start off with some thoughts on our progress halfway through the year. I'll then provide some details on Q2 and our full year outlook. I will then turn it over to Noel for his thoughts, and he'll open it up for your questions. Halfway through 2019, we're pleased but not satisfied with the acceleration in organic sales growth. As Noel discussed earlier in the year, delivering on our organic sales growth target is our number one priority for 2019. We continue to focus on executing against three key areas to accelerate growth, using innovation to drive the core, pushing into adjacent higher growth segments, and expanding our availability in faster growth channels. These strategies have helped us to deliver broad-based improvement in organic sales growth over the past few quarters, with a healthy balance between pricing and volume growth. For both the first and second quarters, we've delivered organic sales growth across all four product categories, oral care, personal care, home care, and pet nutrition, and in both developed and emerging markets. Our first area of focus is driving the core through innovation like Colgate Total and Hill Science Diet relaunches. We've seen Colgate Total's global market share improve sequentially since the relaunch, and we're seeing significant increases in pricing across key markets. For Science Diet, we're seeing share gains in brick and mortar, as well as in e-commerce in the U.S. We're just at the beginning of the international rollout of this relaunch, and the initial retailer response has been positive. Secondly, we are pushing into adjacent higher growth segments like naturals and therapeutics. We are very pleased with the progress that our charcoal launches are making around the world, and we continue to expand Elmex and Meridal to new markets. Our third focus is to expand the availability of our products around the world by focusing on faster growth channels like e-commerce and discounters, which are driving much of the category growth. Our U.S. e-commerce business continues to deliver growth well in excess of the category, driving significant toothpaste market share gains in the second quarter and year to date. Next, we were pleased to show progress in gross margin expansion in the second quarter as our gross margin was up for the first time in five quarters. Our focus on delivering pricing through premiumization and revenue growth management is paying off both in terms of organic sales growth and at the gross margin line. And our funding the growth initiatives are having a strong year so far. We are also very excited about the transaction we announced two weeks ago. We've spoken over the past few years about our focus on skin health. The completion of our acquisition of the Laboratoire Philorga Cosmetique skincare business will provide us with a high margin, very high growth brand with a focus on the anti-aging segment. Philorga had net sales of approximately $250 million for the latest 12 months ending June 2019. The business is also nicely profitable, as it has gross and operating margins that are above our overall personal care margins. As we said in the press release announcing the transaction, we expect no impact to EPS this year from Florga. That excludes one cent of transaction costs. We expect roughly one cent of earnings accretion in 2020. We plan to finance the acquisition with a combination of cash and debt. In order to pay down the additional debt more quickly, we intend to reduce our share repurchase activity after the close of the transaction. We expect this will reduce our 2019 gross share repurchase by around 10% from last year's total of $1.24 billion. Finally, we've made some real progress on enhancing our leadership on sustainability. As part of our 2025 target to make all of our packaging recyclable, We received the first ever approval for a recyclable toothpaste tube in the United States from the Association of Plastic Recyclers. This is a big step in our sustainability journey. Moving to our Q2 results. Our net sales declined 0.5% in the second quarter. We delivered 4% organic sales growth with 1% unit volume growth and 3% favorable pricing. This was more than offset by negative foreign exchange impact of 4.5%. On a gap basis, our gross margin was up 50 basis points year-over-year. Excluding the impact of our global growth and efficiency program, it was up 30 basis points year-over-year. Pricing was a positive 100 basis point impact to gross margin in the second quarter, while strong productivity performance drove a 220 basis point benefit. This was mostly offset by a minus 300 basis point drag from raw materials inflation, which includes foreign exchange transaction costs, and other was favorable by 10 basis points. On an absolute basis, advertising investment was up 3% year over year. On a percent-to-sales basis, advertising was up 40 basis points year over year, with increases on a percent-to-sales basis in every division. We still expect a greater increase in advertising spending on both an absolute basis and as a percent-to-sales in the second half of the year. Excluding charges resulting from our global growth and efficiency program and advertising spending, our SG&A expenses were up year-over-year in the second quarter on an absolute basis and as a percent to sales, as higher compensation, logistics costs, and the cycling of some one-time benefits in the year-ago period more than offset savings from our productivity programs. On a GAAP basis, diluting earnings per share of 68 cents were down 7% year-over-year in Q2. Excluding charges resulting from our global growth and efficiency program in 2019 and 2018, and the benefit from a foreign tax matter in 2018, diluted earnings per share were down 6% to 72 cents. Our free cash flow through the first half was $1.1 billion, which was up 2% versus prior year. Now taking a quick look at the divisions. North American net sales grew 2.5% in the quarter, as 2% volume growth and 1% pricing growth were partially offset by minus 0.5% foreign exchange. North America oral care growth was led by our toothpaste business, where the Colgate Total relaunch helped drive significant positive pricing. Our personal care growth was led by our PCA Skin and Elta MD professional skincare businesses, which continue to deliver very strong growth. On the home care business, Fabuloso continued its strong performance, reaching its highest ever market share in the U.S. Europe posted a 5% decline in net sales, with organic sales up 1% and foreign exchange minus 6%. We're seeing sequential market share improvement following the Colgate total relaunch in key markets like the U.K., Spain, and Italy. On the personal care side, our Sanex physiological line, which brings pharmacy trends into mass channels, is driving incremental share in body cleansing. Latin American net sales were down 0.5% as 1.5% volume and 5.5% pricing were offset by 7.5% negative foreign exchange. For the second quarter in a row, we saw organic sales growth in every hub, including Mexico and Brazil. The underlying category growth rates in Latin America remain modestly positive, which is an improvement versus 2018. Our focus on premiumizing our portfolio through the Colgate Total relaunch, additional oral care and personal care premium innovation, and revenue growth management drove the strong pricing growth across the division. Net sales in Asia Pacific were down 4%, driven by negative foreign exchange of 3%, a 1.5% decline in volume, and positive pricing of 0.5%. We showed improvement in organic sales growth in the quarter, led by better pricing growth. As expected, China remained the drag on our results, with all of the other hubs showing organic sales growth. We're encouraged by the performance of our natural toothpaste brands in India and Thailand, while our South Pacific business benefited from strong pricing for the Colgate Total relaunch. Our results in China improved sequentially in the quarter, but remained negative as we continued to focus on optimizing our distribution network. As we indicated last quarter, we expect more significant improvement in the second half of the year. The Africa Eurasia Division delivered robust underlying performance in the quarter, with net sales up 0.5 percent, volume plus 3.5 percent, pricing up 6 percent, and foreign exchange of minus 9 percent. The division delivered organic sales growth across every hub, driven by strong pricing. Significant investment in advertising spending over the past few years is paying off in improved growth across the division. Our Eurasia hub continued its improved performance, led by Russia, with solid volume and pricing growth aided by the Colgate total relaunch. Our strong volume and pricing performance in Turkey allowed the Colgate brand to achieve all-time highs in market share and establish market share leadership. Our Sub-Saharan Africa business also delivered a nice combination of volume and pricing growth in the quarter. Hills continued to deliver in Q2 with net sales growth of 3.5%. Volume growth of 2% and pricing growth of 4% were partially offset by negative foreign exchange of minus 2.5%. The turnaround at Hills over the last two years shows that a combination of increased marketing support and strong innovation behind a compelling brand purpose narrative can drive growth. While growth was led by North America, every hub delivered positive pricing and every hub but one delivered volume growth in the quarter. The international results are encouraging since they do not yet reflect any impact from the science diet relaunch outside of North America. Europe grew both volume and pricing in the quarter behind our new prescription diet stews business and e-commerce growth. Moving on to full year guidance, which excludes the impact of the Florida transaction. We continue to expect net sales to be flat to up low single digits, and organic sales to be up 2% to 4%. Given our performance year to date, we would expect organic sales to be towards the higher end of that 2% to 4% range. 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 foreign exchange transaction costs. We would expect advertising as a percent to sales for the full year to be fairly consistent with the first half level. We now expect our full year 2019 tax rate to be between 25% and 26% 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. Our previous guidance was for 25.5% to 26.5%. Based on current spot rates, we expect GAAP 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 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. And with that, I'll turn it over to Noel.

