Operator: Good day, everyone, and welcome to today’s Colgate-Palmolive Company First Quarter 2010 Earnings Conference Call. Today’s call is being recorded and is being simulcast live at www.colgate.com. Just as a reminder, there may be a slight delay before the question-and-answer session begins due to the web simulcast.
At this time, for opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Ms. Bina Thompson. Please go ahead.
Bina H. Thompson - VP, IR: Thank you, Diana, and good morning, everybody and welcome to our first quarter 2010 earnings release conference call. With me this morning are Ian Cook, Chairman, President and CEO; Steve Patrick, CFO; Dennis Hickey, Corporate Controller and Elaine Paik, Treasurer.
This conference call will include forward-looking statements. 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 caption Risk Factors and Cautionary Statement on Forward-Looking Statements.
We’ll discuss our results and outlook excluding the one-time charge of $271 million related to the transition to hyperinflationary accounting in Venezuela as of the 1st of January 2010. We’ll also discuss organic sales growth, excluding foreign exchange, acquisitions and divestitures.
A full reconciliation for the corresponding GAAP measures is included in the press release and is posted on the Investor Relations page of our website at www.colgate.com. And we’ll be glad to answer any questions you may have including or excluding these items, as you wish.
We are really delighted with our results. We’ve started off the year with good momentum and strong financials. Our financial strategy which we have been deploying for well over a decade continues to deliver a healthy P&L, solid balance sheet and good cash flow, with increased volume and gross margin while containing our fixed expenses which has allowed us to invest generously in advertising, while at the same time growing the bottom line.
We had told you last year that 2009 would be a transition of balancing price and volume and in each successive quarter volume growth increased while pricing played less of a role. We have seen that shift again in the first quarter with volume increasing solidly in nearly every operating division. Of particular note, as Ian said in the press release, is our 170 basis point increase in gross margin. And as you can see this is as a result of our cost savings efforts including many Funding the Growth programs around the world, rather than from pricing. This is consistent with how we have achieved gross margin increases over many years.
You will hear as we go through the divisions how market shares have increased in many categories. And as always, new products play an important role. Our very healthy increase in advertising of over 30% has allowed us to support both new product launches as well as our ongoing businesses.
Cash flow was good and our working capital remains at very low levels. And as you may recall, we recently announced a dividend increase of 20% effective this quarter along with renewal of our share repurchase program. We expect our strong cash generation will allow us to fund these activities while maintaining a low level of debt.
And as we indicated in our previous guidance, the tax rate in the first quarter was below the first quarter of 2009, due to the devaluation in Venezuela. Also included in the quarter was a $9 million one-time charge related to the elimination of the tax deductibility of the Medicare Part D retiree drug subsidy. Our expectation going forward is that the tax rate will be between 32% and 33% for the remainder of the year.
And as previously disclosed, first quarter results were also impacted by the currency devaluation in Venezuela. A gain of $59 million or $0.11 per diluted share is included in net income for the quarter related to the remeasurement of the Venezuela balance sheet and lower taxes on accrued but unpaid remittances. This gain was partially offset by the impact of translating our Venezuela financial statement at a lower exchange rate resulting in a reduction in net income of approximately 30 million or $0.06 per diluted share.
As mentioned in the press release, the company continues to estimate that the full year impact of the devaluation will be a net reduction of $0.06 to $0.10 per diluted share. The impact for the quarter and full year is in line with guidance we provided in January of this year.
So, let’s turn to divisions, starting with North America. Results in North America were solid, with healthy volume growth and excellent operating profit growth. We told you about a number of new products last quarter and the new product flow continues. Most recently in oral care area we’ve introduced Colgate ProClinical Toothpaste, a product which brings cosmeceuticals to oral care.
Colgate ProClinical is a new line of professionally inspired daily toothpaste formulated with clinically proven technologies that provide health and beauty benefits. It started shipping at the end of the first quarter when media and online activities also began. Colgate Wisp continues to perform well. A second variant, Wisp plus Whitening was launched in March. Trial for the product continues to grow monthly, exceeding our initial goals. And importantly, the repeat rate continues to grow as well. It’s considerably ahead of where Colgate 360, the best selling toothbrush in the U.S. was at a similar time frame following its launch. This has resulted in excellent market shares referenced in the press release. Distribution into new channels is increasing as well, including convenience stores, gas stations, airports and college campus bookstores.
