Colgate-Palmolive Company (CL)

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Colgate-Palmolive (CL)

Q2 2011 Earnings Call

July 28, 2011 11:00 am ET

Executives

Ian Cook - Chairman, Chief Executive Officer and President

Bina Thompson - Vice President of Investor Relations

Analysts

Javier Escalante - Weeden & Co., LP

Dara Mohsenian - Morgan Stanley

Joe Lachky - Wells Fargo Securities, LLC

Constance Maneaty - BMO Capital Markets U.S.

Alice Longley - Buckingham Research Group, Inc.

John Faucher - JP Morgan Chase & Co

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Per Ostlund - Jefferies & Company, Inc.

Joseph Altobello - Oppenheimer & Co. Inc.

William Chappell - SunTrust Robinson Humphrey, Inc.

William Schmitz - Deutsche Bank AG

Jason Gere - RBC Capital Markets, LLC

Wendy Nicholson - Citigroup Inc

Jon Andersen - William Blair & Company L.L.C.

Linda Bolton Weiser - Oppenheimer

Caroline Levy - Credit Agricole Securities (USA) Inc.

John San Marco - Janney Montgomery Scott LLC

Christopher Ferrara - BofA Merrill Lynch

Nik Modi - UBS Investment Bank

Presentation

Operator

Good day, and welcome to today's Colgate-Palmolive Co. Second Quarter 2011 Earnings Conference Call. Today's call is being recorded and is being simulcast live at www.colgate.com. [Operator Instructions] At this time, for opening remarks, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Bina Thompson. Please go ahead, ma'am.

Bina Thompson

Thank you, Elizabeth. Good morning, everybody, and welcome to our second quarter 2011 conference call. With me this morning are Ian Cook, Chairman, President and CEO; Dennis Hickey, CFO; Victoria Dolan, Corporate Controller; and Elaine Paik, Treasurer.

This conference call will include forward-looking statements. And these statements are made on the basis of our views and assumptions as of this time and are not guarantees of future performance. Actual events or results may differ materially from these statements.

For information about certain factors that could cause such differences, investors should consult our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and available on our website, including the information set forth under the captions Risk Factors and Cautionary Statements on Forward-looking Statements.

We will discuss organic sales growth, excluding foreign exchange, acquisitions and divestitures. A full reconciliation with the corresponding GAAP measures is included in the press release and is posted on the Investor Relations section of our website at www.colgate.com.

We're pleased with our results for the second quarter, which exhibit acceleration from the first quarter across the lines of the P&L, higher volume in organic sales growth, coupled with a greater increase in advertising, operating profit and EPS growth.

And looking specifically on organic sales growth, we see particular momentum in our emerging markets, which, as you know, represent more than half of our sales worldwide. Organic sales growth in these markets was strong high single-digit and was the highest quarterly growth in the year. Our long-standing presence, deep distribution and leading market shares in this part of the world provide a strong balance to the continued macroeconomic challenges which we and our competitors face in the more mature markets of North America and Europe.

Given the continued rise in commodity costs worldwide, gross margin declined in the quarter. And as Ian said in the press release, we still expect the gross margin to remain at first quarter levels for the full year, as pricing will play a greater role in the second half of the year to offset cost increases and as we continue to realize accelerating savings from our Funding the Growth initiatives. Additionally, we're beginning to see progress on our overhead line.

Fixed cost within SG&A in the quarter declined by 30 basis points, which freed up money to invest in advertising. And as we've told you on previous calls, we periodically undertake projects to further reduce fixed expenses, and these initiatives are generating strong savings. Again as planned, advertising in the quarter was up, absolutely and as a percent of sales in support of new product launches around the world. We expect even more new product activity in the second half here in the U.S. in particular, and that will be backed by continued healthy increases in advertising.

As previously announced, we've closed on the acquisition of the Sanex business in the second quarter and expect that we will complete the divestment of our Colombian detergent brand tomorrow, July 29.

From a company-wide ongoing operating perspective, the 2 transactions should offset each other, so the income statement for the balance of the year should be unaffected. However, as we go through the divisions, I will outline for you the effect in Europe and Latin America in terms of sales and profits.

The one-time gain for the sale of detergent should be approximately $130 million after-tax. And in-line with our efforts to continually lower costs and become more effective and efficient, our current plan is to reinvest this gain in support of various business realignment opportunities throughout the Colgate world. Implementation of these initiatives will begin in the third and fourth quarters, and we expect that they will fully offset the gain. And these initiatives should yield ongoing savings beginning mostly in 2012, in line with our historic rate of return for similar projects of 30% to 40%. So let's turn to the divisions, starting with North America.

We're pleased with our North American results in light of slower than historical category growth rates and continued very aggressive competitive activity. As noted in the press release, our all-outlet toothpaste share is up on a year-to-date basis. And in addition, our dish liquid market share reached 2009 levels in the most recent period, almost 38%. You may recall there was a low-priced new product entry in this category 2 years ago, and we're pleased that we have regained the share, which was temporary lost.

Our share momentum in these and other categories should continue as we launch some exciting new products in the second half of 2011.

As you read in the press release, we're extremely excited to be introducing Colgate Optic White toothpaste and toothbrush in the third quarter. Colgate Optic White toothpaste represents a breakthrough for Colgate in the whitening category, having taken many years to develop this technology. Colgate Optic White toothpaste contains the same whitening ingredient as whitening strips for whiter teeth in one week. The Colgate Optic White toothbrush contains both whitening cups and polishing bristles. Colgate Optic White toothpaste and toothbrush will be supported with an extensive integrated marketing campaign, including both direct in-store and out of store support.

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