Great. Thanks, John. And good morning, everyone. I thought I'd open up with a few thoughts before we jump into the Q&A. Solid quarter to be sure. We're pleased with the broad-based acceleration in organic sales growth, particularly at the geographic and category level, and more sharply around emerging markets as we continue to focus on accelerating that part of the world. As we have said in the past and you've heard me talk about, we're really trying to drive faster growth differently. And that really begins with a clear understanding of our categories, a clear understanding of our consumers and our retail environments and how they are changing and how it shapes our efforts, how it allocates our investments differently, how we decide to innovate differently against those changes and informs the investment choices that we make so far through the first half of the year and moving through the back half of the year as well. Happily, you're seeing this pay off through our increased investments and our focus on driving the core through better innovation, as John mentioned. We're very selective on the adjacent segments that we're going after. Natural is particularly as important. The premium therapeutic is an area of opportunity for us. And most recently, the focus that we have on skin health behind L2PCA and soon as we integrate the Felorga acquisition that we recently announced. Lastly, on the channel acceleration, specifically our go-to-market approach and how we're going after e-commerce, where we've seen significant acceleration in the first half of the year, as well as in pharmacy and discount stores. Now, while the shares in track channels aren't where we'd like them to be, the first step is obviously accelerating growth across our business on a broad-based perspective. And you're going to start to see those shares improve in the back half, but first we need to get the top line moving. And as you well know, generating significant share growth and organic growth and non-track channels, which are obviously not picked up in the shared results that you're looking at. But we know we need to drive profitable growth. And to do that, we need to change how we think about driving productivity across the organization as well. Of course, we'll remain focused on those traditional efforts that we've done so well. Our focus on funding the growth, which is off to a great start in the first half of the year and particularly accelerated in the second quarter. the GJEP, which is coming to an end in the balance of this year, but we're well focused on fully maximizing that as we move through the next six months of the year. And our productivity lens really needs to move beyond just the cost-cutting efforts. We need to think about productivity and how we really maximize and fully realize the capacity of all the Colgate people around the Colgate world. And to do that, we need to change how we work, eliminating and streamlining processes, getting to quicker decisions through the use of data and analytics, using technology across the enterprise to support our business more effectively. You've heard me talk about a little bit in the past on SAP and how we're now upgrading to S4 HANA, and we're now looking to build global capabilities once again that will make us far more productive with a single global standard, far more simplified and automated system to allow us to get to decisions quicker and allow us to find efficiency faster. All these changes will importantly free up capacity of Colgate people to drive growth and do that on a more sustainable basis moving forward. So excited about the progress we're making, but as I said earlier, more work to do. And with that, I'll turn it over to you for the Q&A, please.