And we told you last quarter about a new deodorant product Speed Stick Stainguard. Initial shipments were strong and a very comprehensive integrated marketing campaign is in place to support this launch. We are combining TV media with a targeted sampling program as well as in-store activities. And we also have a partnership with Hanes t-shirts, a sampling program which highlights that Speed Stick Stainguard is designed to help fight yellow stains on white t-shirts.
So looking ahead, volume in North America is expected to grow mid single digit for the second quarter and full year. Organic sales are expected to grow low to mid single-digit for the second quarter and full year. And operating profit is expected to grow double-digit for the second quarter, up absolutely and as a percent to sales, and should grow at least mid single-digit for the full year, up absolutely and as a percent to sales.
Europe/South Pacific. We are very pleased with the continued momentum in our European business. Although macroeconomic conditions remain somewhat fragile, successful new products backed by healthy advertising have resulted in good volume and organic sales growth. Across the region our market shares increased in toothpaste, manual and powered toothbrushes, mouthwash, body wash, liquid hand soap, bar soap and fabric softeners.
We are continuing our introduction of Colgate Sensitive Pro-Relief throughout the region. Results are very encouraging. In the U.K., one of our initial markets, our toothpaste market share is now over 50% and Colgate Sensitive Pro-Relief has added incremental share. In the Sensitive segment, the gap between Colgate and the leading sensitive toothpaste has been cut almost in half. In Greece, after four months in the market, we have now taken leadership in the Sensitive segment at 8.5%, over 2.5 points ahead of our nearest competitor. In Italy, where Total Advanced Clean was named new product of the year for 2010, our toothpaste share is up almost 2 points year-over-year.
We are excited about new products in other categories as well. We told you about our new body wash, Palmolive Nutrafruit, which began shipping late in the first quarter. Even before advertising the product, consumer response has been excellent which bodes well for the second quarter when media support will begin.
Another new product is in the home care category. We will be building our existing equities of Ajax cleaners, Palmolive dish liquids and Soupline fabric conditioners under the brand NaturaVerde. Targeted to consumers who are eco aware but desire uncompromised efficacy, these products contain ingredients of natural origin and their formulas are biodegradable while still offering strong performance – the kind of performance for which these leading brands are already known. Early trade reaction has been extremely encouraging and the products are shipping now.
So, looking ahead, we expect volume and organic sales to be up mid single-digit for the second quarter and full year. Operating profit is expected to be up double-digit for the second quarter and full year, up both absolutely and as a percent to sales in each period.
Latin America. We are especially pleased with the continued strong performance in our Latin American business, particularly given the challenges we and other companies are facing in Venezuela.
As noted in the press release, we saw strong volume gains in most of our markets and continued good performance in our market shares.
In toothpaste, our latest exciting innovation, Colgate Sensitive Pro-Relief, is being rolled out across the region. It is now selling in Brazil, Mexico and the Southern Cone and has contributed to year-over-year market share increases in all of those geographies. In Brazil, where our overall toothpaste share was up year-over-year, Colgate Total reached a record level of over 18%. In Mexico, despite heightened competitive activity, our toothpaste market share is up 20 basis points year-over-year to over 85%. And in Venezuela, our toothpaste share increased 3.6 share points to a record 93.7%.
As you know, mouthwash is another critical area of focus for us in many parts of the world. Across Latin America, our share is up over two points year-over-year to almost 30% nearly halving the gap with the leading manufacturer that existed in 2007. We gained two more share points in Argentina, consolidating our leadership position to over 50%. The gain was achieved through growth in our base Plax business as well as the recent launch of Plax Whitening.
In bar soap, we've maintained the leadership position across the region we established in 2008 and our 2010 year to date share is up 20 basis points. And in fabric conditioners, our share was up 50 basis points to over 50%. Our most recent innovative new product Suavitel GoodBye Ironing helped increase share. New TV testimonial advertising reinforced the key benefit such as wrinkle reduction on clothes and time savings.
