Colgate-Palmolive Company

Good day and welcome to today's Colgate-Palmolive Company third quarter 2019 earnings conference call. This call is being recorded and is being simulcast live at www.colgate-palmolive.com. Now for opening remarks, I would like to turn the call over to the Senior Vice President of Investor Relations, John Poche. Please go ahead, John.

Thanks, Paula. Good morning and welcome to our third quarter earnings release conference call. This is John Poche, Senior Vice President for Investor Relations. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and our most recent filings with the SEC, including our 2018 Annual Report on Form 10-K and subsequent SEC filings, all available on Colgate's website, for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in 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 begin with some thoughts on our performance before discussing our updated 2019 guidance. We'll then open it up for Noel's Q&A session. The third quarter marked a further step in our plan to return to sustainable organic sales growth. Throughout 2019, we have focused on innovating around the core of our business, driving growth in adjacent segments, and expanding our availability in faster growth markets and channels. Along with higher levels of consumer-facing spending, these strategies were paying off in broad-based growth across our businesses. Q3 marked the third quarter in a row where we delivered a combination of both volume and pricing growth on an organic basis. Volume was up in every division, and pricing was positive in every division except for one. Our revenue growth management strategies are driving pricing growth as we focus on premium innovation. On a geographic basis, we saw organic sales growth in five of our six divisions. Importantly, we returned to organic sales growth in Asia Pacific, including delivering organic sales growth in the greater China region. We drove a good combination of developed market growth, plus 3.5%, and emerging markets growth, plus 6%. And from a category standpoint, we again delivered organic sales growth across all four of our businesses, oral care, personal care, home care, and pet nutrition. In order to drive this growth, we continue to invest behind our businesses. Total advertising spending was up nicely in the quarter. In particular, I would point to Hills, where a significant increase in spending over the past few years behind our purpose-driven marketing has been a key driver of the organic sales growth. We were also pleased to close the Philorga transaction on September 19th, continuing the expansion of our personal care portfolio into skin health. Although we point out that Philorga's results from the acquisition date through quarter end were immaterial to our results of operations and were not included in our Q3 results. On the sustainability front, we received recognition from the Dow Jones Worldwide Sustainability Index, taking the lead in our industry sector for the first time. Back in September, Noel discussed our new recyclable toothpaste, too. We are currently in production and it will be on shelf under the Tom's brand in November. Moving to our Q3 results. Our net sales grew 2% in the quarter. We delivered 4.5% organic sales growth with 3% unit volume growth and 1.5% favorable pricing. This was partially offset by foreign exchange impact of minus 2.5%. On a GAAP basis, our gross margin was even with Q3 2018. Excluding the impact of our global growth and efficiency program, it was down 20 basis points year over year. Pricing was a positive 70 basis point impact to gross margin in the third quarter, while our productivity programs drove a 240 basis point benefit. This was offset by a 310 basis point drag from raw materials inflation, which included foreign exchange transaction costs. Other, primarily mixed, was unfavorable by 20 basis points. Our stronger growth in emerging markets relative to our developed markets business put some slight pressure on our gross market. On an absolute basis, advertising investment was up 7% year-over-year. On a percent-to-sales basis, advertising was up 50 basis points year-over-year. Excluding charges resulting from our global growth and efficiency program and advertising spending, our SDA and A expenses were up year-over-year in the third quarter on an absolute basis, but down as a percent-to-sales, as we were able to offset higher compensation and other costs with savings from our productivity programs. On a GAAP basis, diluted earnings per share of 67 cents were up 12% year-over-year in Q3. Excluding charges resulting from our global growth and efficiency program in 2019 and 2018, acquisition costs in 2019, and a charge related to U.S. tax reform in 2018, diluted earnings per share were down 1.5% to 71 cents. Our free cash flow through the first nine months of 2019 was $1.9 billion, which was up 3% versus prior year. Taking a quick look at the divisions, North American net sales grew 1.5% in the quarter, driven by 1% pricing growth and 0.5% volume growth. There was no FX impact in the quarter. Our performance in e-commerce, where we continue