Thank you. And ladies and gentlemen, 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 touch tone 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 your question. Once again, if you would like to ask a question, please press star one. And we will take our first question from Dara Mosinian with Morgan Stanley. Please go ahead.

Hi. Good morning, guys.

Hey, Dara.

So this is now your third skincare deal in the last couple of years here in the segment for a company that generally has been pretty judicious with M&A in the past. And you mentioned skincare expansion as a priority last quarter. So I was just hoping you could give us a bit of state of the union around your interest in skincare. Is gaining a lot more scale in the segment a priority as you look out over the next five to ten years? And just help us better understand the strategy to succeed in the segment, you know, from a Colgate perspective, particularly relative to some of the larger established competitors that seemingly are spending a lot of money and efforts already in the segment. What gives you the confidence that Colgate can prosper in skin care? Thanks.

Great, Darrell. Thanks. You know, obviously, let's start off with Elton PCA, which we've talked about now a couple times. Great. We love the capabilities they bring to the organization, but underscoring that is the category itself. I mean, skincare is a significant category. It's growing at a clip of about 5% to 6% globally. We know it's highly margin accretive to us, and we feel like the spaces that we have very thoughtfully selected to participate in are spaces that we can do well. So as we talked about ELTA, particularly as we relate to the fact that they're very Durham recommended and the capabilities that we can bring to that. PCA is esthetician driven and the endorsements that we can continue to drive there. And more recently with Philorga, obviously they're very strong in the pharmacy channel, which we think we can obviously bring significant value to. We're being selective on the spaces we go into. We'll continue to be very judicious on the acquisition front. These things kind of happen in streams, so to speak, and we're obviously building out a very strong skincare portfolio. But we'll continue to be very, very mindful moving forward in how we continue to build that. If I look at Filorga very specifically, we really love the brand. It's positioned extraordinarily well demographically when you look around the world. Ninety percent of its business is in anti-aging, and certainly the demographic trends that we see both here in North America and all around the world bode well for that business moving forward. anti-aging within the skincare segment is the fastest growing sub-segment within skincare it's highly profitable to the business and creative on a gross margin basis importantly they've got a really well-balanced management team with significant experience in skincare that we think will add real value to us and as I mentioned earlier we like the profile of their channels particularly the pharmacy growth where they're premium priced within pharmacy which we think will add a lot of value to our pharmacy business around the world and they've got new expansion opportunities and emerging channels in the world. And last, I'd say geographically, obviously strength in Europe, but more importantly, emerging strength in Asia and particularly China. So, you know, those are the reasons we like skincare. We're going to continue to answer your question, be very judicious and thoughtful about M&A. We feel we've got a really good one here, and it's going to round out our skincare portfolio quite nicely.

Okay, thanks.

We'll take our next question from Andrea Texario with JP Morgan. Please go ahead. Thank you. Good morning.

Good morning. So can you please elaborate a little bit more on the funding for growth? I think it came in well in the gross margin level, and usually it's back-loaded in the balance of the year. So my question is if we should be seeing that probably slightly ahead of expectation and that's funding a bit of your overhead expenses and on that one if you can tell us I think it's part of your SG&A came in a little stronger because you you're investing in these emerging channels as you just described for skincare or if there's anything that may have been heavier in the quarter And if we have time, if I can squeeze in China, if you can update us on the changes there and the distribution, that would be great. Thank you.

Thanks, Andrea. So let me quickly go through the margin roll forward, which I think you heard John take you through. But in summary, obviously pleased with the pricing that we generated in the quarter up one point and the funding to growth, as you mentioned, a little bit outpacing where we were at this time last year. And I think that's a result of more sharpened focus on the cost line, specifically moving through the first half of this year. And that bodes well, obviously, for the back half of this year, particularly as we see hopefully lower transaction costs coming through the P&L, given we're lapping some of the significant deval that we had in the second half of last year. Material prices were up about 300 basis points. So those are obviously offset with the strong pricing. and the strong funding to growth that we had. So the outlook for the balance, as John mentioned, that we expect to see gross margins up and will continue to be very sharply focused on funding to growth. And I think the efforts that we have around revenue growth management and the premiumization of our bundles, particularly around the core, bode well for the back half of the year. On the SG&A line, the biggest impact on SG&A in the quarter were a result of the following. Higher logistics costs, which we've seen, as you know, creeping into the P&L over the last six to nine months. A swing in compensation this year versus last year, where obviously the results were weaker in the quarter. And last year, we had some one-time benefits that were now lapping through the P&L. Looking ahead, we obviously do not feel we've got an issue of cost at the SGA line. We're very focused on maximizing the GJET program through the last six months of the year, and more importantly, setting up some of the significant changes we've made around the company, both structurally and operationally, to ensure that it continues to yield savings for us as we move into 2020. The other element of that is looking at what we're going to do with S4 HANA. As I mentioned up front, a significant structural change for us over the next 18 months. where we anticipate that will generate significant savings for us as we look to standardize processes and systems around the world and find ways to drive more agility through the system. So all in all, we think we're in a good place. The blip in SG&A was more one-time. We think we've got good control of that moving forward.