So, looking ahead, volume in Latin America is expected to grow mid single-digit for the second quarter and full year with organic sales growing double-digit for both periods. Operating profit in the second quarter is expected to decline modestly from the very high level for the second quarter of 2009. Full year 2010 operating profit is expected to be basically flat due to the negative currency translation effect in the Venezuelan business.
Greater Asia/Africa. Results in this region were very strong, continuing the momentum with which we exited 2009. Toothpaste shares across the region were strong. In China, our share was up 120 basis points to almost 33% and was over 33% in the most recent period. Part of this was driven by the launch of Colgate Sensitive Pro-Relief in key cities. In Russia, our year-to-date share is up almost a full point. And you may recall, we launched Elmex, a GABA product, in this market last year and that has contributed to the growth along with our Colgate business.
Colgate Sensitive Pro-Relief has now been launched across the region, and in the second quarter we will be shipping a whitening version in addition to the original variant, thereby increasing presence on the shelf. We've maintained our leadership share in toothbrushes across the region. In India, our share is up 400 basis points year-over-year to over 40% and in Russia our share is now over 51%, up 220 basis points on a year-to-date basis.
Another category which has been very strong is mouthwash. As we continue our focus on this category in markets outside the U.S. Our shares increased in every market we are present in, more than doubling in a number of markets.
Our shower gel shares are up almost two points across the region. New products supported by increased advertising drove our Palmolive franchise in Russia and Turkey. And in Thailand, a new thematic campaign for Protex accompanied by impactful in-store activity drove our share up two points year-over-year.
So looking ahead, we expect volume and organic sales to continue to grow at high single-digit levels for the second quarter and full year. Operating profit is expected to increase double-digit for the second quarter and full year, up both absolutely and as a percent of sales.
Turning now to Hill's; we are encouraged by the improvement in our Hill's business from the fourth quarter of 2009. As we told you, we’ve been working around the world to ensure that our pricing is competitive in the marketplace, through a combination of price reductions as well as right sizing. And that process which began in September of 2009 should be substantially complete by the end of this quarter in the U.S. and by the third quarter in Europe. In conjunction with this, we’ve been building brand awareness via an integrated marketing communication plan. The print and online campaign leverages powerful testimonials to communicate nutritional efficacy, strong visuals to showcase new lower prices and includes the tagline ‘Vets Number One Choice To Feed Their Own Pets.’ We're already seeing the benefits in the marketplace. Monthly scanner data through March indicates that consumption of those right-sized, right-priced products in U.S. large format retailers has increased as compared with the prior six months average. And in addition, we are seeing veterinary endorsements returning to their historically high levels.
A number of new product initiatives are helping to restore growth in market share. We told you last quarter about our launch here in the U.S. of Science Diet for Small and Toy Breed dogs. We began shipping in February and have achieved excellent distribution and overall consumer response.
So, this quarter we will be launching Small and Toy Breed in Japan. We have customized the product for the region with even smaller kibble sizes and smaller package sizes. This is a great opportunity in a country where 65% of registered dogs are 5 kilos or smaller in size. And in Japan, these dogs are considered precious and treasured family members that require food specifically tailored to them.
Another new product launched recently across Europe was Science Plan for Healthy Mobility Canine. Following this success, we are now launching the product under the Science Diet brand in the U.S. in June with a very comprehensive support plan including the Healthy Mobility Challenge to improve a pet’s mobility in just 30 days.
And just this month in Europe we are launching a wellness product which will be sold exclusively through the veterinary channel. Initial reaction has been very positive. This should help drive brand recommendation as well as market share.
So, looking ahead, volume at Hill’s is expected to be essentially flat year-over-year in the second quarter and should be up low to mid single digit for the full year. Organic sales are expected to decline modestly for the second quarter with growth for the full year in the low single-digits. Operating profit is expected to be up mid single-digit for the second quarter and full year, up absolutely and as a percent to sales.
So, in summary, we are very pleased with the way 2010 has started. Clearly, the momentum in our business which we enjoyed as we exited 2009 is continuing this year. Our strategies are working. Our ongoing Funding the Growth programs are helping to increase gross margin significantly. Our worldwide focus on increasing advertising is resulting in excellent sales and volume growth. Our market shares are healthy and increasing around the world. So, we look forward to sharing our progress as we go through the remainder of the year.
And now Dena, I would like to turn it over to questions please.