to see strong share growth and other non-measured channels, was partially offset by declines in food retail. We also remain very pleased with the performance of our skin health businesses, Elta MD and PCA Skin. Our focus in North America continues to be on the premiumization of our oral care portfolio through innovation. Colgate Total SF and Colgate Optic White drove pricing growth in the quarter, and we have further innovation to come in the next few quarters, particularly on Optic White. Europe posted a 5% decline in net sales with organic sales flat and foreign exchange minus 5%. Growth in Northern Europe behind the relaunch of Colgate Total and our whitening brands was offset by weakness in Western Europe where the retail environment continues to be difficult. As with North America, we expect significant premium innovation to drive improved price mix going forward as we have a full calendar of natural innovation in the first half of 2020. Latin American net sales were up 3% as 4.5% volume and 3.5% pricing. were only partially offset by 5% negative foreign exchange. Our 8% organic sales growth was broad-based, as we saw organic sales growth in every hub for the third quarter in a row. While Brazil benefited from the year-ago comparison, which included some impact from the trucker strike, the underlying business remained solid, and pricing was up nicely, driven by premium products like Protex Face and Colgate Total 12. Net sales in Asia-Pacific were up 2.5%, volume growth was 2%, pricing grew 1%, while foreign exchange was minus 0.5%. Organic sales growth of 3% was our first positive result in six quarters. Importantly, we delivered organic sales growth in the greater China region in the quarter, driven by improvements in both volume and pricing. While the China improvement in the third quarter was ahead of our expectations, we remained laser-focused on executing our plan to return the business to sustainable, profitable growth through improved go-to-market capabilities, China-specific innovation, and improved brand marketing. Asia-Pacific growth was led by toothpaste, particularly our Naturals portfolio and Colgate anti-cavity toothpaste. The After Eurasia division delivered 5% net sales growth in the quarter, its best result in several years. Organic sales growth of 6% consisted of 4% pricing growth and 2% organic volume growth. FX was a 2% drag on net sales growth, while our newly established joint venture in Nigeria was a 1% benefit to net sales and volume growth. The organic sales growth in after Eurasia was consistent across all hubs, and we are particularly pleased with our strong performance in Eurasia in the quarter, where our focus on faster growth channels like discounters is paying off. Momentum on our pet food business continued in Q3, as hills delivered 8.5% net sales growth and 10% organic sales growth. Hills' 6.5% volume growth was their best result since 2006. Pricing was positive at 3.5%, while foreign exchange was negative at minus 1.5%. Our core innovation strategy continues to deliver robust growth in North America and is now beginning to pay off internationally as we roll out the science site relaunch around the globe. In August, Hills partnered on NBCUniversal's annual Clear the Shelters pet adoption campaign in the U.S. This year's campaign was its most successful ever, with over 160,000 pets adopted over the course of the campaign, an increase of 57% versus last year's program. Tails earned over 9,000 displays, which helped drive the strong U.S. volume growth in the quarter. Moving on to guidance. We continue to expect net sales to be flat to upload single digits. We have raised our organic sales growth target to plus 3% to 4%, with the full year growth rate roughly in line with year-to-date growth. We now expect our full year gross margin to be down slightly on both the GAAP basis and excluding the items referenced in the earnings press release. We do expect gross margin to be up year over year on both the GAAP and non-GAAP basis in the fourth quarter. We would expect advertising as a percent of sales for the full year to be fairly consistent with the year-to-date level. We now expect our full year 2019 tax rate to be between 24% and 24.5%, both on a GAAP basis and excluding the items referenced in the earnings pressure list. Our previous guidance was for 25% to 26%. This change includes the recent reduction in corporate taxes in India. As mentioned on the Q2 call, we will moderate our share repurchase activity for the next several quarters in order to return to a leverage ratio more in line with our ratio before the Florida transaction. Based on current spot rates, we expect the GAAP earnings per share to be down low single digits for the year. Excluding the items referenced in the earnings press release, we still expect earnings per share to decline mid-single digits for the year. And with that, I'll turn it over to Noel for the Q&A. Paula?

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 1 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 would like to ask a question, press star 1. First, we'll go to Steve Strykula with UBS.