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

Hey, great. Thanks. Good morning, Noel. So as John highlighted, you've been working hard at regaining traction in Asia and China specifically over the past several quarters. And it sounds like you still feel optimistic about those efforts beginning to take greater hold in the second half. But can you maybe help frame your expectations for us in a bit more detail just in terms of what success would look like over the balance of the year in that region for you? Thanks.

Sure. Progress specifically. Obviously, we've seen progress sequentially in the quarter from first to second. Asia came in slightly ahead of plan, but not enough to change the outlook that we have guided for the back half of the year. Importantly on Asia, all hubs were up very nicely in the quarter outside of China, and China was sequentially up in the quarter. And so as we've guided before, we anticipate that we'll continue to see that improvement through the back half of this year, and that's the plan that we're executing as we speak.

We'll take our next question from Ali Dabaja with Bernstein. Please go ahead.

Hey, guys. Thanks. I guess more broadly, I'm just trying to understand whether you think you're hitting the right balance of investments versus top line and bottom line delivery. You guys see it much more granularly, but kind of from the outside, it certainly looks like S&P expenses were up 195 basis points. You just said that's short term. We could tell A&P was only up about 40 basis points of the percentage sales year-on-year, which is below what we had thought. It's really below what we thought for the year. And then meanwhile, you mentioned it, but global toothpaste share was down 40 basis points year-on-year. Manual toothpaste share was down 40 basis points year-on-year. The company continues to lose share in North America, I guess the U.S., Mexico, Brazil, Russia, India, China. And to be clear, this is not tracked or untracked data. This is just by your numbers in the release. And then you're getting to the EPS by better taxes, lowering the increase in A&P for the year, and now saying you're going to curtail buybacks by 10% for these acquisitions and skin care. So you put this mosaic together, and I guess I'm struggling to see the queer... vector that suggests that you're getting the right balance in terms of investment for the long term? Or do you need to make more dramatic actions on cost savings or spend back or something else? And so I'm just trying to get a sense of which of those mosaic pieces I should overemphasize versus underemphasize to feel comfortable that the balance in investments is the right one. Thank you.

Thanks, Ali. Let's start with the story that we've been communicating externally, which is that is to get an acceleration of top line growth back into the P and L and the investment strategy to do that. As you've seen, we've accelerated our investments and to be sure that acceleration is paid off in the first quarter and an acceleration in the second quarter. And specifically in the second quarter, you've seen acceleration across all of our categories relative to that investment. You've seen acceleration across all of our geographies, X Asia with that investment. So we're pleased, quite frankly, with the focus that we put in the story that we're building throughout the organization, which is to accelerate top line growth through an accelerated investment strategy. And you've certainly seen that pay off. We haven't seen the shares move, as you mentioned. We're starting to see some of that accelerate as we move through the back half of the quarter. The total, which has received a decent amount of investment in the first half and will continue to receive investment through the balance of the year, our shares are up globally on that basis. And remember, A big part of that was ensuring that the investment helped us generate the price increase that we executed behind that relaunch, which is on average we're seeing about 10% come through on total globally. So the investment strategy to ensure that we had a successful launch we think is playing out. And as you heard from John, likewise on Science Diet where we've accelerated investment, we've seen growth across all areas of the P&L and all areas of the business. Again, from an investment standpoint, the story was more investment to generate top-line growth, and we're seeing that, we think, on a balanced basis throughout the world.

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

Hey, good morning, folks. Thanks for slotting me in. We've obviously covered a reasonable amount of ground already. I guess I'd like just to drill in a bit deeper. on Latin America. As Ali referenced in running through your market share, by country, Brazil and Mexico are two areas that are excluded from your market share growth figures. Yet Latin America has been sort of held up as the area where you've rejiggered your innovation process. It's got perhaps the fastest speed to market, a lot going on. You've been expanding channels. Can you update us on the progress of that? how maybe sequentially market share may be building in these markets, and also still sticking on Latin America, and sorry, I realize it's getting long-winded. This is also the area where going to your segment bridges, you're seeing the most substantial increase in overhead expense, and the increase is surprising in context to the FX pressure there. Can you give us a little more color on where that money is going in that market? Thank you.

