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.