Okay, a lot there. So let me step back on Latin America. You know, again, the focus strategy around core adjacencies and segments we think is really playing out in the quarter. And again, sequentially up on the first quarter, they've now seen, you know, two strong quarters of growth and very balanced growth at that relative to pricing and volume. Good pricing coming through in the quarter as well. which is obviously driven by some of the changes that we made on Colgate Total, as well as reacting to some of the inflationary pressures that we saw coming through the P&L in the back half of 2018. Looking specifically at Mexico and Brazil, I think we're quite pleased on what we're seeing there. On Brazil, obviously the categories look okay, slightly down in the second quarter, but on the half, still up versus where we were last year. We've seen some promotional pricing on the low end of the franchise, particularly around the Sarisa brand, which we talked about in the first quarter. That continued in the second quarter. Obviously, a bigger dip in February on shares, but starting to see that slowly come back. But more pleasingly was the launch of Colgate Total, and both those markets have done very, very well. Just getting out of the gate, so about a month and a half of real clear readings on it, and In Brazil, the share is up about half a point on Colgate total to, at least from what I'm seeing, a record high share for quite some time at 17 and a half. And likewise, in Mexico, we're up over a point on Colgate total, where overall shares are flat. So I think the strategies that we're putting in place, particularly on oral care and driving the core are paying off. As I mentioned, I think previously, they are pushing aggressively into new channel expansion in pharmacy. with the launch of LMEX that is driving incremental share in pharmacy as we speak and we're happy to see what LMEX is doing and continues to grow month in and month out and they're launching into some new adjacencies as well across the division which is doing well. What I was particularly excited about in the quarter was every single operating hub grew across Latin America and we hadn't seen that for quite some time at least consistently So, again, I think the strategies that we're deploying around the core adjacencies and segments are playing well. Good pricing in the second quarter, which will play out, obviously, with our investment strategy in the back half. And we're seeing more and more investment go in. You know, coming back to a certain extent to Ali's question, as we see, you know, Latin America accelerate, Latin America has a lower advertising to sales, given some of the cost of media in those businesses. And that obviously moves its way through the overall company P&L. But again, good plans in the back half with accelerated investment in that region.

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

Great. Thanks so much. Hi, Lauren. I wanted first to just follow up on Barclays. Brazil. I was actually just focused a little bit more on volume, just the comparisons, because I know that last year we had the Brazil trucking strike. So notwithstanding efforts, this is not a market share question. But I was just curious about volume trajectory in Brazil, if there was any impact there from some of the pricing you've taken in terms of the slower build back on volume specifically. And then I do have a second bigger picture question. Thanks.

Okay. Sure. So, yeah, we did take pretty significant pricing in the quarter. And I'll remind everyone that the cadence of volume and pricing that we had last year, as you may recall, most of the trucker stride or the impact of that hit us in the third quarter. So the comparisons get much easier for us going forward. We didn't have While we did have a small hit in the second quarter last year, it wasn't to the extent that we saw it in the third quarter, which is where most of the impact came through the P&L. In this quarter, a volume was slightly down, but pricing was strong and largely driven by some of the price changes that we made based on some of the inflationary pressures that we faced in the back half of the year. Categories continue to be okay, as I mentioned earlier. And we've got a strong innovation pipeline in the balance of the year and investment to support that. So we feel we're in a good position to see continued acceleration, particularly given the comparisons get easier in the year to go.

We'll take our next question from Bonnie Herzog with Wells Fargo. Please go ahead.

All right. Thank you. Good morning. I actually wanted to circle back to some of your comments. on your top line. I guess I'm trying to understand your ability to sustain the improvements you've seen, especially as you head into next year and you have to lap the innovation and relaunches that you put into the market. I know you're not going to give guidance for 2020, but could you touch on your ability to lap the innovation from this year and then maybe how full your innovation pipeline is for next year? Also, as we think about your spending levels that did increase, you know, things continue to improve, will you continue to reinvest in your business for the long term? Or, you know, should we start to see some of this potential upside flow to the bottom line? Thanks.

Thanks. You know, specifically on the top line, you know, next year is no different than any year in the sense of that we continue to be focused on ensuring that that we have, one, the right level of innovation to continue to drive incremental value in the market, that we're focused on driving category value, which is extremely important. You heard John talk a little bit about the success we're having behind revenue growth management and the discipline that we're deploying across the world to ensure that teams are thinking very differently about how to drive value back into the categories, which ultimately drives better top-line growth for us and our trade customers. And then likewise, as we look at some of the adjacencies and geographic expansion opportunities we have that each year, being very deliberate about how we go after those. And so next year, we'll be looking at some category expansion opportunities into new markets. We'll be looking into new adjacencies, and we'll be looking to support new core businesses, as we've mentioned, which is going to be an important part of our growth strategy moving forward to ensure You know, every 12 to 18 months, we have a significant core business that we're putting investment behind to ensure that the incremental innovation we're getting behind adjacent season channel expansion indeed comes on top. In terms of, you know, getting gross margins up and our focus there, I think we're starting, we're really happy with the fact that we've seen gross margin acceleration this quarter. That is a function, I think, of, again, a sharpened focus on funding the growth, but more importantly, the pricing that we have taken and the revenue growth management aspects that are coming more day in and day out in terms of how we manage the business. As we look at the back half, as we see a more benign inflation environment, particularly around foreign exchange, we expect that to continue to bode well for the gross margin line, which will allow the investment that we need in the business to continue to accelerate that top-line growth on a sustainable basis.

We'll take our next question from Wendy Nicholson with Citi. Please go ahead.

Hi. Thanks very much. A couple things. First of all, can you disclose how much the distribution expansion for ELTA and PCA contributed to your organic sales growth? Second quick thing, just in terms of the comments you made, Noel, about how the track channel market share data hasn't looked as good as you expect it to, but actually the North American shipments looks pretty good this quarter. So my question is, do you have any sense or is there any feeling that there could be excess inventory in the trade? In other words, will that North American growth have to slow as the marketeers kind of catch up with your shipments? And then my last question is, with Justin having left the company on Tuesday, You know, as you kind of look at the management structure, as you settle in as new CEO, do you think, is there going to be a new chief growth officer? Are there other changes in sort of the management structure contemplated? Or is this just typical Colgate, you know, succession planning, all that kind of good stuff rolling through? Thanks.

Great, Wendy, thanks. So, you know, let me go one by one. Specifically, we don't disclose and break out, obviously, PCA and ELTA within the context of the U.S., I'll say the growth was balanced. We had growth across all of our core segments in the quarter in the U.S., specifically oral care, personal care, and home care, as well as on the HILS business, as John mentioned. And obviously, PCA and ELTA continue to have a good quarter in that regard. Relative to the management structure question, obviously, as you well know, as well as anyone, we have a deep bench of tremendous leaders across the organization with Justin's departure. We're looking to obviously continue to develop our organization, put people in new roles and responsibilities, and we're in the process of making that happen. We made some recent changes, which I'm really excited about, which have elevated the responsibility of Panos and Prabha specifically and moved some new people into new roles across the organization. And all that, I think, bodes well for particularly the strategy that we're trying to execute moving forward. In that case, all good moves and a very qualified bench of people to choose from in that regard. Relative to your question on inventories, I know that came up last time as well, I think from Ali. There's no inventory issues in the U.S., and we've had nice growth in untracked channels. As you know, particularly around the toothpaste business, Colgate Total way over indexes in club. had a good quarter on Club, having a good growth in some of the other track channels, e-commerce specifically. We saw significant share growth on the toothpaste business in the quarter. So all that obviously rolling up to a strong organic delivery in the quarter for the North America business.

Our next question will come from Steve Stracullo with UBS. Please go ahead.

Hi, good morning. So, Noel, my question is... After three recent acquisitions, it appears that you're slowly stitching together a global premium skincare business with a clinical focus. So how do we think about the leadership and integration strategy of these businesses since one is in primarily France and China versus other assets in the U.S.? How is this being integrated? What's the leadership structure? And then could you give us any more texture separately on the oral care business in China? You mentioned it's improving sequentially, but Where are we in terms of milestones and kind of repairing that business for maybe some qualitative talking points? Thank you.

Sure. So listen, as we have learned in many of the successful acquisitions that we've made, and we've been very prudent in approaching these acquisitions in this way, and that is to ensure that we respect and admire the independence of these organizations. And from that perspective, we will continue to run Philorga independently. as we learn the business, and more importantly, understand how we can leverage some of the best practices across our entire skincare portfolio. So today, Alta, PCA, and Filorga are run independently, but that being said, we have a team of people here in New York, as we've done through our other categories, ensuring that we are looking holistically at the business, leveraging the synergies that we see across the three different businesses, and more importantly, from a growth opportunity, ensuring that we're sharing best practices across those three businesses to sustain accelerated growth moving forward. And as we go through the due diligence of each of those acquisitions, we very much put that in the back of our mind. How are these going to help the other businesses that we have, not only on the skincare side, but obviously on the Colgate portfolio side as well, in terms of transferring best practices. And that's something historically and culturally that we've done really well across the company. and that is to share the learning. And there's a tremendous sense of humility when we go in and make an acquisition to respect the depth of the management team, what they've accomplished, and to ensure that we listen and learn, but provide the scale and the efficiencies to them so they can continue to drive top-line growth. On the China question, it is moving exactly as we anticipated. It is slightly ahead of schedule relative to some of the pickup that we saw in the quarter, but a lot of work to do. and we'll continue to see momentum build in the third quarter and into the fourth quarter this year based on the plans that we're executing as we speak.

Our next question will come from Javier Escalante with Evercore ISI. Please go ahead.

Back to China again. So basically, this improvement, if you can basically split it between acceptance of the price increases that you took last year versus is it LMICS that is gaining traction online, or is it that the destocking that is lessened? And I have a more longer-term question after that.

Thanks, Javier. It's all of the above. You know, obviously, as the go-to-market shifts happen so dramatically across particularly China over the last nine months, we needed to rebalance the inventory in the market, and that is well underway. And we've seen improvements in that respect. The LMEX launch continues to do well as it widened its distribution both across different e-commerce platforms and a rollout in AS Watson's as well. So all in all, it's all those elements. The pricing, likewise, holding, particularly on the 360 franchise that we took in the back half of last year. But it's all really trying to get the portfolio right, the go-to-market strategy changes right, the distributor strategies implemented as well. And all that is on schedule, as I mentioned.

Our next question will come from Kevin Grundy with Jefferies. Please go ahead.

Thanks. Good morning. Noel, two-part question if I can. First one, just gauging the success of the Colgate total rollout in the U.S. Some of the Nielsen data we see suggest the brand is down about half a point. I think the hope was to take some share from Sensodyne. Sensodyne seems like the market share trends are accelerating there. Maybe talk a little bit about how you're gauging success so far with the product rollout. to date. And then I hope I can throw in another one here. John spoke to the company's superior results in the online channel where you're gaining share. And of course, we see in scan channels where the company is probably not where it hopes to be at this point from a market share perspective and bleeding a little bit of share in oral care. Why do you think that is? And maybe you could speak to tactically what you need to do to address that. Thanks for those.

Sure. So again, on Colgate Total, you know, if you look globally at where we are right now, the share is up close to half a point on the business. And that obviously considers the fact that we're down about 20 basis points in the U.S., which is on a weighted basis, weighs very heavily into that half a point growth that we have globally. So we're very pleased with where we are. Specifically on the U.S., recognize that we took a 16% downsizing on that product. So We're looking for the purchase frequency of the brand to accelerate share moving forward. You're not going to get the price accretion immediately moving through the consumption and therefore the share. That will over time accelerate as we get the frequency of repurchase to accelerate. So all in all, we're pleased with where we are, particularly pleased with the fact that we've generated about a 10% increase globally on that business, which is one of the more significant increases that we've seen on that franchise in over a decade, and that bodes well, given that we have a sustainable spending on that business in the back half, and we continue to roll out in some of our bigger markets, particularly Latin America, which just got underway towards the back end of the quarter. So all in all, we're pleased. Not pleased with the tracked channels, and listen, despite the fact that we're growing in untracked channels really well, we need to get tracked channels growing again. saw a lot of coupon activity in the first half of the year. We saw some share erosion on the base business in the first quarter, which we're obviously trying to play a little bit of catch up, but we're not going to chase some of this coupon-driven activity that we're seeing. We want to ensure that we continue to move the franchise towards the premium end, both on Colgate Total with the launch of Naturals and with the launch of some of the whitening SKUs that we're putting into the market, which will hopefully drive more incrementality moving forward. So, More work to be done, to be sure, but pleased overall where we are with the total we launched.

And our next question will come from Bill Chappelle with SunTrust. Please go ahead.

Good morning. Thanks. Hey, Noel, just kind of big picture on emerging markets. You certainly sound more optimistic about kind of how things are trending. And I guess the question is, we saw the similar type optimism 18, 24 months ago. And then it went south for not just you, but for everyone. I mean, is there a way to kind of talk about how this time is different? Or if it's not different so far, you're just kind of cautiously optimistic and kind of what you see on the horizon?

Sure, Bill. So let me, again, we've talked about Asia quite extensively, so I won't get into more specifics. Obviously, good growth outside of China and the plans in place to see China grow. continue to make progress in the back half of the year. I haven't talked a lot about Africa. As you remember, that was a real headwind for us over the last couple years. A complete refocus on fundamentals in those markets and some terrific execution by the team on the ground. We've seen a real acceleration in that business moving forward. Pleasingly, Russia doing quite well. Eurasia, Turkey, likewise doing quite well, where we achieved market leadership very recently in the toothpaste category in that market. So again, Africa, we think, doing quite well, and the fundamentals will bode well moving forward. Latin America, largely driven by some of the economic and political changes that we saw over the last 18 months, and we'll be cautious on Latin America moving forward. So particularly in Brazil and Mexico, where you've seen political change, and new leaders in their first year of their administration. We'll see how that unfolds. There's always uncertainty associated with that. But the categories that were slightly down in the second quarter on the first half, as I mentioned earlier, up versus where they were last year. But the fundamentals I think we have in Latin America around, again, the core, the adjacencies, and the channel work that we're doing, we think will continue to bode well through the back half of this year. And the comparisons particularly in Latin America, favor us as we look to the back half.

Got it. Thanks.

Our next question will come from Nick Nody with RBC Capital Markets. Please go ahead.

Yeah, thanks. Good morning, everyone. So just two real quick ones. No, maybe you can – hey, how are you? Good morning. Maybe you could just talk about your definition of skin health. And I'm just curious if your definition longer term would extend outside of creams. So that's the first question. And then the second question is really on FX. I mean, obviously, it's created tons of havoc over the years for all multinational companies. Coca-Cola provided some thoughts about how they expected to be a benign year in 2020. And I was hoping maybe you have some thoughts from your treasury group on how you guys are thinking about FX as you think about the next 12 months.

Sure, let me take the FX question first. Obviously, we saw an acceleration of FX in the back half, particularly in Latin America and Eurasia, and we're expecting a slightly more benign environment, obviously, given those comparisons, but we can't be certain. There's obviously a lot of political instability and a lot of rhetoric going on around the world, so I would hate to sit here and try to predict exactly where FX is going to go, We'll remain cautious, but we think it'll be certainly better than what we experienced in the back half of last year. Specifically, as it relates to skin health, it's a big category. Obviously, there's a lot of different spaces to it. We like Elton, the sun care business. It's got a great skin cleansing business, which is close in to what we understand. PCA is uniquely positioned in the categories in which they compete. We like those. And the recent acquisition of Philorga, obviously on the anti-aging, we like that space a lot, specifically one because of the economics of the space and the premium nature of it. But more importantly, as you look at the aging consumer everywhere in the world, that will continue to be an expanding category for skin health. So we're being selective on where we go in. We want to ensure that we have great brands with great go-to-market and great management teams, and that's kind of how we've looked at Skin Health. But obviously the three are, we believe, well-positioned where they compete and complement each other in the longer term really well.

We'll take our next question from Olivia Tong with Bank of America.

Great, thanks. I wanted to talk about the U.S. You alluded to a couple of efforts to improve performance in tract channels. So I'd love a little bit more detail there on how these initiatives help specifically in tract channels. But also, you continue to do significantly better in non-tract. So is there any reason to expect that that relationship will change as you put more focus on tract channels? Presumably, you're not driving growth in tract by shifting between the two. And then just one quick thing on SG&A. obviously higher comp logistics you talked about, but some of it sounds more like restoring sort of more normalized levels of variable comp, but is there anything in terms of like, you know, the investments that you're making, hiring more people, building out capabilities, and things like that? Thanks.

Okay, so let me try to address the first question there, which is on tracked channels and untracked channels and how we think about that. First, we take a step back and ensure that, as I mentioned up front, that we're really understanding the changes in the omnichannel environment. And those changes happen very quickly relative to where the growth is coming from and how consumers are shopping. So we've invested a lot more time and effort to ensure that we have much sharper strategies around our go-to-market to ensure that we're putting resources, spending, and innovation against those channels that we think are going to continue to accelerate, particularly as it relates to the U.S. Obviously, great growth in the first half of the year on e-commerce. Our share up about 140 basis points split between both Colgate and TOMS, and that's a function of, one, understanding the route to market and the route to purchase from the consumer and getting the innovation and the execution right in that channel. We talked about pharmacy channel around the world being one of the faster growing channels that we see globally. And we put plans in place to execute that both from a resource standpoint. And what I mean specifically by that is how we allocate our sales organization to growing opportunities. And likewise, from an innovation standpoint and from a portfolio standpoint, where we've launched LMEX particularly in the very select geographies where the pharmacy channel is outpacing the market and where we're under indexed in terms of share. So again, we look at it very holistically and our channel strategies are allocated based on where we see the best growth opportunities. And when I talked a little bit upfront about how we're thinking about growth differently and how we're driving growth differently, it's ensuring that we're looking at each of those channels very exclusively in terms of our go-to-market specifically as it relates to the innovation required to be successful. And we're starting to see that play off as we see the acceleration, particularly in non-track channels moving forward. On the SG&A, I think you hit it all already. But the last point you made is an interesting one in the sense of as we look at allocating resources and driving productivity across the organization, It really is ensuring that we're putting people in places that, one, are going to drive more accelerated growth for the company. So let's take the area of digital and analytics and predictive analytics and making sure that we're putting resources in those areas because we believe that will bode well and drive more sustainable growth and efficiency across the PML moving forward. So it's shifting of resources in that line. The SG&A acceleration you saw in the quarter was not a result of adding more people. it was a result of the specific areas that I articulated earlier.

And our final question will come from Mark Pishon with Stiefel. Please go ahead.

Thanks, and good morning, everybody. Hi, Mark. Two questions. One on Felurga. If you could just comment on what the growth rates have looked like trailing 12 months, maybe expectations on a go-forward basis. And then on pet nutrition, so a large competitor reported similarly strong top line results this morning. I guess it seems like category growth rates, not to take anything away from your performance, have accelerated. So I guess I'm curious, what do you think is driving the acceleration? How much is it price versus underlying category demand? And what do you think a reasonable longer-term growth rate would be from a category perspective?

Thanks, Mark. So, you know, back on Philorga, obviously, All I can disclose at this point, the acquisition hasn't closed, is that we're very attracted by not only the growth rates of the category itself, but the growth rates of Philorga and the potential for continued growth and geographic expansion moving forward. We'll disclose more information as we bring that under the Colgate family. specifically as it relates to the premiumization in the dog food category and the pet food category. I mean, good growth. We've seen a bit more stability in pet retail, specifically amongst PetSmart and Petco, but still somewhat challenged. Continued acceleration of e-commerce, where we're seeing nice growth in that business. And I think importantly is we're seeing shared growth in the U.S. around the science diet relaunch, which again, again, included obviously significant packaging changes, significant reformulations, new campaigns, and accelerated investment, which were all intended to help support and drive trial, but more importantly, justify the price increase that we took on that business, which we hadn't done in quite some time. So all in all, we think the plans we have in place on hills, the fact that we've expanded distribution into some new channels, And we've got a terrific piece of advertising working for the business. We'll bode well as we look to expand the science that we launch internationally in the back half.

And this does conclude today's question and answer session. I'd like to turn the call back over to John Fauché for any additional or closing remarks.

So let me quickly close. As always, let me thank the entire Colgate family of people out there that have done such a terrific job, again, delivering sequential growth In the quarter, I remind everyone we're in the third quarter. Get back to work, and thanks, everyone. Have a great weekend.

At the end, ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.